AI image generator says 'Buy meeee!'
On Wednesday 11 Dec 2024 1119pm, I emailed Clients my latest post titled "Buy the Promises, Sell the Execution?"
Below is the full transcript for your perusal:
'Dear Clients,
The S&P 500 (aka SPX) remains on track to reach my target of 6,220, as outlined in my 2nd October memo. A client recently asked why my SPX price targets and forecasts, derived from classical chart patterns, tend to be simple and more accurate compared to others who also employ Technical Analysis (TA). My answer is straightforward: it is simple bcos I keep it simple!
While I invest significant hours studying advanced technical methodologies such as the Wyckoff Method, Elliott Waves, T-Theory, etc, I rarely discuss these in my memos to avoid overcomplicating matters for most readers.
Market Update and Strategy
The Good News:
1. As SPX continues its ascent, my target of 6,220 remains valid unless the critical support at 5,500 (below the C&H bullish pattern breakout level & 200-day EMA) is breached decisively. Do note I've raised support level as the uptrend continues. See SPX Chart A below.
2. The "buy-on-dip" strategy remains in place, supported also by the US 6-month positive seasonality we are currently experiencing. Positive Seasonality runs from Nov 2024 to Apr 2025.
3. Further, Wall Street's enthusiastic promotion of the narrative that "Trump 2.0 is business and stock market positive" adds to the current bullish momentum, albeit with caveats.
S&P500 Index (aka SPX) Daily, 12 mths - Watch those raised flags!
The Bad News: As we approach 2025, several fundamental and technical concerns warrant caution:
Earnings Expectations: The outlook for 2025 earnings growth remains tricky. See Chart 1 below from Goldman Investment Research. While valuations are high by most metrics, investors are typically willing to pay a premium if future earnings growth materializes. The issue lies in the fact that the majority of earnings growth is concentrated in the Mag 7. Despite hopes that the remaining 493 companies of the S&P500 Index will begin to deliver meaningful earnings growth, their performance over the past two years has been less than satisfactory.
Chart 1 - Seven magnificos to lift up the sky! Three for Singapore!
Buffett's Record Cash Hoard as a percentage of Assets: While Mr Buffett tells you to NEVER time the market, it is those things that are not said that should warrant your attention. In a nutshell, his record cash hoard of USD 325B at the very least, signals caution - see Chart 2 below from Bloomberg. Notice how Buffett’s cash hoard often spikes before equity market slowdowns.
Chart 2 - Don't you get it folks? The Oracle of Omaha is the GOAT market timer! With due respect, I too wonder how a 94-year old drinks 5 cans of coke a day.
US Corporate Insiders selling reach an all-time high: This is good for awareness, not a timing tool though - see Chart 3 from Financial Times.
Chart 3 - Oh hey, you saw Zuck's new watch & hairdo?
Post-Inauguration Reality:
Wall Street's current "buy on promises" mentality may give way to "sell on execution" disappointment as policy promises often face real-world challenges.
US 4-year Presidential Cycle Risks: Historically, the 1st year of a U.S. president’s term tends to be challenging for markets, often characterized by blame-shifting to the prior administration.
Trump's Unpredictability: Mr Market abhors uncertainity. Expect markets next year to be "bumpy" with increased volatility across all asset classes.
Conclusion for Equities, in layman's terms:
Maintain a buy-on-dip approach targeting 6,220, with 5,500 as the downside risk threshold.
Exercise caution around the overly optimistic "Trump is business & stock market-positive" narrative. History suggests a post-inauguration reality check could lead to a pullback of sorts. In other words, today's agressive bets on equities, USD and the Crypto Complex may see pressure in 2025.
Be mindful of historical patterns: the first year of a new presidential term often underdelivers for equities.
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On Bonds: Rethinking the “Trumpflation” Narrative
Wall Street has embraced "Trumpflation", projecting higher inflation due to:
Tariffs
Deficit spending
Wage pressures from reduced immigration
This narrative has driven bond yields higher, pressuring bond prices post election. Despite this, my curated Bond Portfolio has performed well, with drawdowns limited to 1-3%, allowing investors to continue benefiting from monthly dividends.
However, the ball is round & I believe the inflation narrative is overstated:
Trump 1.0’s Record: His first term saw only modest inflation increases between 2016 to 2018 even as the Trade War rages on. During 2020, inflation was primarily driven by unique COVID-era factors (supply chain disruptions and stimulus), i.e. inflation only came about in a big way during COVID as the mountain of helicopter money printed was met with supply chain and China shut down. With both supply side issues now resolved, that COVID-era type of inflation is of a lesser concern now.
Tariff Complexities: Chinese retaliatory policies during his first term actually negated tariff effects by depreciating the Yuan deeply, making non-tariffed exports in effect, cheaper. In other words, tariifed products import prices were neutralised while non-tariffed products actually went into US even cheaper!
Deficit Spending: Contrary to common belief, long-term deficit spending is deflationary - more debt diverts tax revenues toward interest payments instead of productive investments/spending such as infrastructure building, etc.
Wage Inflation: Research paper by the San Francisco Federal Reserve (2023) indicates labor cost growth has a minimal impact on overall inflation. Pls click this link to read up more - https://tinyurl.com/laborinflation
IMHO, the current "Trumpflation" narrative oversimplifies a much more nuanced picture. If this consensus proves wrong, we could see a mean reversion event, with equities correcting from all-time highs while bond prices recover.
Of course my above 4 pointers generalizes the matter but my main objective is to share with you that Wall Street's uni-directional view is likely overstated. If you wish to find out more, a google search away will offer tons of of reading material as to what actually happen in Trump's 1st term and how his policies may not be as inflationary as Wall Street would like you to think!
Looking Ahead:
Equities: Maintain caution into 2025 as we navigate the first year of a new Presidential Cycle, be mindful of potential corrections.
Bonds: The anticipated 3-5 Fed rate cuts in 2025 (down from earlier expectations of 8) could stabilize bond prices and offer renewed opportunities in the Fixed Income space.Drop me a line for a non-obligatory discussion on my curated Bond Portfolio.
Broader Market: Barring a recession or black swan event, I foresee moderate growth with selective opportunities across both asset classes.
A Natural Hedge: In effect, Bonds may offer an equities hedge against a US recession or black swan event as such a scenario will likely force the FED's hand to cut rates at a more fervent pace.
Thank you for your continued trust and confidence. As always, I remain committed to helping you navigate the complexities of the market with clarity and strategy. Please feel free to reach out to pick my brains or for a deeper discussion on these insights.
Live Long & Trade Well!
Thank you & regards, Thomas Ng, CMT Principal Trading Representative 首席股票经纪 www.thom-ng.com
Chart source: Tradingview Image source: Goldman research / Bloomberg / FT'
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