January 13, 2025

Preview from my weekly report*

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Stocks have been moving from weak hands to strong hands.

Highlights from the past week

• The S&P 500 stock price index (symbol: $SPX, 5,827.04) fell 1.94% last week, breaking below the December low, and has moved lower 4 of the past 5 weeks.
• Typically bullish seasonal tendencies have failed to appear.
• On-Balance Volume (OBV) held above its December low, following a moderate downside correction similar to previous minor price pullbacks in 2024.
• RSI short-term price momentum actually is higher than it was after Fed Chairman Powell’s rather hawkish remarks about fewer future interest-rate cuts, which alarmed traders and set off a wave of selling on 12/18/2024.
• The Fed’s more subdued interest rate guidance on 12/18/2024 plus strong employment data on Friday have led to a stock market shakeout of weak hands.
• For every seller there has to be a buyer, so it appears likely that stock has been moving from weak hands (typically short-term speculators) to strong hands (more confident investors willing to buy on price weakness to take advantage of emotional selling).
• Small-capitalization stocks (IWM) appear oversold.
• The following sector ETFs turned systematically neutral last week when prices fell below 50-day SMAs: Technology Sector SPDR (XLK), Communication Services Sector SPDR (XLC), and Consumer Discretionary Sector SPDR (XLY).
• Consumer Staples Sector SPDR (XLP) fell to a 6-month price low.
• The number of Net New Highs ($NYHL) is technically bearish. The current level of -204 is greater than the December low of -245, however, suggesting positive divergence.
• iShares Core U.S. Aggregate Bond ETF (AGG) fell to a lower low and remains systematically bearish.
• US dollar ($USD) rose further above 2-year highs and remains systematically bullish.
• Gold turned systematically bullish again.
• Crude Oil ($WTIC) broke out above 3-month highs.
• Copper turned systematically neutral on 1/7/2025 when price rose above its 50-day SMA.
• Bitcoin ETF (IBIT) price lost bullish momentum.
• Short-term sentiment indicators (which generally follow the price trend) currently indicate increasing Fear, which is healthy sign for the market according to The Art of Contrary Opinion.

The case for further bull market stock price gains

• The major uptrend has been confirmed by a large majority of technical market indicators.
• Long-term, major momentum still favors the bulls. 
• The Dow Theory confirmed a bullish major trend for the stock market in November.
• Seasonal tendencies for the stock market are bullish.
• Some short-term stock market indicators are oversold.
• Inflation has come way down from a CPI peak rate of 9% for June, 2022.
• Financial Stress continues to decline.
• The Federal Reserve Board has begun to lower short-term interest rates, although as of Fed meeting on 12/18/2024 the Fed’s path forward appears doubtful.
• The benchmark 10-year US Treasury interest rate signaled “overbought”.
• Consumer spending and the economy have remained remarkably resilient.
• The Conference Board’s Leading Economic Index® (LEI) for the US turned upward and “no longer signals an impending recession.”
• Corporations are buying back their own stocks.
• The incoming Trump administration is expected to promote business-friendly, pro-growth economic policies, with lower corporate taxes, looser regulations, and reduced red tape.
• Artificial intelligence could usher in a new era of productivity and profits. 
• A growing economy, resilient consumer spending, and a strong jobs market support rising corporate profits.
• Copper price turned systematically neutral on 1/7/2025 when price rose above its 50-day SMA. “Dr. Copper” is widely thought to be a leading indicator of global economic conditions, with a better forecasting record than some Ph.D. economists.
• The consensus among big banks and research analysts anticipates the S&P 500 price rising 14.8% in 2025.
• Short-term sentiment indicators (which generally follow the price trend) currently indicate increasing Fear, which is healthy sign for the market according to The Art of Contrary Opinion.
• Finally, in a bull market, the benefit of the doubt goes to the bulls.

The case for a cautious stock market strategy

• Stock prices have lost bullish momentum since the S&P 500 price peak on 12/6/2024.
• A large majority of stocks crossed below their 50-day SMAs (simple moving averages), confirming the loss of bullish momentum for the short term.
• In recent weeks, indicators of the broader stock market lagged the big-cap market leaders, suggesting negative divergences.
• The latest data show that employment is much stronger than expected, which may motivate the Fed to keep interest rates high. Fed Chair Powel already said he felt less willing to lower interest rates aggressively.
• Prices of US Treasury notes, and bonds have been under downward pressure since 12/6/2024, when interest rates bottomed and turned up. Stock prices peaked and turned down on the same day.
• The latest data show that consumer confidence weakened. The Conference Board’s Consumer Confidence Index and Expectations Index both declined in December.
• University of Michigan Consumer Expectations Index declined for early January and Inflation Expectations rose.
• Some investors fear that President-elect Trump’s tariffs, tax cuts, and immigrant deportations could increase inflation, which might motivate the Fed to adopt a more restrictive monetary policy. Tariffs also could lead to trade wars, disrupt supply chains, and depress global business.
• The Personal Consumption Expenditures Price Index (the Fed’s preferred inflation gauge) for November rose to a 2.82% annual rate, the highest since April.
• Crude oil prices jumped up to a 3-month high, exacerbating inflation expectations. 
• Longer term, inflation may remain stubbornly high due to tight labor markets reflecting an aging work force with fewer working-age adults, climate change costs, more expensive green energy, the cost of delayed replacement of aging infrastructure, geopolitical risks to supply chains, trade restrictions, and out-of-control government deficit spending.
• Heavy supplies of new bond offerings and rising inflation could mean higher-than-hoped-for interest rates.
• US dollar ($USD) rose further above 2-year highs, and Gold turned systematically bullish, suggesting movement to safety and away from risk.
• Stocks remain long-term overbought and overvalued by all historical standards, such as Price/Earnings, Price/Dividends, Price/Book Value.
• The Buffett Indicator (total market capitalization of the US stock market divided by gross domestic product) suggests that stocks are overpriced. Warren Buffet continues to sell stocks and move money into defensive, safe-haven investments.
• Geopolitics has threatened to be the biggest tail risk to markets for many months, with potentially disruptive, escalating wars in Russia/Ukraine and the Middle East, as well as increasing signs of China aggression—but the market has ignored war risk so far.
• Some investors fear that the speculative enthusiasm for artificial intelligence might be overblown, and the hoped-for benefits might not pan out.

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Weekly Rankings of Major Trend Relative Strength
My weekly Top 10 ETFs ranked by the Major Trend Relative Strength outperformed the S&P 500 by over an 11-year period of real-time weekly tests. Click here for a graph of simulated performance.
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My ETF Rankings are not investment advice. Rather, they are an objective ongoing research study.

Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my Money Management Rules.

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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.

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