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July 15, 2024

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Fear of Missing Out and The Greater Fool Theory win the day.  

The S&P 500 stock price index (symbol: $SPX, 5,615.35) rose 0.87% last week to another new high following the good news that the rate of CPI inflation appears be slowing, which bullish investors assume could help the Fed’s fight against inflation, leading to an easing of monetary policy and lower interest rates in September. The large-cap market leaders lost bullish momentum and relative performance on Thursday, but it may be too soon to call that significant. Seasonal tendencies, which have been bullish for the first 2 weeks of July, turn mixed for the rest of July, suggesting a more choppy, up and down stock market. The long-term price trend remains systematically bullish, although technical indicators show diminished short-term price momentum after reaching extremely high overbought levels. A few big technology stocks dominate this capitalization-weighted index.

Unweighted price indexes and breadth indicators for the broader stock market were stronger than the large-cap technology stocks that dominate the S&P 500. More than 70% of the S&P 500 stocks are currently above their own 50-day and 200-day SMAs. The number of Net New Highs ($NYHL), now at +300, showed a great leap upward; it is technically bullish when it is greater than zero. Even the previously weak Cumulative Advance-Decline Issues Line surged to a new high last week, which is bullish.

The major news story of the week was a surprising drop in the CPI. On Thursday, the US Bureau of Labor Statistics (BLS) reported that The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1% on a seasonally adjusted basis in June. Energy fell 2.0%, gasoline fell 3.8%, fuel oil fell 2.4%, and natural gas rose 2.4% in June. On Friday, the BLS reported that the Producer Price Index (PPI) rose to 0.2%, up from zero in May and above the 0.1% expected, but the market dismissed that news.

“The Consumer Price Index is not economic reality”, according to Stephen Mihm, a professor of history at the University of Georgia writing for Bloomberg. “The nation’s leading indicator of inflation has always existed as a creature of politics and power, revised and updated in ways that betray its image.”

“Federal statistical agencies face increasing challenges to their ability to produce relevant, timely, credible, accurate, and objective statistics,” according to researchers of the American Statistical Association. “Immediate action is needed to put the agencies … on a firmer footing so that federal statistics remain widely trusted and useful….”

This CPI decline caught us by surprise, because energy prices in the futures market, which reflect actual demand and supply of buyers and sellers and are not seasonally adjusted, rose strongly in June—in stark contrast to the big drops in energy prices reported by the Bureau of Labor Statistics.

Energy Futures Contracts

May

June

Change

% Change

Crude Oil WTI (Aug '24)

76.9900

81.5400

4.5500

5.91%

ULSD NY Harbor (Aug '24)

2.3842

2.5331

0.1489

6.25%

Gasoline RBOB (Aug '24)

2.3878

2.5015

0.1137

4.76%

Natural Gas (Sep '24)

2.5870

2.6010

0.0140

0.54%

Crude Oil Brent (F) (Sep '24)

81.1100

85.0000

3.8900

4.80%

Ethanol Chicago (Aug '24)

1.8050

1.9700

0.1650

9.14%

Source: barchart.com

 

 

 

 

We believe actual market prices are more accurate indicators of inflation than government bureaucrats’ seasonally-adjusted data—but that doesn’t seem to matter at this time. It seems that the consensus of investors now expects disinflation, and that implies lower interest rates, which can stimulate economic growth. The market believes it, so the market reflects it. As The Doobie Brothers say, “What a fool believes, he sees. No wise man has the power to reason away what seems to be.”

Fear of Missing Out and The Greater Fool Theory (buy now in hopes of selling at a higher price later to a greater fool) suggest the rising stock market trend may continue. Longer term, however, stocks have been overbought and overvalued for months already after the price run-up since the stock market price low in October 2023. And many risks are lying dormant like icebergs under the surface. 

As we continuously weigh and measure all the technical and fundamental data, we conclude that a conservative long-term investment strategy with emphasis on preservation of capital is rational and prudent when market risk is high. Speculators and traders who are willing to take a chance on further bullish momentum need to pay very close attention to risk control because short-term trends are fickle and change frequently.

See The Colby Global Markets Report (click herefor our complete analysis of global markets and specific investment rankings.

Every day, we use technical, fundamental, and quantitative analysis to judge the Reward/Risk probabilities of trend continuation or reversal. We strive to control risks and to make sure that all of our clients are safe and protected from large losses. If you want to earn reasonable returns while avoiding large losses, move your wealth to our professional fiduciary asset management. We always put our clients’ best interests first, and we are always here to help you in times of stress.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. "The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States."

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