Merely two trading days into the new year, a sentiment of dwindling optimism pervades investors regarding the 2024 market outlook. Paradoxically, we view this as exceptional news and a reflection of the prevailing investor mindset. The acceleration in market dynamics, driven by the ascendancy of algorithmic and quant trading firms, has given rise to a mentality among market participants. Both bullish and bearish sentiments seem tethered to the belief that the market is only functioning efficiently when perpetually aligning with their respective preferences—a misconception we aim to dispel.

Examining recent price actions and contemplating prevailing theories that have swiftly gained traction within a span of 45 days, we uncover intriguing insights. Commencing from the lows recorded on October 27, 2023, the S&P 500 achieved an impressive rally of approximately 16.80% within 42 trading days. Simultaneously, the Nasdaq, from its low on October 26, 2023, demonstrated a robust rally of around 20.71% in 43 trading days. Similarly, the Dow Jones Industrial Average, starting from the low on October 27, 2023, surged by approximately 16.86% within 42 trading days. The Russell 2000, originating from the low on October 27, 2023, exhibited remarkable strength with a rally of about 26.82% in just 41 trading days. To provide context to these movements, a comprehensive annual performance chart, sourced from @StockMKTNewz [Media posts by Evan (@StockMKTNewz) / X (twitter.com)], is presented below for a more nuanced perspective.

Introducing a nuanced perspective, examining data from 1928 to 2023 reveals a spectrum of 40 complete years wherein the S&P 500 recorded year-end returns ranging from 10% to (-40%). Remarkably, this historical context underscores that the span of 42 days—yes, a mere 42 days—concluding the remarkable year for the bulls, is an occurrence not only within the bounds of market dynamics but also pales in comparison to the historical variability experienced over complete years. It's noteworthy that our analysis excludes years falling within the 10-20% return range, recognizing that some years within this interval failed to surpass the recent 16.8% rally witnessed in the S&P 500.

As participants in the financial realm, whether investors, traders, or speculators, the allure of immediate returns is undeniable—after all, who doesn't relish swift gains? However, the apparent discontent among bulls or the premature exuberance among bears, with only two trading days concluded in 2024, is indeed perplexing. It beckons a call for composure and a reaffirmation of trust in the market as an efficient pricing system that operates with a broader canvas than immediate market fluctuations suggest.

A conspicuous trend has unfolded in recent years—the prevalence of algorithmic and quant trading emanating from a singular school of thought. Recognizing this unifying paradigm significantly enhances one's ability to navigate the intricacies of the market. The advent of Fintwit (Financial Twitter/X) has given rise to a generation of 'technical traders' who draw from an identical system, revolving around pre-market, daily, and weekly highs and lows. While this system yields efficiency for practitioners in tandem, the question arises: Why? The answer lies in their shared adherence to the same methodology. The chart presented below serves as a compelling illustration of the system's vulnerabilities, showcasing instances where the 'old school' technicians, grounded in principles of supply/demand, Elliott wave theory, and traditional sentiment analysis, stand to reap substantial benefits.

Before delving into the intricacies, it's crucial to acknowledge the inherent efficiency of the system under discussion. Most of the time, this methodology proves effective, underscoring the imperative nature of understanding its dynamics to capitalize on momentum during its operational phases. Our aim is not to undermine the system but rather to shed light on a recent instance of its fallibility—a market curveball, if you will. In October, the Russell 2000 breached its 16-month trend-line support, marking a pivotal shift from buyer to seller sentiments. Though we won't delve into posts from that month, it's noteworthy that the prevailing sentiment mirrored, if not surpassed, the downturn observed during the March correction. The irony lies in the universal affinity for Warren Buffett's advice, "Buy when there's blood in the streets," yet executing this strategy in real-time presents a distinct challenge. At Bankfluence, we, too, have encountered failures in implementing this strategy over the years, but on this particular occasion, we navigated it with precision.

