Stock Market Prep – Major Shift Starting

As predicted in last week’s newsletter, the stock market bottomed out and rallied last week, nearly hitting new all time highs, but still logging a loss for November. Now we get into December, and the historical Santa Claus rally. We’re on track to hit new all time highs by the end of the month, but it probably won’t happen in the way most people are expecting it to. We could very well hit new all time highs without help from AI stocks as a major shift starts to takes place in the stock market.

On a side note, Stock Dads is running a massive Black Friday sale through December 7. Details are here: https://weprofit.io/StockDads

Market Recap

With only 3.5 trading days, the stock market nearly recovered all of November’s losses in one short week. It unfortunately fell just shy of that goal and ultimately logged losses for November, but we’re close to new all time highs. The Dow finished the week up over 3% and just 1.4% shy of all time highs. The S&P 500 finished the week up nearly 4%, and the Nasdaq finished the week up nearly 5%. That’s incredible, considering the stock market historically rises an average of 10% per year, and we saw nearly half of that in a single week!

Still, we must exercise caution. The NASDAQ formed a hanging man candle on the monthly chart for November, which is 60% accurate in predicting a bearish reversal. That means we have a 60% chance of the market being red in December and January (although it also means we have a 40% chance of going to new all time highs).

What’s certain is that the market is not strongly bullish like it has been for the past 7 months, so we can’t just buy stocks and expect whatever we buy to rise. We need to watch out for a larger market sell-off, especially on stocks that are over-valued such as AI stocks. For example, Nvidia fell 13% last month and Palantir fell 16% last month. Stocks just don’t maintain PE ratios of 400 forever, and there’s a chance AI stocks are starting to sell-off, while other sectors are starting to rise. I talked about this in detail in Saturday’s video, which you can watch here if you missed it: https://www.youtube.com/watch?v=b8DVRk8-h6s

Crypto also recovered a little bit last week, with Bitcoin up 5%, but it was nowhere near enough to make up for November’s losses. Bitcoin logged a massive 17% decline last month, while Ethereum fell 22% – it’s 3rd month in a row in the red. Regardless of what the stock market does, crypto looks like it’ll continue to fall.

Market Sentiment

Despite the massive rally last week, the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) remains in extreme fear. If you’re confused, don’t forget that the CNN Fear and Greed Index is made up of 7 factors, with index valuations making up just 1 of those factors. The market momentum indicator is in fact Neutral, which was a significant rise over last week. But all of the other factors, except volatility, are still in extreme fear. That indicates that it was just a few stocks rising last week that brough the overall market up, even though the majority of stocks remain bearish. This isn’t much different from what we’ve been seeing all year (AI stocks causing the whole market to rise, while most stocks lag behind). But now that the market is in Extreme Fear, any drop in AI stocks could cause a massive sell-off in the overall market.

When we look at the Volatility Index (VIX), we see a massive decline back to neutral, and this lines up with the volatility part of the CNN Fear and Greed Index. This means options traders have become less concerned about an overall stock market crash, but are still buying a lot of bearish put options on individual stocks. The main reason for this is because instead of seeing an overall stock market sell-off, we’re seeing money move out of AI stocks and into consumer retail stocks. That means money is staying in the stock market, helping the S&P 500 to rise, but it’s hurting AI stocks. That’s why options traders are neutral on the overall S&P 500, but bearish on AI stocks.

Technical Analysis

Last week’s technical analysis correctly predicted a rebound in the stock market. This week is a little less certain, but still leaning bullish. On one hand, all of the technical indicators are 100% bullish. The problem is that they’re TOO bullish, and the candles are too far above the 10 day EMA lines, as highlighted below in yellow. My thought is that the market will remain bullish overall, but will have either a small pull-back or trade mostly flat this week. We need a pause in last week’s rally to get the technicals back in line before we continue higher, also known as consolidation.

Despite last week’s rally, the weekly charts are still only 80% bullish. That’s not concerning enough to panic, but it should cause investors to take some extra caution. If the daily chart plays out and the market trades flat this week or slightly down, we could see the weekly charts become just a little more bearish which could have some consequences long term, especially into January. But for now, I think we have enough bullishness in the market to remain bullish, at least through the end of December. And while I do think we’ll hit a new all time high by the end of the year, I do not think it’ll happen this week.

Economic News

The economic news last week was both bad and good. On one hand, the labor market came in stronger than expected although still weak. This caused investors to panic that the Fed would not lower interest rates in December. On top of that, consumer spending came in stronger than expected but still weak also. Overall, the economy is weak, but investors don’t seem to care for now.

This week we have Jerome Powell speaking on Monday, and this will be our last chance to hear from him before the FOMC meeting next week. If Powell indicates the Fed will lower interest rates next week, we could see a major rally on Monday. But if Powell indicates the Fed will not lower interest rates next week, we could see a major sell-off on Monday.

Beyond that, we have ADP jobs data on Wednesday and inflation data on Friday.

Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar

Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm

Earnings

Earnings season continues to wind down, but we still have a few companies reporting on Wednesday that you might want to watch. Specifically, Salesforce, Snowflake, and C3.ai all report Wednesday after the bell. None of these are large enough to move the overall market, but they are all popular with retail investors.

Crypto

As I mentioned earlier, Bitcoin recovered about 5% of its losses last week, but still remains down 28% from highs. And Ethereum is faring even worse, down 39% from highs. The crypto winter continues, and I reiterate my $55,000 price target on Bitcoin.

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