The Market Mosaic 12.15.24
S&P 500: Breadth oversold as a seasonal sweet spot begins.
Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at macro, technicals, and market internals. I’ll also highlight trade ideas using this analysis.
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For today’s update, I want to highlight several key charts I’m watching for the capital markets and how they are impacting the near-term outlook.
I also have a quick summary and links to recent posts that remain impactful for monitoring the markets. And after that, you can find a bonus trade idea on a chart setup that I’m monitoring.
Big Picture
Another updated look at inflation shows that pricing pressures keep moving in the wrong direction. The Consumer Price Index (CPI) gained 2.7% in November compared to last year, while the core figure that excludes food and energy prices rose by 3.3%. The headline figure accelerated from the prior month’s 2.6% pace, while core inflation bottomed in August and has trended sideways the past three months. The Producer Price Index (PPI) jumped 3.0%, which is the largest gain since February 2023. It’s also worth noting that the PPI tends to lead changes in the CPI as you can see below. The chart plots core PPI (blue line) and core CPI (red line), with core PPI crossing above CPI in November’s figures.
Many economists are dismissing the acceleration in CPI and PPI over the past month to rising food prices. For instance, food prices accounted for around 60% of the PPI’s monthly increase with egg prices up 55% alone. The chart below shows an index of agricultural commodities, which are up nearly 30% year-over-year and are recently breaking out to the highest levels in over 12 years.
While many economists are pointing to one-off factors that are driving recent increases in inflation, some alternative measures of core inflation show that pricing pressures are persistent. The Fed’s “supercore” measure that looks at core services excluding home rents has averaged 4.3% over the past three months. Another measure of core goods that excludes food and energy shows the annualized pace over multiple lookback periods is turning higher over the past couple months (chart below).
The average stock is lagging badly during a historical period of weak seasonality for the S&P 500. Mid-December tends to see a volatile stretch for the S&P 500 looking at historical trends over the past 20-years. And right on cue, there have been more declining stocks than advancers for 10 straight sessions for holdings in the S&P. That’s the longest streak since October 2000. Across the major exchanges, there are now only about 39% of stocks trading above their 20-day moving average (chart below). That’s a way of gauging how many stocks are trading in short-term uptrends.
As the average stock is pulling back, some measures of stock market breadth are reaching oversold levels. The McClellan Oscillator in the chart below looks at advancing versus declining stocks on the NYSE over a trailing period. You can see the oscillator is approaching oversold levels seen during periods like the start of November and first week of August that saw broad rallies unfold.
After a short-term period of seasonal weakness, a strong three week stretch is coming up for the S&P 500. The chart below shows the S&P 500’s seasonality during election years going back to 1928. If those seasonal trends hold up, then a rally into mid-January could start this coming week. That makes emerging signs of oversold breadth conditions quite interesting against the backdrop of historic seasonal trends.
Mosaic Tidbits
Here are a few of my recent posts that are still impactful and relevant to the stock market’s next move:
Catalysts are lining up to boost small-caps. The rate-cutting cycle, relative valuations, and a momentum thrust are driving a historical breakout in the Russell 2000 Index of small-cap stocks.
Animal spirits are igniting speculative areas of the capital markets. High-yield bonds are another segment delivering a positive signal on the outlook, including junk bond spreads and relative performance of the lowest rated categories.
The S&P 500 is setup for a strong finish to 2024. A favorable seasonal period, recent surge in the number of stocks making net new 52-week highs, and loose financial conditions are supportive near-term for the stock market.
If inflation keeps accelerating, then a major change in stock market leadership could be coming in 2025. Energy and consumer discretionary sectors are highly correlated to rising inflation, while commodities could be set for a mean-reverting move higher.
Heard in the Hub
The Traders Hub features live trade alerts, frequent market update videos, and other educational content for members.
Here’s a quick recap of recent alerts, market updates, and educational posts:
Riding Bitcoin’s breakout to a 37% gain in just 25 days.
My favorite crypto-linked trade idea heading into year-end.
How high quality growth fundamentals helped us capture a 73% gain.
Boosting longer-term gains with trailing moving averages, including one growth holding now up 247%.
You can follow everything we’re trading and tracking by starting a 7-day free trial here. By starting a trial, you will unlock all content and reports created exclusively for members.
Chart Idea
IREN Ltd (IREN)
If cryptocurrencies keep rallying into year-end, then keep a close eye on IREN. The company’s data center facilities are optimized for Bitcoin mining and artificial intelligence applications. The stock tested the $16 area back in July then pulled back. The stock is making a smaller pullback after testing that level again at the start of December, which is resetting the MACD at the zero line. I’m watching for a breakout over $16, and will send a complete trading plan to Hub members.
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Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence! I may hold a position in the securities mentioned in this report.