The discourse at hand bears significance as we approach the third trading day of the year, witnessing a peculiar early dynamic. Bears are attempting a premature victory lap, juxtaposed with what we once considered the most ardent bulls exhibiting indications of rhetorical capitulation. Amidst this narrative, a particularly intriguing data point has gained prominence—the Santa Claus Rally (SCR), notably failing to signal a bullish trajectory for the year, potentially hinting at the emergence of a bear market. At Bankfluence, we find immense intrigue in the rapid dissemination of this concept, and the underlying sentiment is encapsulated in the article's title itself (We have them “right where we want them”).

We’ve seen rhetoric that supports a difference in starting dates for the most recent SCR. We’ll examine it using both:

S&P 500 Santa Clause Rally:

December 21 - Jan 3 = (-0.52%)

December 22 - Jan 3 = (-1.03%)

Irrespective of the analytical perspective applied, it is evident that SCR experienced a round trip, concluding the year in negative territory. While our articles may have led readers to perceive us as consistently favoring contrarian trades, this characterization is not universally applicable. It is essential to recognize that the contemporary market landscape boasts a higher density of active participants than ever before. Furthermore, newer investors, ourselves included, benefit from a wealth of data that was inaccessible in previous decades. The industry pioneers have bequeathed invaluable insights, arguably enhancing the knowledge base of today's investor compared to that of two decades past—an anticipated progression facilitated by technological advancements.

The current market composition is a fascinating blend, encompassing individuals who once relied on newspapers or extensive Moody's handbooks for investment information alongside those with instantaneous access to precise price movements. This dichotomy presents a captivating opportunity. Amidst these innovative bounds, both generational cohorts may sometimes overlook the nuanced insights and psychological drivers of the other. The older generation tends to anchor more in fundamentals than price action, while the newer generation gravitates toward price action over fundamentals. The true trailblazers, akin to the next Warren Buffett, will emerge from minds adept at harmonizing both paradigms—those who not only respect the trailblazers who paved the way for instantaneous data but also remain attuned to emerging theories in the ever-evolving financial landscape.

Why We Aren’t Sweating A Pullback

Entering the latter part of January, our attention turns to the impending Q4 earnings reports from the renowned Magnificent 7. Our focal point lies in discerning genuine 'earnings growth' or indications thereof for the year 2024. As illustrated in the chart below, a notable proportion of growth in the mega-cap technology sector stems from multiple expansion rather than authentic earnings growth. While we entertain the prospect of Ed Yardeni emerging as the EOY S&P price target leader, we underscore that this narrative cannot rely solely on multiple expansions. What strikes us as 'contradictory' is the sizable influx of sophisticated investors, particularly from the older generation, who embraced the Magnificent 7 trade last year, seemingly diverging from their traditional fundamentalist views. Among the seven, only Amazon, Nvidia, Google and Meta exhibited a year of earnings growth surpassing multiple expansion. From our perspective, this trend is neither sustainable nor conducive to the overall health of market growth.

While arguing that Nvidia can sustain such substantial sequential yearly earnings growth might pose a challenge, we hold the conviction that strategic levers can be pulled. The remaining six entities within the Magnificent 7 have the potential to elevate their performance, enhance operational efficiency, and diligently execute their plans centered around Artificial Intelligence, Augmented Reality, and cutting-edge Electric Vehicles. Such concerted efforts can solidify the emerging narrative of a new bull market.

The realization of this transformation may not unfold in the immediate span of two to three weeks, but the advent of a new calendar year signals a propitious moment for the premier technology companies to translate their visionary narratives into tangible outcomes. Investors ought to embrace the prospect of a share price pull-back in technology as it unfurls a remarkable buying opportunity for the entirety of 2024.

Amidst the tumultuous narratives circulating in the market, with bears wielding fear, the bulls remain steadfast, composed, and in control. We assert our dominance in this market, and there is no indication that this paradigm will shift in the foreseeable future. In the face of uncertainties, it is prudent to adopt a measured and composed stance—let's collectively "chill" a little.

While the QQQs may currently be in a period of consolidation and digestion, abundant opportunities for long bias investments exist throughout the market landscape, extending beyond the realm of high-profile technology holdings.