The Phrase I Learned in 1998 Predicts Next Month's Market Direction

 “The cost of living is a problem to a lot of people…”

Janet Yellen, May 24, 2024

Is This Just a Good Old Fashioned “Wall of Worry”?

One of the first things that I learned when I came into the investment research business in 1998 was the phrase “wall of worry.” It was during the early stages of researching investor sentiment and its effects on the market, but back then it was a powerful term.

The idea is simple. The way it works… not as simple.

For a market to climb the “wall of worry,” it needs three things. Positive fundamentals, positive technicals, and extreme pessimism. This market has this in select places.

The Nasdaq 100 is a great example of the “wall of worry” trade.

We’re coming out of the earnings season, and for the most part, the Nasdaq 100 companies have bested earnings expectations.

Sure, there have been losers on the earnings front (Tesla (TSLA) and Meta (META) to name a couple), but the companies in the Main Street Investor’s eyes have beat the odds with a good – and some may even call it great – earnings season.

From a technical perspective, the Nasdaq 100 is in good shape as well. The QQQ shares are trading above their 50-day moving average. That same 50-day moving average is trading in a bullish rising pattern. In general, QQQ is in great shape.

But there’s a little catch.

Using the same technical measurement of health (above a bullish 50-day) there are only 39 companies out of the 100 that make up the index that are bullish. Another 44 are trading below a bearish trending 50-day moving average.

Names like Tesla, Meta, and Cisco (CSCO) are all trading with a clear bearish lean to them. But they don’t count since they’re not the headlines of the group. There is one of these stocks that you should pay special attention to, Tesla, since it is in position to drop another 15%.

So, if the Nasdaq 100 appears to be climbing the “wall of worry,” then what’s wrong with the market?

Are you getting tired of this market’s bipolar activity? Well, get used to it - because it feels like it’s not going away for a while.

There was a word that I used to like to slip into a conversation whenever I could on CNBC.

BIFURCATED.

Definition: divide into two branches or forks.

This market is the perfect example of one that is bifurcated, period.

One fork of the market is represented by the Nasdaq 100 (QQQ), which turned in a slight loss for the week but is trading 12% higher for the year as investors and traders alike have been flocking to the large cap names as a safe harbor in this otherwise dangerous market.

On a side note, the last time that investors ran to the top tech names as a “safety trade” was in late 2021. We all know what happened after that.

The other fork in the bifurcated market is the Russell 2000 small cap index (IWM).

For the year, the small cap stocks are up 0.9%. That’s not a typo. With just a slight push lower, the extremely important small cap sector slips into the red AGAIN for the year.

The stark difference in these two areas of the market is what is wrong. We’re still not seeing any signs of true risk-taking from investors. This is evidenced by the fact that the small-cap sector continues to not only lag the broader markets, but is now looking to go back into the red for the year.

Put simply, investors just don’t have any confidence in the market. Why should they? Janet Yellen has been issuing warnings all over the place.

Where Does That Leave Us Heading Into June?

Bullish ETFs: Gold (GLD), Gold Miners ETF (GDX), Utilities (XLU)

Bearish ETFS: Regional Bank ETF (KRE), Transportation (IYT), Energy (XLE)

Bullish Spotlight on Gold

I’ve been hammering the table as a bull on Gold, and with good reason.

Let’s think about the combination I described above…

  • Gold’s Fundamentals: Bullish
  • Gold’s Technicals: Bullish
  • Gold’s Sentiment: While not pessimistic, we’re still not seeing overwhelming optimism towards gold like we are other sectors like AI stocks and QQQ

We’ve seen a short-term pullback in gold over the last two weeks as the market adjusts to higher rates and the reality that the Fed may not drop rates until later in 2024.

That said, gold and the GLD shares remain in a bullish technical trend as the GLD’s 50-day moving average is trending higher.

Support for the GLD shares is just below current prices at $214 with a bullish target of $240 on its next advance higher.

gld stock chart

On the bearish side: Regional Banks

Higher rates are the enemy of the regional banks, it’s just that simple.

The regional bank ETF has remained in a wide trading range since the Fed made it clear that their outlook for rates was more patient than investors. Now, the KRE shares are falling below their 50-day moving average with a near-term target of $45.

The problem with that $45 target is that it will drop the KRE below its 200-day moving average for the first time since November.

The month of June is historically tough for the regional banks. Over the last five years, June has been the third worst performing month for the KRE, averaging losses of 2.2%. When you expand that view to the last 19 years, June is the second worst performing month of the year for the KRE.

There’s a clear headwind coming for the regional banks as we turn the calendar to June.

kre stock chart

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

Read full bio