EQUITIES

We began 2024 [see: A Look Ahead at 2024] by reminding members of a very important chart feature: the large inverted Head & Shoulders pattern in the S&P 500.

The most important chart pattern for SPX is the large Inverted H&S Pattern which completed on Dec 11.  It points to 5727 (a 24.5% rise from the neckline) and, if it’s to align with the large rising white channel, would reach its target in late June 2024.

The timing was tricky because reaching the 5727 target in June would mean breaking out of the large white channel from 1929. We noted this at the time.

Taking a stab at the path higher, there is definitely a possibility that October works just as well as June for the IH&S payoff.

It would also require the very narrow leadership of the Mag 7 to continue or the other 493 stocks to step up to the plate.

Will the rest of the market catch up to the Mag 7 or will the Mag 7 “catch down” to the rest of the market?

As it turned out, the Mag 7 continued to lead while everything else continued to lag. It wasn’t quite as dramatic as in 2023. But, again, those who properly diversified their portfolios were severely penalized.

SPX came within 58 points of 5727 in mid-July where it reversed at the 1.618 Fibonacci extension, resulting in a backtest of the 1.272 Fib at 5179. As the chart above shows, the Mag 7 bore the brunt of the pain from that reversal.

SPX  bounced sharply at the 1.272 Fib, disappointing those bears who were counting on a 200-day moving average backtest.

It took another run at the 1.618 Fib in August and a third in September before finally breaking out and tagging 5727. Once it topped 5727, of course, the real work began. What could serve as a catalyst to drive it up past the previous overhead resistance?

In our estimation, it was the FOMC rate cut expectations. As we frequently discussed, the increase we expected in inflation and interest rates wouldn’t occur until October [see: Fedsplaining.]

The recent increases in oil and gas futures haven’t shown up in the retail market just yet. So, they won’t be reflected in CPI until the October print which (conveniently) won’t be released until Nov 13 – after the election.

This is also conveniently after the next Fed meeting occurs (Nov 6-7.) Bottom line, Powell will be able to say – with a straight face – that the FOMC is waiting on the data before altering their rate cut plans.

While it was always possible (and still is) that an overheated market could fall apart, the anticipation of multiple rate cuts was enough to support our upside targets at 5885 and 6009.

SPX obviously pushed slightly past 6009, but has failed to hold it five times in a row. We’ll discuss the implications and updated price targets in our Look Ahead at 2025 later in the week.

BONDS

It’s hard to overstate the importance of interest rates to the markets. Our view in the Look Ahead at 2024 was that inflation would generally moderate in 2024, leading to lower rates. But, the path was very dependent on oil and gas prices which were difficult to forecast.

Our CPI/Gas model showed in Jan 2024 that inflation would continue to moderate until October as long as gas prices remained stable. At that point, we would see an uptick. One year later, the relationship has held up nicely even though oil and gas prices didn’t remain stable. CPI, which bottomed out in September, increased in October and again in November.

We nailed the top for the 10Y on Oct 19, 2023 at 5% [see: Powell Speaks] and called the bottom in December at 3.8%. By the time of our 2024 forecast, we were focused on a rising channel whose midline had proven resilient.

The sharp decline from the November highs that helped fuel the year-end equity rally is essentially over unless the red midline breaks down.

When the 10Y broke out of the falling white channel and back above the SMA200, it was clear that the red channel midline had held yet again. The reason, of course, was the concurrent bounce in oil and gas prices.

We added upside targets at 4.39%, 4.53% and ultimately 4.73% (a Fibonacci target) set for early May.)

It reached exactly 4.73% on April 25 and subsequently retreated, following energy’s lead. We then forecast a drop to 4.53%, which was reached two weeks later, and set a series of lower targets that generally mirrored RBOB’s slump, tussling with the red channel midline again in July and ending at 3.61% on September 11.

At this point, oil and gas had each set a lower low, slightly exceeding our downside targets, and were bouncing. This allowed us to set upside targets for the 10Y of 4.14% and 4.47%, which were reached by November and December respectively.

We added 4.698% after the 10Y broke out of the falling white channel on Dec 18 following Jay Powell’s hawkish rate cut [see: FOMC Day.] The 10Y reached 4.699% earlier today, two weeks ahead of schedule.

OIL AND GAS

Energy prices have been extraordinarily important to the inflation picture, and thus to equities, bonds and currencies. We noted last year that, given geopolitical concerns such as the Israel-Hamas war, the Red Sea problems, etc., oil and gas prices were the biggest fundamental wild cards in our forecast.

As often happens, our charts offered much more certainty.

There is a very large H&S pattern in CL that would complete at about 65.50. It’s kind of nonsensical, as it would target 0. And, 65.50 would also backtest the top of the falling yellow channel. It’s hard to imagine OPEC+ allowing CL to drop below 65.50, and there’s plenty of reason for it to bounce.

