Stocks are on a major bullish run … why we shouldn’t expect another month of double-digit returns … beyond short-term weakness lies another leg higher … reasons to be bullish
The market is on a tear.Since mid-June, the S&P has climbed 15%, with a 2% surge on Wednesday thanks to a lower-than-expected inflation reading.As I write Friday afternoon, the markets are on pace for four straight winning weeks.So, where do we go from here?More gains? Some sideways action as traders take profits off the table? Or should we expect the bears to come clawing back?Let’s jump straight to our technical experts John Jagerson and Wade Hansen of Strategic Trader:
From a technical perspective, we aren’t optimistic that stock prices are going to rise another 12-14% like they did in July.However, there has been enough improvement in the economic outlook for us to feel a lot more confident about support holding for now in the 3,875-3,900 range if [Wednesday’s] breakout does not hold.
Let’s analyze this visually.
Below, we look at the S&P here in 2022, with some added trendlines
First, notice that this week’s bullishness pushed the S&P over key horizontal resistance points (the green circle above the dotted blue line).Second, we’ve circled the 3,875-3,900 range that John and Wade identified. (It’s about 8% lower than the S&P, as I write.)As you’ll see, this is where stocks ran into temporary resistance from mid-June to early July.
Here’s more from John and Wade on the circled support level above:
From an investor psychology standpoint, the last breakout level that investors started accumulating profits in May and July is likely to be the point at which investors start buying again.So, if resistance does hold and stocks drop at some point in August, we recommend looking for buying opportunities at support.
John and Wade point out that if we do see a choppy market that bounces between support and resistance levels in the coming weeks, that’s great for options income traders. That’s because they can sell calls at the highs and buy them back or let them expire on the dips.By the way, if you’re not as familiar with options but want to learn more, we’ve created a free report just for you.It clearly explains what options are, the various types of options available to investors, the pros and the cons of using them, examples to drive everything home, even how to open an options account so you can start trading.And, again, it’s totally free! Everything you need to know to get started in options is right here. Returning to today’s market and where it’s likely headed, here’s John and Wade’s bottom-line:
Based on the information we have available to us right now, we think the major indexes like the S&P 500 will have a tough time sustaining a break above resistance in the short term.That’s not an ideal scenario, but we also expect nearby support to easily hold.
Meanwhile, our hypergrowth expert Luke Lango is also expecting some short-term weakness, but he’s eyeing a major new bull market in tech stocks afterward
For new Digest readers, Luke specializes in finding cutting-edge technology innovators that are changing our world – and transforming portfolio returns in the process.I don’t write that lightly.The tech-heavy Nasdaq has now pushed 21% higher since its June low. Meanwhile, Luke’s Innovation Investor stocks are up more than 50%. And the gains are coming fast and furious.Yesterday alone, one of his portfolio holdings soared 15%. On Wednesday, a different holding exploded 36% higher. Last week, it was another one popping 28% in a single session.So, what is Luke seeing for upcoming market conditions after such explosive gains? Specifically, for top-tier tech stocks?From his Innovation Investor Daily Notes:
We still believe a short-lived and minor pullback is in the cards over the next few weeks. Stocks don’t go up in straight lines.But we are very confident in saying that after such a pullback, it is off to the races for growth stocks.History shows that what tends to come next after a bear-market exit like the one we experienced today is a 40%-plus melt-up in tech stocks, which will last into mid-2023.
Regular Digest readers know that Luke backs all of his market forecasts with data. So, what numbers are getting Luke so bullish today?
The main contributor to Wednesday’s lower Consumer Price Index (CPI) reading was significantly lower oil prices. In fact, shelter costs and food costs were actually up. But oil’s price was down so much, it helped cool off the overall CPI number.Luke doesn’t believe this is an anomaly. He sees lower-for-longer oil prices continuing to drop inflation as we move toward the holiday season.Back to Luke’s Daily Notes with more:
Simply consider a recent Bloomberg analysis, which projects transport costs for consumers over the next few years, assuming oil prices simply stabilize in the $90s.Per that analysis, transport costs will plunge. If they do, the historical correlation between inflation and transport costs strongly suggests that inflation rates will collapse over the next 12 months.This is assuming oil prices stabilize in the $90 range – and we actually believe it’s more likely they collapse below $70.In that scenario, inflation rates will plunge even faster. Either way, inflation appears to be on its way out.
Luke’s bullishness also stems from what history tells us about returns following a new Nasdaq push of 20% or more
Traditionally, 20% or more from a recent low is considered a new bull market. The Nasdaq now fits that description.And historically, this is huge for forward-looking returns.Back to Luke with the details:
These new bull market entries have successfully predicted the end of every bear market of the past 50 years except for one – the dot-com crash. And this is not that, since valuations were about 50% higher at that time.Including the dot-com crash false signals, the average 12-month-forward gains for tech stocks after a new bull market entry have averaged a still very impressive 23%.Median 12-month-forward returns are 30%.Excluding the dot-com crash false signals, the average 12-month-forward returns jump to nearly 40%.Over the past 20 years, the average 12-month-forward returns are more than 45%.We believe this data illustrates the point we’ve been making for weeks now: Fortunes are made in bear-to-bull-market transitions.Technically, we just confirmed that transition. History says that what comes next for tech stocks is a 40% melt-up over the next 12 months.
If you’re a data junky, here’s a chart containing the numbers Luke just specified.
For our final piece of data, Luke is eyeing the collapse of the 10-year Treasury yield
It’s a bit hard to believe, but less than two months ago, the 10-year Treasury yield closed at just under 3.5% as fears of runaway inflation rattled investors.Today, it’s coming in at 2.86%.Back to Luke for what this means:
If, indeed, this does kick off a multi-month stretch of cool inflation prints, then yields should keep falling.The technical picture confirms this reality. Based on that, we think the 10-year will fall below 2% by the end of the year.
Luke isn’t the only analyst eyeing this potential. A few days ago, in a note to clients, Bank of America suggested the 10-year Treasury yield could fall 2% within the next six-to-12 months. So, if this is to happen, what are the investing implications?Here’s Luke:
One, it’s time to buy bonds. Two, it’s time to buy growth stocks.Huge rallies ahead!
Wrapping up, let’s take a moment to celebrate what’s been a fantastic run for stocks in recent weeks
It’s offered much-needed relief from battered portfolios everywhere.Looking forward, our Strategic Trader team and Luke both expect some short-term weakness. But they see such spells as “buy the dip” opportunities.Returning specifically to hypergrowth tech stocks, we’ll give Luke the final word on what’s headed our way:
Overall, we’re bullish – very bullish.Of course, we don’t want to get too greedy or overly confident. That’s a recipe for disaster in the stock market. But honestly, we could not be more enthused about our portfolios these days.We’ve said it before, and we will say it again: Fortunes are made in the stock market during the 12 months after a bear market becomes a bull market.Today, the tech stock bear market of 2022 turned into a bull market, confirmed by a 20% rally from recent lows after July’s inflation report strongly suggested that inflation is on the way out.…Fortunes will be made by smart investors over the next 12 months.
Have a good evening,Jeff Remsburg
