A technical look at the S&P today … what the RSI and MACD are telling us … how low might we go? … the bullish tailwinds Luke and Louis seeing pushing stocks higher on the other side

Yesterday’s pullback in the S&P (continuing as I write Tuesday near the closing bell) was long overdue.

The market has been redlining for weeks thanks to November’s epic performance. It was wonderful, but near-vertical price moves aren’t sustainable.

The question now is how much of a pullback we’ll see, and whether it’s an opportunity for bullish investors to push more chips onto the table.

Let’s not keep you in suspense. Here’s our hypergrowth expert, Luke Lango, from his Innovation Investor Daily Notes:

We aren’t concerned by this breather. In fact, we think it is already creating some great buying opportunities.

That’s because the evidence continues to support that stocks will march meaningfully higher in December after this temporary consolidation…

We remain very bullish on the outlook for next year and would advise buying on any and all weakness here in late 2023.

Legendary investor Louis Navellier holds the same opinion. In Louis’ latest issue of Growth Investor, he detailed a long list of tailwinds behind today’s market, followed by:

Now, with that said, we’ll still likely experience some bumpiness in early December.

All of the major indices soared higher in November, with the Dow, S&P 500 and NASDAQ rallying 8.8%, 8.9% and 10.7%, respectively. The market will need to digest some of these gains before the next leg higher.

***To get a birds’ eye view on this consolidation, let’s look at the S&P from a technical perspective

We’ll begin with the Relative Strength Index (RSI).

For newer Digest readers, the RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold. A reading over 70 suggests an asset is “overbought” (and likely poised to pull back as traders take profits) while a reading below 30 means it’s “oversold” (and poised for gains as bargain hunters step in and buy).

As you can see below, the S&P is falling out of overbought territory. Yesterday, the RSI clocked in at 73, which was the third highest reading over the last 12 months. It’s now fallen to 66, suggesting growing weakness.

Note how the two previous overbought periods resulted in a market pullback in the ensuing weeks (though to different degrees).

***An analysis of the MACD Indicator points toward lower prices in the short term

MACD stands for “moving average convergence/divergence.” It reflects changes in a price trend’s strength, direction, momentum, and duration. Traders use this tool by analyzing the location of the MACD line relative to its signal line.

At its most basic interpretation, if the MACD crosses above the signal line, it’s considered a bullish crossover, and potentially a buy signal. The opposite is true as well.

Consideration is also given to whether the MACD and signal line are trading above or below the zero line. The farther the MACD and signal line are from zero, the more stretched prices are in that direction.

As you can see below, the MACD line (in black) has gone from climbing, to angling lower, and is now poised to cross beneath its signal line (in red). The term for this is a “bearish crossover.” And if it happens from this elevated level, towering above the zero line, it’s suggestive of a market pullback.

Below, note how the S&P performed following other bearish crossovers earlier this year. As with the RSI, some of the declines were bigger than others.

***So, how low might we go this time around?

In Luke’s trading service, AI Trader, he keeps a bead on overbought/oversold conditions since they provide helpful entry points for new trades, as well as profit-taking opportunities for existing trades.

For example, last week, Luke’s subscribers took profits on four trades to the tune of, respectively, 15%, 25%, 35%, and 70%. This was in large part due to Luke’s analysis of overstretched readings on RSI and MACD charts.

On the flip side, Luke held off on recommending new trades during stretches of November for the same reason. From Luke last week:

To be clear, we’re seeing fantastic set-ups that we’re going to pounce on as soon as the next market pullback begins. But nearly across the board, the trades we like are stretched, and we refuse to sacrifice safety simply to add another handful of positions to the portfolio.

Circling back to how low this current pullback might take us, let’s jump to Luke’s Trading Room video update from last Thursday:

From where we sit today, there are definitely some short-term indicators that are telling us, “Hey, we’re probably at a short-term top.”

We’re probably due for a little bit of a pullback here, maybe 2% or 3%, something tiny, something very non-malicious, nothing to worry about. 

***Returning to our technical analysis lens, let’s look at why 2% or 3% is Luke’s rough guess

Below, we’re going to add two moving averages to our S&P 500 chart.

Let’s look at the 20-day MA (in blue) and 50-day MA (in red). These are considered shorter-term moving averages often used by swing traders. Since the long-term momentum of the S&P is decidedly bullish today, we’re focusing more on these shorter-term momentum shifts.

As I write, the S&P trades 1.4% above its 20-day MA, and 4.3% above its 50-day MA. Luke’s 2%-3% estimate covers the middle ground here.

When we look at the S&P’s long-term trendline, it reinforces this broad support area. As you can see below, the bullish trendline beginning last October hits the S&P at roughly 4,375. That’s also roughly 4% lower.

***Now, with this general pullback size as our expectation, why are Luke and Louis bullish on what comes afterward?

Let’s begin with Louis’ take on December:

As we look ahead to December, the month may not be as strong of a month as November; stocks will need to consolidate some of these recent gains after all. But we are still in the “happy time of year,” and December is typically a positive month for the market.

Historically, in December, the S&P 500 has posted gains 73% of the time, and the Dow has climbed higher 71% of the time. Both indices have posted average gains of 1.4% in December.

So, I’m optimistic that December will be another great month.

As for the new year, Louis is eyeing the enormous tailwind of rate cuts:

The Fed’s favorite inflation indicator, the Personal Consumption Expenditures (PCE) index rose at a 3% annual pace in October. That’s down from 3.4% in September. Core PCE, which excludes food and energy, increased at a 3.5% annual pace, down from 3.7% in October.

In other words, inflation continues to cool – and it’s growing more likely that the Fed will cut rates in the New Year.

They won’t cut rates in December, but it looks like they will be cutting rates in January or February. We just have to give them the data to do so.

As for Luke, he echoes Louis’ comment on inflation, but also sees bullishness in today’s technical, fundamental, and earnings set-ups:

Technical trends in the stock market are bullish. We think the S&P 500 is very healthily consolidating and digesting the feverish November rally before it takes its next leg higher in this holiday rally.   

Valuations in the stock market remain bearish, but continue to show signs of improvement as Treasury yields continue to fall… If [the 10-year Treasury yield] keeps falling as we expect, the equity risk premium (ERP) will expand to levels that are comfortable enough for us to turn bullish on the valuation outlook. We aren’t there yet – but we are getting there. 

Fundamental earnings trends in the stock market are bullish. Analysts see earnings rising by ~10% next year and ~11% the year after that, creating a very promising two-year-forward outlook for earnings and stocks.     

So, bringing it all together, let’s be ready for a pullback somewhere in the range of a 2% – 4%, followed by a return to holiday rally conditions.

***A word on 2024

Though Luke writes he “cannot overstate how confident we are going into 2024,” he’s quick to set expectations for investors.

As he notes below, while he sees a big bull coming, it may also be an erratic bull:

We believe that [in 2024] the U.S. economy will achieve a soft landing, and that will lead stocks to soar. 

That doesn’t mean everything will be “smooth sailing” next year. After all, 2024 will be Year 2 of this new bull market, and typically, the second year of bull markets are choppy. But they always bring net positive returns. 

That means we need to continue to embrace our buy-all-dips strategy and not let short-term volatility deter us. 

We are approaching Year 2 of the AI Boom. And as with the dot-com boom of the 1990s, the AI Boom will last for several years and will produce huge returns for tech investors.

Let’s stay focused on the emerging opportunities, and the rest will take care of itself. 

Have a good evening,

Jeff Remsburg