When stock markets closed higher in August many on Wall Street were looking for a rough month ahead as they worried about a weak performance in September. The investor pros were negative and those investors surveyed by the American Association of Individual Investors (AAII) also got the message that after two readings over 50% bullish in mid-August the bullish % dropped to 39.8% on September. 11th.
Of course, the S&P 500 had dropped from the August high of 5651 to an early September low of 5402. In my view, the decline was due in part to the wide acceptance of the negative commentary. The reversal and new A/D buy signals on September 11th started a significant shift in sentiment.
Surprisingly the September gain of 2% was the first since 2019 but did not impress Wall Street. You may remember that at the end of 2023, the year-end S&P 500 target from the Wall Street strategists for 2024 was 4861. Given that the S&P 500 closed December 2023 at 4769 and the strong action of the advance/decline lines I felt then that the strategists were too negative.
This nice chart from www.withplenty.com shows the wide range in forecasts as the highest target then was 5400 from Ed Yardeni. The year-end average target of 4861 was exceeded in early 2024 as so far the high in 2024 has been just over 5878.
This reminded me of 2023 when a majority of Wall Street strategists also missed the 2023 stock market rally as their year-end target for the S&P 500 in 2023 was 4009. This was just above the 2022 year-end closing price of 3839. By the end of 2023 a column in Bloomberg concluded “Everyone got burned”
In my opinion, this was due primarily to the widely held fundamental view that a recession was inevitable. Most felt earnings would be weak and this was another reason that one should not buy stocks. The October low during the 2023 correction was 4103. but the S&P 500 closed at 4769. That was 19% above the year-end target from Wall Street strategists.
By late 2023 the fact that both bonds and stocks were moving higher, too high valuations, and prospects for disappointing earnings also were factors that likely kept the S&P 500 forecasts low for 2024. Market bulls were hard to find and many advised staying on the sidelines.
I have often discussed the year-end S&P 500 targets of leading Wall Street strategists. That is done not to belittle their analysis to point out that such forecasts have unrealistic expectations that should not be used to guide one’s investments. That is why I try to teach clients to focus on the data. This means don’t take a position just because a hedge fund billionaire promotes it. Learn to do your own analysis.
Also if you see that a majority are coming to the same conclusion look for reasons they might be wrong. Be careful when terms of certainty like always or never are used as absolutes rarely work in the financial markets.
My view of the stock market’s trend is determined by the action of the action of the advance/decline lines. The weekly S&P 500 A/D line in June 2023 (point 1) moved to a new all-time high. This was a sign that the S&P 500 would also make a new high which it did in early 2024.
Another new A/D line high was made in December of 2023, line 2, which was a bullish indication for 2024. Another new high in July 3024, line 3, was a sign that the seasonal trend for September and October might be incorrect in 2024.
As the market rally progressed in September the market internals signaled an upside breakout but some strategists had already modified their forecasts. One most bullish forecasts from the original survey was from Ed Yardeni. In July he raised his target from 5400 to 5800. He is looking for 6,000 in 2025. Fundstrat’s Tom Lee is also looking for the S&P 500 to reach 6,000 this year.
This trend has continued as the major averages have recorded six straight weeks of gains and after one of the strongest rallies in nearly three decades. Over the past month “analysts at BMO Capital Markets, Goldman Sachs Group Inc., and UBS Group AG have marked up their year-end projections for the S&P 500 Index.”
Not only are they raising their 2024 forecasts but several have raised their 2025 forecast from 6000 to 6450. Some have been raising their targets for much of the year. “Goldman Sachs chief equity strategist David Kostin bumped up his S&P call to 6,000 by December. It was also his fourth increase since the final months of 2023.”
Some of you may be wondering if this change in sentiment from the Wall Street strategists means we are closer to a stock market top?
Having followed these numbers for many cycles the shift in sentiment will eventually lead to a significant correction but they are warning signs well in advance. After two years of inaccurate forecasts, it will be interesting to see what the targets are for 2025. They were also very wrong in 2017 and then overreacted by being too bullish for 2018.
The daily chart of the Spyder Trust (SPY
Principal Shareholder Yield Index ETF
SPDR S&P 500 ETF Trust
The S&P 500 A/D line shows an uptrend, line b, that goes back to the April lows. The A/D line moved to new highs in both May and July. The SPY dropped much more from the July highs than the S&P A/D line which was a sign of strength as it indicated the decline was narrowly based. The move above resistance after the August lows (see arrow) was bullish. The A/D line has continued to make higher highs since the August 14th breakout and closed last week well above its rising WMA.
Since the August 5th lows the SPY has gained 14.5% while the Invesco QQQ
Invesco QQQ Trust
The Nasdaq 100 Advance/Decline also had an upside breakout in August as the resistance at line b was overcome. It also shows a pattern of higher highs and moved sharply higher in the past two weeks indicating that QQQ may be ready to catch up with SPY.
Since the September low, I have been closely watching the relative performance (RS) analysis to watch for signs that QQQ was ready to again lead the SPY. The RS needs to first move above its WMA and then close above the resistance at line c. This would be similar to the signal in early May 2024 that lasted until early July when QQQ gave up its leadership over SPY.
Despite the bullish technical action one should not be surprised to see 1-2% correction at any point as we get closer to the election. They could be similar to last Tuesday’s 1.3% decline in the QQQ in reaction to concerns over the earnings from a semiconductor. Pay careful attention to the risk of any new position and the Trading Lesson: Buying The Dip 101 may be helpful.