The market’s headlines can be misleading, but as I always say… market prices don’t lie.
Investors are celebrating the Dow Jones Industrial Average’s cross above 40,000, as they do every 10,000-point milestone.
The last celebration at 30,000 was the beginning of a 22% rally over the next year.
Investors reacted to the move above 20,000 with a 33% rally.
10,000, well, that drew a quick 10% rally followed by a sharp pullback right back to 10,000, which served as support for the Dow for nine months. A market that basically went nowhere.
Investor’s reactions to moving above this key psychological level has developed what I refer to as a “market muscle memory.” In this case the muscle memory is like that of a track runner’s muscles when they hear the starting gun, they run.
I mentioned that headlines can be misleading…
There has been a flurry of headlines this morning about the dangers of crossing above 40,000. Specifically, that feeling that stock may be tired and ready to sell off.
Let’s go back to the track analogy.
You’ve seen it before, maybe in the Olympics. Runners stretch their bodies forward as much as they can in the last few feet of a race.
Sometimes they fall, other times they win. It is the surge that makes the difference.
In the case of the Dow, you should note that this time around there was no anticipation. No push. No “Dow 10,000” hats (if you know, you know).
That’s the reason that we should not expect stocks to suffer an ill-fated bear market about face for now. Yes, that’s Rudy Giuliani.
Forget about Tesla (TSLA) layoffs and Gamestock (GME)’s pump-and-dump (this is going to be a good story for you next week)… let’s talk about Ray Dalio.
If you’re not familiar with him, Ray Dalio is one of the brightest minds on Wall Street. The billionaire hedge fund manager was one of the first investing boots on the ground in China and has continued that long-term strategy to this day.
Mr. Dalio is also the author of the 2021 book titled “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail”. The book chronicles the cycle of history’s superpower nations. It’s a great read, but you can get the “Cliff’s Notes” version narated by Dalio here.
This morning’s big headline is Mr. Dalio’s quote that “We are now on the brink,” of a civil war, one of the steps in the decline of a superpower according to his book.
This could be the biggest “Wall of Worry” that the market has faced in decades.
If you haven’t hear the phrase before it goes like this… “the market climbs a wall of worry.”
This is a play on Warren Buffett’s famous claims that you should buy stocks when everyone is fearful. That’s the Wall of Worry. As long as investors aren’t so optimistic that they are partying like its 1999.
From inflation worries to civil wars to the election in November, this market has plenty of things to worry about. In the strange world of sentiment – which is oftern one of the stronger and unknown prevailing winds of the market – the current Wall of Worry if good for the bullish argument for stocks.
Sidenote: Ironically, Prince should go down as one of the best market timers in history for calling the Dot.com bubble with his hit “Party Like It’s 1999”.
Keep an eye on the Nasdaq 100’s Daily price chart with me for an easy sign that the market’s momentum has truly shifted after April’s short correction.
We’re within a few days of the large cap technology index making an intermediate-term bullish signal as two of its widely watched trendlines prepare to cross.
The QQQ’s 20-day moving average turned short-term bullish on May 13 when it started ascending from a “valley” created by that pullback in April.
At the same time, QQQ’s 50-day moving average just turned bullish this week as it started its own ascent.
Here is the “signal.”
The faster-moving 20-day moving average is set to cross above the slower moving 50-day moving average, which has historically been an indication that the market’s momentum is set to carry stocks higher.
The last instance was in November 2023 after last year’s large corrections. QQQ rose 6% over the next month, 5% over the following 30 days and another 5% over the next 30 days.
Not all signals are created equally, but this suggests a stronger than expected tailwind for stocks into the summer.
Here is how I apply today’s look at the markets…
If you follow me, you know that I have a close eye on consumer activity right now. There are signs that you and I are scaling back our spending as a result of inflation and a growing consensus that we’re heading into a recession. We’re battening down the hatches.
I’m going to continue monitoring that situation, but the view from our behavioral valuation perspective is that I need to let the market’s trend be my friend.
This means that I’m sticking with an allocation that is heavier in the market favorite Nasdaq 100 as well as the other areas of the market that are working like the utilities and dividend yielders.
The Nasdaq 100 ETF (QQQ) is the easiest way to play this trend as an investor.
More aggressive investors may consider the Proshares Ultra QQQ ETF (QLD) or Proshares UltraPro QQQ ETF (TQQQ) for 2X and 3X leverage of the Nasdaq 100’s bullish move.
We’ll talk about why the utilities and dividend yielders are rocketing higher on Monday.
