Blow-off Spring Rally Led by Fewer and Fewer Stocks


By Victor Sperandeo with the Curmudgeon

Fed Watch:

As everyone expected, the Fed kept interest rates unchanged last week, but penciled in only one 25bps rate cut this year.  At his post FOMC meeting press conference on Wednesday, Fed Chair Jerome Powell indicated that the U.S. central bank is in no rush to shift gears, waiting for more evidence that its fight against inflation is moving in the right direction.  The markets largely held their gains afterwards, downplaying Powell’s hawkish talk as a signal that the Fed doesn’t want to be boxed in. Bond and note yields declined; prices rose for the rest of the week.

As previously stated, Victor believes that there will be 25 bps rate cuts at EACH of the next two FOMC meetings (July 30-31 and September 17-18) for political purposes.  If the economic numbers are weak, the Fed might cut 50 bps at the September meeting.

Meanwhile, the CME Fed Watch Tool assigns only a 12.4% probability of a 25 bps rate cut at the end of July FOMC meeting; a 62% probability of a 25 bps rate cut and an 8.2% chance of a total of 50 bps rate cuts at the September FOMC meeting.

Using different measurement gauges, Bloomberg forecasts two 25 bps rate cuts by the end of 2024.  That’s shown in this graph:

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-→Victor expects the U.S. economy will continue to weaken, so financial markets will welcome those rate cuts. It’s all bullish he says!

Stock Market Comment & Analysis:

The S&P and NDX 100 are at all time new highs, with U.S. debt prices rising and with precious metals stable, the markets were stronger than Victor expected in the first half of June. 

As of Friday’s close, the S&P 500 posted its best week in over a month, while the Nasdaq logged its largest weekly advance since April 26, according to FactSet data.

In sharp contrast to those impressive stock index gains, the market breadth was very weak.  Last week, the NYSE had 1,017 issues advancing vs 1,883 declines; the Nasdaq had 1,846 advances vs. 2,747 declines.  

Money is leaving the market as there have been net redemptions from stock index ETFs.  In particular, S&P 500 index funds saw the biggest outflows on record last week, according to data from Lipper’s global fund flows.  In the week ending June 12th, S&P 500 exchange-traded funds had outflows of $17.4 billion, even as the index SPX advanced by 1.25% over that same time period. Overall, exchange-traded equity funds saw $14.7 billion in outflows, the largest weekly outflow since the week ending Dec. 12, 2021.

As the Curmudgeon noted in recent posts (here and here), there have been many divergences which have only gotten worse.  For example:

·       Over 73% of sub-industry groups closed within 5% of a 6-month low. S&P 1500 sub-industry groups have unfavorable relative trend profiles with fewer groups managing to keep up with the cap-weighted S&P 500. Source: Dean Christians, SentimenTrader.

·       Just 5 big name tech stocks— Nvidia, Meta Platforms/Facebook, Alphabet/GOOGL, Microsoft, and Amazon —have accounted for 61% of the S&P 500’s return this year. Source: Barron’s.

·       Nvidia accounted for 32.26% of the S&P 500’s total return through May 31st which exceeds the 21.01% total contribution of the other six members of the Magnificent 7.  Source: Barron’s.

·       Thursday evening, a trader wrote on X: “>40% of S&P 500 gains are due to just Nvidia; as its weighting goes up, more capital must flow in (because of bench marking), further driving its price up.”

·       The CBOE Volatility Index, or VIX, dropped below 12 last week, a nearly five-year low. History shows that periods of extreme market calm rarely last. “On a really calm day, it’s easy to blow bubbles. They can grow to humongous sizes,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “When the wind picks up, they pop,” he added.

·       On Thursday, the NASDAQ finished the day +0.57% despite an astounding 70% of the stocks in the index closing lower on that day’s trading session.

·       On Friday, the S&P and NASDAQ were flat, but the NYSE had only 771 Advances vs 2,057 Declines (2.67 times as many declines as advances). Declining Volume (2,647,069,202) was 3.7 times Advancing Volume (721,949,734).  The NASDAQ had 1,209 Advances vs 3,014 Declines and 3 times as many new 52-week lows as new highs.

·       Since May 15th, the S&P 500 (market cap weighted) has been in a strong uptrend, while the equal weighted S&P 500 average has trended down.  The out performance in 2024 YTD is staggering, as can be seen from this chart:

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As a result of the above data points, the Curmudgeon is not nearly as sanguine as Victor on the outlook for the U.S. stock market.  We have never seen such divergences and narrow domination by large cap tech stocks (which are perceived to benefit from AI), while the rest of the market languishes. 