Central banks, which are relying on being able to drive interest rates lower, might see things differently. Can they achieve lower rates without further drops in oil/gas?

CL started the year at 73 after tagging our major 68.50-70.19 target. A bounce was in order after such a significant Fibonacci level, but to where? We didn’t see a good argument for a long position unless it was able to prove itself.

…In the absence of those [geopolitical] issues becoming more problematic, CL and RB should remain fairly steady, with a slight bias toward higher unless economic activity slows markedly.

In my opinion, however, this upside bias isn’t enough to make a very compelling case for investment. I would consider a long position if CL or RB can push back above their SMA50s, but with fairly tight stops.

Meanwhile, RB – which had also recently reached an important downside target – was also due for a bounce.

The picture for gas is quite similar. RB has reached the bottom of the rising purple channel and will likely stabilize here – at least if OPEC+ has anything to say about it.

It took a month for CL to sustain a push past its SMA50, yielding a run up to 86 where it ran into important overhead resistance – a trend line from Mar 2022 and a backtest of a recently broken channel.

RB rallied past its SMA50 at 2.14 to our 2.814 target at an important Fibonacci retracement and horizontal resistance. Together, CL and RB had driven “the 10Y to highs not seen since Nov 2023.”

We noted the risk that a continued rally posed to interest rates in our April 4 Update on Oil and Gas.

WTI reached our upside target yesterday, resurrecting inflation fears and nudging interest rates higher.

If it pushes back into the rising purple channel, then it has plenty of upside potential… Needless to say, the rising tensions in the Middle East could see things get completely out of control – dashing hopes for lower inflation.

RB is in a similar situation, though its rising purple channel never broke down. It made a lower low in December, and if it breaks above horizontal resistance at 2.95ish has potential from 3.42 all the way up to 4.55. Again, the repercussions for inflation are potentially huge.

The powers that be saw things that way too, as both CL and RB reversed sharply, with CL dropping through our 68.50 target to the 65.50 level discussed in January (and above) and RB dropping through our 1.97 target to reach 1.85 on Sep 10.

As we expected, both inflation and the 10Y bottomed at the same time and have been on the rise ever since.

CURRENCIES

We follow the euro, the yen and of course the US dollar on a daily basis as equity algos are very attentive to their moves – usually via the mechanism of carry trades.

We noted last January that the EURUSD (1.09 at the time) was threatening a breakout, but that there was potential for a drop that would improve the US’ inflation picture.

EURUSD’s breakout suggests they’re intent on making new SPX highs to go along with DJIA’s – which would imply that EURUSD has upside to 1.1748 in the next few months.

If EURUSD fails to top the July highs at 1.1272 then it is more likely to drop to 1.0203. Such a drop would be better for the bulls in the long run as it would facilitate a sharper drop in CPI ( a stronger USD.)

The breakout above the falling red channel was, indeed, a head fake. EURUSD traded in a tight range of 1.06 – 1.12 through November, whipsawing with shifting interest rate expectations.

It finally broke down in November, reaching our 1.0203 target just this morning.

We have followed the USDJPY and yen carry trade for years. Its role in boosting equity prices has been well documented.  We began the year looking for the USDJPY to continue its ascent within a well-defined channel from September 2022.

This latest move tops the 1998 highs and opens a clear path to 159.14, followed by the 1.272 at 167.25 and 261.8 at 169.29.

This means higher inflation for Japan, but the BoJ seems unconcerned. From all appearances, they have pretty good control over their bond “market” so it would probably not make much difference except to the Nikkei, which positively loves the yen carry trade.

A long position is clearly warranted at the current price of 145.85 with stops at the SMA200 currently at 143.66. Nervous types could safely wait for a breakout above the SMA50 at 146.26.

USDJPY had no trouble reaching 159.14, right on schedule on April 29. It pulled back, but made another run in July, at which point it seemed likely to break out. The USD went on a tear however, resulting in USDJPY breaking down below its SMA200 as well as several trend lines. It finally bottomed out at the .886 Fib at 139.43,

The correlation to the Nikkei remained strong throughout the year, rising when needed to prop up the index – but not so high that it drove Japan CPI back above 3%.

The result: the runup from January’s lows to July’s highs were unwound by September, with the rally repeating itself as we write this post.Now that USDJPY has reached the 88.6% retracement of the 2024 drop, it remains to be seen whether the 1.67-1.69 range will be reached. It hasn’t happened yet. But, then again, stocks haven’t been severely worked over – just yet.

Not surprisingly, the dollar index (DXY) has marched in lock step with 10Y interest rates. This made it relatively easy to forecast as the 10Y itself was not too challenging.

CONCLUSION

The year 2024 was generally a good year from a forecasting standpoint. The trends in economics, interest rates, inflation, and geopolitical events tended to drive central banks’ policy and, therefore, markets in fairly predictable ways.

Our next post will focus on 2025. The past few days have been interesting, as equities and interest rates approach our targets from several months ago.

Stay tuned.