US stocks close mixed, the impact of Trump's proposed ban on corporate homebuying

Key Concepts

• Russell 2000: A small-cap stock market index showing recent strength, but with a history of “fake outs.”
• Dow Transports: An index of transportation companies, confirming bullishness when rising in tandem with the Dow Industrials (Dow Theory).
• January Trifecta: A set of three indicators (Santa Claus Rally, first five trading days of the year, and the entire month of January) used to predict the year’s market performance.
• Leveraged ETFs: Exchange-Traded Funds that amplify returns (and losses) – a high ratio of long to inverse leveraged ETFs is seen as a warning sign.
• Institutional Home Buying: The practice of large investors purchasing single-family homes, targeted by potential policy changes.
• Fannie Mae & Freddie Mac: Government-sponsored enterprises impacting mortgage rates through bond purchases.
• Nvidia H200 & Vera Rubin: New generations of Nvidia’s AI chips, representing significant performance improvements.
• Robotics & AI Integration: Increasing presence of robotics and AI across various sectors, highlighted at CES.
• Dow Theory: A technical analysis theory suggesting that the Dow Industrials and Dow Transports should confirm each other’s trends.

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Market Takeaways & Trends – January 10, 2024

I. Trading Day Recap & Small Cap Strength

The trading day was mixed, with tech stocks underperforming and weighing on the S&P 500 and NASDAQ. However, there were positive signals in the small-cap realm. The Russell 2000 index, while experiencing sideways movement during the afternoon, broke free from a pandemic-era trading range, reaching new highs. Jared Blickery of Yahoo Finance noted that while past breakouts have been followed by declines, the current setup appears more favorable, with analysts increasingly optimistic. He cautioned, however, that “there have been a lot of fake outs.”

The Dow Transports also reached new 5-year highs, reinforcing the bullish signal from the Dow Industrials, aligning with Dow Theory. This simultaneous rise in both indices is considered a “confirmation signal” of broader market strength.

II. The January Trifecta & 2024 Outlook

Jared Blickery highlighted the “January Trifecta” – a set of indicators developed by stock trader’s Almanac’s Jeff Hirsch – as a potential predictor of the year’s performance. The first component, the Santa Claus Rally (the last five trading days of the old year plus the first two of the new year), was negative. However, the first five trading days of 2024 are up 1.11%, historically indicating a positive year (with gains occurring 83% of the time, averaging around 15%). The final component, the performance of the entire month of January, remains to be seen, but early tracking suggests a continuation of the positive trend observed in the first five days. Blickery noted the possibility of “double-digit returns for four years in a row,” while acknowledging it’s premature to be overly optimistic.

III. Warning Signs: Leveraged ETFs & Market Sentiment

Despite the positive indicators, Blickery cautioned about a potential warning sign: the ratio of leveraged long ETFs to inverse ETFs. Strategus ETF Research’s Todd Sohn reported a ratio of 13:1, significantly skewed towards bullish positions. This level was last seen a year ago before a market decline. Sohn clarified this isn’t a “sell signal” but a “situational awareness” indicator, suggesting excessive enthusiasm. He emphasized that this setup is concerning only if accompanied by deterioration in market breadth. Currently, market breadth remains stable, making this a “yellow warning” rather than an immediate threat. As Sohn stated, “It is not a sell signal but more a situational raress that hey people are very enthusiastic right now. Um if that is met with deterioration from market breath that's when you start to raise your guard.”

IV. Trump’s Housing Market Intervention

President Trump announced plans to ban large institutional investors from buying single-family homes and intends to seek Congressional support to codify this ban. Lance Lambert, CEO and co-founder of Resi Club, explained that the impact of such a ban would vary significantly by market. Nationally, institutional investors own around 0.5% of housing stock (1% for those with 100+ homes). However, in markets like Atlanta, this figure rises to 4% (20-25% for single-family rentals). A forced selloff of institutional holdings could lead to a surge in listings in these concentrated markets.

Lambert assessed that Trump’s proposal has a high probability of gaining traction due to its populist appeal, citing a recent poll with a +50 percentage point net favorability rating. He noted Trump’s tendency to test public opinion before pursuing policies.

Trump also announced plans to instruct his representatives to purchase $200 billion in mortgage bonds, aiming to lower mortgage rates and increase affordability. Lambert explained that increased demand for mortgage-backed securities typically lowers yields and rates. While Fannie Mae and Freddie Mac are already increasing their purchases, the additional $200 billion could exert further downward pressure, though the overall economy remains the primary driver of rate fluctuations.

V. Nvidia’s China Approval & CES Highlights

Chinese officials are expected to approve the purchase of Nvidia’s H200 AI chips, reversing a previous policy decision. Patrick Morehead, founder of More Insights and Strategy, emphasized the importance of actual shipments and revenue booking before considering the deal finalized. He estimated a potential $30-40 billion revenue lift for Nvidia, representing a 10% increase. He also noted that the H200 chips are significantly more powerful than the previously debated H100 chips.

Regarding CES, Morehead highlighted the growing importance of robotics, with companies like Qualcomm and Cuka making significant investments. He also pointed to advancements in automotive digitization and automation, as well as renewed investor confidence in Intel’s latest chip manufacturing process. He observed that CES has shifted from a consumer electronics show to a more enterprise-focused event, with AI-powered healthcare solutions and home robots gaining prominence. Morehead noted the challenges of developing reliable and safe multi-purpose home robots, citing energy requirements and safety concerns.

Conclusion:

The market currently exhibits positive momentum, supported by the January Trifecta and strength in small-cap and transportation stocks. However, caution is warranted due to the high ratio of leveraged long ETFs and potential policy interventions in the housing market. Nvidia’s potential China approval and the advancements showcased at CES suggest continued innovation in the technology sector, particularly in AI and robotics. Investors should remain vigilant, monitoring market breadth and economic indicators while acknowledging the potential for volatility.