In reality, there is only one company today that is making money from AI and that is Nvidia, which recently split 10:1. It closed Friday at $131.88, which is 11.75 times its October 14, 2022 bear market bottom (split adjusted) price of $11.22.  That means if you invested $10,000 in NVDA on October 12, 2022, that investment would now be worth $131,899!

Have you ever seen such a meteoric stock price increase in 19 months?


Victor’s Assessment of U.S. Economic Policies and the Fed:

As a multi- decade believer in Austrian Economics and Monetarism (i.e. Milton Friedman), the current economic philosophies are not based on reality. The hodgepodge of Neo-Keynesianism coupled with a large dose of Modern Monetary Theory (MMT) are completely invalid in forecasting the economy, especially inflation.

Those bogus beliefs will continue to lead the Fed to move monetary policy up and down like a YO-YO.  As a result, the Fed has no real knowledge of what is true to guide its monetary policy.  They are a political gang that does the bidding of the nation’s leaders. Jerome Powell has no philosophy to guide his actions as he is totally a puppet of the powers that be.

Of course, politicians use whatever it takes to win elections in the short run, without concern for the long run. As great economist John Maynard Keynes said, “in the long run we are all dead.”

Unfortunately, economic policy that gets a politician elected is what’s believed to be economic truth.  Sadly, the long run end result doesn’t matter to today’s political power holders.  In particular, the massive debt caused by U.S. government deficits and excessive spending.

Today, federal government spending into oblivion is fine as it increases GDP and (on the surface) keeps unemployment low.  Government agency reported data is used as a premise for economic policy. As we’ve shown many times, the BLS employment data is rarely accurate, as it’s distorted by the bias to win power by fooling the masses.  Few realize that the data is a sham to fool the people into voting for the current political party in power.

Victor on Ethics and a “Code of Values:”

Here’s an example of using ethics. To quote Ayn Rand, “What is morality, or ethics? It is a code of values to ‘guide man’s choices and actions’—the choices and actions that determine the purpose and the course of his life. Ethics, as a science, deals with discovering and defining such a code.”

Yet the Fed has no such code to guide its MONETARY policy. They don’t pay heed to Money Supply, which is why they never will solve the problem of high inflation.

Fed Chair Powell uses historical government agency data to help formulate monetary policy.  He “cherry picks” what he likes and disregards what he doesn’t care for.  Yet markets look FORWARD (not BACKWARDS), so he can never be correct.

Most economists follow what they are taught in college i.e.  Keynesianism. They never question if it is correct or not.

As Albert Einstein said: “Five per cent of the people think, ten per cent of the people think they think, and the other eighty-five per cent would rather die than think.”

Today, thinking outside of university dogma can cause you to lose your job! For more on this theme, please visit the American Association of University Professors (AAUP), which tracks cases of alleged violations of academic freedom.

U.S. is Headed for a “Crack Up Boom”:

Austrian Economics uses a term called “The Crack Up Boom.” It is a synonym for Hyperinflation in economic “money” terms. “A crack-up boom is an economic crisis that involves a recession in the real economy and a collapse of the monetary system due to continual credit expansion and resulting in unsustainable, rapid price increases. This concept of a crack-up boom was developed by Austrian economist Ludwig von Mises as a part of the Austrian business cycle theory.”

But for stocks, it is called “melt-up” or “blow off top.” This is where we are headed under current U.S. fiscal and monetary policy.

The Fed target of 2% annual inflation rate target is beyond a fantasy, it’s historically impossible!    From 1914 January 1 till May 2024 (110.42 years) the official CPI, which is understated, is compounding at 3.17% ( 314.069). Also, the median individual income is currently $57,406 as of 2023.  Therefore, all prices will double in 22.7 years at 3.17%.

In conclusion, inflation will force a crack up boom, which is being shown by NDX 100 and cap weighted S&P 500.

End Quote:

“The rate of profit... is naturally low in rich and high in poor countries and it is always highest in the countries which are going fastest to ruin.” Adam Smith in Wealth of Nations

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Adam Smith was a Scottish economist and philosopher who wrote what is considered the "bible of capitalism," The Wealth of Nations, in which he details the first system of political economy.


Be well, stay calm, success and good luck.  Till next time……………..

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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