Stock Talk - "Charts R Us" - Which Charts to Watch after the Fed's Interest Rate Decision

Starting point is 00:00:00 Troy Charles and myself did a 90-minute live stream last night, covering our team's thoughts on various topics. I'll drop a link in the description below. Please subscribe to it in my Stock Talk YouTube channel. In it, we covered a lot of ground, including yesterday's Federal Reserve meeting and actions, the upcoming presidential election, seasonal is in the stock market, covering economic data, inflation, economic growth, and where we stand versus our team's 2024 overall market outlook, and our second half of the year. So far, year to date, it's pretty much trading on plane for the year.

Starting point is 00:00:35 And we haven't changed our optimistic outlook for year-end, 2024, of around 5,800 on the S&P 500, since we first alluded to it in the fourth quarter of last year, 2023. Our early first quarter 2025 target remains 6,000. But given the current backdrop and what I'm seeing, I lean that that 6,000 figure is probably too low by up to 200 S&P. 500 points under a soft landing Goldilocks year-end, fear of missing out, moving post-election, extending into inauguration time. For today, I'm sticking with a few important charts.

Starting point is 00:01:11 Regardless of what you might hear on TV or the internet about this or that chart being key or the most important chart to watch, none is more important than the largest stock market index in the world, the market cap weighted S&P 500. Take a look at the year to date daily chart on the S&P 500. For the Postpart, it's up and to the right with weakness during its normal week post-July 4th holiday into early August. The chat boards and financial networks were in panic mode after the August 1st moved down. Why? Because that little candle on August 1st is called a bearish engulfing candlestick formation. So, hey, Chris, what is a bearish engulfing formation?

Starting point is 00:01:50 Well, that pattern consists of an up candlestick, followed by a big down candlestick that eclipses or engulfs the smaller up-candle. This is what it generally looks like. Technicians consider the worst of these formations when the engulfing candle has a big up opening and closes on or near the engulfing low of the day. This is considered a bearish reversing trend, usually occurring at the top of an up trend. Given the timing of this move down,

Starting point is 00:02:17 negatively oriented traders were out in mass calling the top was in. Many, not only for this summer, but also for the bull market. Okay, so back to charts, the second most important chart, to me remains the chart of real-time, real interest rates. Real rates are the premium of treasury bond investor receives over the inflation rate for holding a US government

Starting point is 00:02:39 treasury bond. This is really the main lever the Fed has at slowing inflation, but it's also the one that can cause companies and investors to hold back from investing on hiring or capital investment and cause recessions in the US. Take a look at the super short-term, one-year, real-time, real interest rates we've discussed all year. only during the dot-com bubble, the pre-great financials crisis in 2007-2008, late 2018,

Starting point is 00:03:05 and recently, has this yield premium exceeded 3 and 3 quarters percent. This is why many prominent hedge fund managers have finally said Fed is too tight and recommended that they cut rates by 50 basis points at yesterday's meeting. An opinion our team has had ever since they skipped cutting rates at the July meeting. The final two charts I want to focus on are ones of volatility. The first chart is on Realized Volatility or R-Val Index on Bloomberg. This is the actual level of volatility that stocks are experienced in the market or on your screen if you're watching them. As you can see from the chart, the trend had been lower for about 18 months, but it has recently moved from 8 to over 20 and now sits around 14.

Starting point is 00:03:48 I remind investors that historically, one, volatility is quite seasonal with normal spikes in volatility higher in midsummer and early fall and lower trends in winter and spring, and second, realize volatility is also normally higher in the two months preceding presidential elections, the period we just entered. However, when discussing volatility, I feel compelled to discuss implied volatility as well. What's that? That is what is priced into the options market. This is the market participants' best guess of what the future will hold. Take a look at the chart of the two-month futures contract for forward volatility. This contract expires in mid-October, so it's the one pricing volatility into a normally weak seasonal stock period as well is into a couple weeks before the election. As one can see, it too has risen during a normal volatility period. However, it's starting

Starting point is 00:04:40 to come down off its feverish high. Finally, I must point out that regardless of the way we feel as investors or voters about the election and volatility in the markets, the numbers show that volatility is actually declining into the election and being priced for a gentler escape from November than six months ago when things looked more certain about who was running and who might win. If you don't believe me, take a look at the volatility curve now and six months ago. Investors, the blue line in the chart was the forward volatility curve six months ago, and the white line is the curve as of September 15th when we taped this. Looking at the data points that overlap currently are the September expiration, which is UX1,

Starting point is 00:05:21 October expiration, and November expiration. In all three cases, the current price of insurance is below, where market is, were asking for insurance six months ago, and future insurance costs for 2025 or below, what it would have cost you to hedge your 2024 election for the better part of a year. So wrapping it up, what does this mean for you and your money? It means the odds are rising that regardless of whether you favor

Starting point is 00:05:46 a candidate or not who wins or loses in the election in the next few weeks, your money in the overall stock market will be treated okay for late 2024 into the inaugural ball, in late January 2025. That our 6,000 upside optimistic target for the first quarter of 2025 might actually be a few hundred points too low, not too high.

Starting point is 00:06:08 That said, for now, don't get greedy when stocks are up on spikes and volatility is low, and don't panic and sell stocks when volatility spikes and stocks drop. Our investment team does believe that over the next few years, more active stock management style

Starting point is 00:06:21 will begin to reassert itself and be rewarded relative to passive index investing. If over the years, found yourself reacting emotionally in your portfolio to presidential elections and their uncertainty or when volatility is high like it was in July, and now is time to step back, take a deep breath, give your advisor a call and talk and walk you through your long-term financial plan. If you're uncomfortable with a wider range of possible equity outcomes, our Oak Harvest team has launched a new strategy that retains the ability to go long stocks, short stocks,

Starting point is 00:06:52 as well as by partial hedges and shock absorbers for your stock portfolio. You can find find information on this new strategy of ours at oak harvest funds.com. For myself, from Eric behind the camera and the whole team supporting us, have a great weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities.

Starting point is 00:07:40 Indexes such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - "Charts R Us" - Which Charts to Watch after the Fed's Interest Rate Decision

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