Putting the Dovish Genie Back in the Bottle
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Fed officials try to send stocks into the dunk tank | A pullback before the next ramp higher? | Diving deep on TradeSmith Analytics | The stock market’s 2023 report card | The dark pools reveal all…
By Michael Salvatore, Editor, TradeSmith Daily
Stocks are backing off a bit as I write on Friday afternoon.
After notching a record close, the Dow Jones Industrial Average is chopping around, mostly unchanged. The S&P 500 has turned negative after a mid-morning recovery.
This is to be expected after two straight days of serious bullishness.
If you ask the Fed, maybe a bit too much bullishness…
Officials are out in force trying to cram the dovish genie back into its bottle. Here’s Bloomberg:
Federal Reserve Bank of New York President John Williams said it’s too early for officials to begin thinking about cutting rates as soon as March as they consider whether policy is restrictive enough to get inflation back to 2%.
“We aren’t really talking about rate cuts,” Williams said Friday in an interview on CNBC. He noted it’s “premature” to be thinking about cutting interest rates in March, and said financial markets reacted “more strongly” than what policymakers showed this week in their rate projections.
“We aren’t really talking about rate cuts,” Williams said Friday in an interview on CNBC. He noted it’s “premature” to be thinking about cutting interest rates in March, and said financial markets reacted “more strongly” than what policymakers showed this week in their rate projections.
Here, the Fed seems to be saying “Do as I say, not as I do.”
The Fed’s own projections put at least two rate cuts on the table for next year. The fabled pivot has arrived… And the once mighty, fearsome hawk at the podium looks more like a cooing dove.
If you have to place your money somewhere, why should it be on the comments of one overcautious Fed official? It should be alongside the trillions of dollars making decisions about the future direction of the market over the last several days.
Investors have seen the data, and the conclusion is clear: we should be bullish…
Right?
Well, Jason Bodner’s Big Money Index has an interesting take on that.
❖ Jason’s Big Money Index is back to overbought levels…
Take a look:
The BMI is Jason’s proprietary measure of Big Money flows. When the yellow line above rises, big money is buying stocks on the whole. And vice versa.
When it crosses the green line, stocks are oversold. The red line, and we’re overbought.
Back in late October, the BMI fell as far as about 18%. That means just 18% of the institutional signals Jason tracks were buys.
Since then, it’s rocketed higher. In just a month and a half, the BMI is back to overbought levels.
It’s noteworthy that this is one of the fastest BMI reversals Jason’s ever seen. Clearly, the major players on Wall Street got caught underinvested in this latest surge.
But, while we should be cautious of an overbought level, we shouldn’t take this as an immediate sign that stocks will crash.
The BMI can both get and stay more overbought than this. Like back in 2020, when it went overbought in May and stayed there all the way through September. Or when it stayed overbought for several months at the beginning of 2021.
Regardless, this is a caution sign to potentially expect some profit taking in the weeks ahead. That is to say, we should initiate new positions with care. and not chase the stocks that have ripped the most.
Speaking of…
❖ TradeSmith Analytics is also a treasure trove of useful info…
I’ve been in the habit of checking this dashboard every single day before I set to writing or making moves in the market.Every panel holds a key, useful insight that’s immediately tradable.
- You can see the best performers in the market — whether stocks or ETFs — on multiple timeframes…
- Or the most overbought or oversold sectors based on their RSI indicator…
- Or the current top-ranked Trinity Stocks — the stocks we’ve found have the best shot at outperforming the market over the long haul.
Here’s the top five best S&P 500 sectors so far in 2023:
And the five “worst”:
If you needed any further proof that 2023, all told, was a great year for markets… here you have it.
8 of the 11 S&P sector ETFs are positive this year, with the worst loss being just a 5.5% drawdown in the Utilities sector (XLU)… and the biggest winner a 56% gain in the Information Technology (XLK) sector.
No big surprises here. Tech dominated 2023. But let’s take a look at, say, the last month. Which stocks have been ripping the most since markets staged their massive recovery in November?
Now this is interesting. Over the last month, technology is nowhere to be seen. Instead, the Real Estate sector (XLRE), Financials (XLF), and Industrials (XLI) have far and away been the trade to make.
This should give us a hint about the stocks set to outperform in a looser-credit environment next year. Look for deals in these spaces.
But as always, we should do more than look at past performance to indicate future results.
And one way to confirm a great trade idea is to simply follow the Big Money.
❖ Access to Jason’s Dark Pools Summit is drawing to a close…
If you’ve been following along in TradeSmith Daily, you know it’s all about finding the specific stocks Big Money is plugging their capital into.Overbought, oversold… underperformer or outperformer… Big Money moves drive stock prices in any sector like nothing else can.
And Jason’s proprietary strategy knows how to sniff out here the Big Money is moving at any given moment. It reveals the small-cap companies that, in time, are set to become much, much larger.
As a TradeSmith Platinum member, you really should be following Jason’s research closely. He’s been hard at work finding the best Big Money stock opportunities to take advantage of.
You can access everything that comes with your Quantum Edge Pro subscription right here.
To your health and wealth,
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Editor, TradeSmith Daily