Expect choppier markets ahead, says Fundstrat's Mark Newton

Key Concepts

• Market Divergence: A significant difference in performance between different market sectors, specifically technology versus the rest of the market.
• Volatility: The degree of variation of a trading price series over time, measured by the standard deviation of logarithmic returns.
• Federal Reserve (Fed) Cuts: Reductions in the target interest rate by the Federal Reserve, which can influence market sentiment and economic activity.
• Moving Average: A technical indicator that smooths out price data by creating a constantly updated average price. The 50-day moving average is a common short-to-medium term indicator.
• Sector Participation: The extent to which various industry sectors (e.g., technology, financials, industrials) are contributing to overall market movements.
• Midterm Election Year: Years in which elections are held for legislative bodies, often associated with increased market choppiness.
• Consolidation: A period where an asset's price trades within a defined range, indicating a pause in the prevailing trend.
• Bull Market: A period of generally rising prices in a financial market.
• Bear Market: A period of generally falling prices in a financial market.
• Earnings: The profits a company generates. Strong earnings can support stock prices.
• Bifurcation: A division or split into two branches. In markets, it refers to different segments moving in opposite directions.

Market Analysis and Outlook

The discussion centers on recent market performance, particularly the divergence between the technology sector and the broader market, which began around July. While technology stocks experienced a significant upward trend, the rest of the market largely moved sideways. This divergence created a "mirage" of market strength when looking at indices like the S&P 500.

Recent Market Performance and November Trends

• November Performance: The market experienced one of its worst Novembers since 2008, with a decline of approximately 2%.
• Pre-November Resilience: This decline followed a more resilient August, September, and October.

Future Market Expectations

• Choppier Markets Ahead: The outlook suggests a period of increased choppiness in the market.
• Unorthodox Timing: The current market downturn or sideways movement is considered unorthodox.
• Fed Cut Expectations: A significant factor influencing market sentiment is the uncertainty surrounding the timing of the next Federal Reserve (Fed) interest rate cut.
  • Williams' Influence: Remarks from Fed official Williams on the preceding Friday reportedly doubled the market's percentage chance of a cut, which helped stabilize and move markets higher.
• Price Targets:
  • The speaker's personal target for the S&P 500 is around 6400, with a maximum expectation of 7000 by year-end.
  • A bounce is anticipated, likely starting within the current week.
  • However, a sustained "off to the races" rally is not expected until more sectors, beyond just technology, begin to participate.

Divergent Opinions and Methodologies

• Tom Lee's Perspective: The discussion acknowledges that opinions can differ, referencing Tom Lee's expectation of choppiness early on, followed by good performance into the year-end.
• Speaker's Methodology: The speaker emphasizes their own methodology and timeframe for market analysis.
  • Technical Analysis: The speaker relies on technical analysis.
  • Year-End Target: The speaker's year-end target was 6650, which they generally maintain.
  • Comparison with Lee: Both speakers were positive for the year, and their targets were largely in line.

Factors Influencing Market Movement

• Interest Rates and the Dollar: The interplay between interest rates, the dollar, and equities is a key consideration.
• Sector Breadth: A critical concern is the limited breadth of the market rally.
  • 50-Day Moving Average: Only about half of all stocks are currently above their 50-day moving average. This is a recurring issue, observed in the previous year and in 2021.
  • Need for Broader Participation: Evidence of participation from sectors like financials and industrials is needed.
• Technology Sector Dominance:
  • Technology is a significant driver, representing 30% of the market.
  • However, tech has become "very overdone."
  • Despite this, tech has been delivering strong earnings, and the economy has generally been in good shape.

Technology Sector Specifics

• Bounce Expected: A bounce in technology stocks is anticipated following recent declines.
• Sustainability of Performance: The key question is whether individual tech stocks can continue to deliver the strong performance seen in recent months.
• Evidence of Slowdown:
  • Stocks like Nvidia have shown signs of slowing since July and have been trading sideways.
  • Conversely, other important stocks like Apple (representing 6-7% of the S&P 500) are still performing well.
• Bifurcation within Tech: There has been a "little bifurcation" within the tech sector, with parts of software showing weakness earlier in the summer.
• Need for Market Unison: The market needs to see many sectors moving in unison.
• Economic Confidence: Increased confidence in the economy is also desired, especially in light of potential disruptions like government shutdowns.

Longer-Term Market Perspective

• Consolidation is Normal: The current period of consolidation is considered normal, especially after two consecutive years of over 20% gains, with this year also likely to see 15-20% gains.
• Bull Market Intact: This consolidation does not necessarily signal the end of the longer-term bull market or an imminent bear market.
• AI Trend: The AI trend is still considered a significant factor.

Midterm Election Year Impact

• Increased Choppiness: Midterm election years tend to be associated with increased market choppiness.

Conclusion

The market is navigating a period of divergence, with technology outperforming the broader market for a significant stretch. While a bounce is expected, a sustained rally hinges on broader sector participation and increased economic confidence. The current consolidation is viewed as a natural pause after strong gains, rather than an indication of a terminal bear market. The timing of Fed rate cuts and the performance of key sectors like technology will be crucial indicators to watch.