It was really Roald Dahl, the author of the 1964 book Charlie and the Chocolate Factory, who was the contrarian, and it was Willie Wonka who gave voice to Dahl’s eccentricities. Anyway, Wonka (Dahl) said – it really is an excellent line and perfectly contrarian – “Oh, you should never, never, doubt what nobody is sure about.” Its direct opposite is equally important and makes perfect paradoxical sense, as did the above, from a contrarian point of view, “Oh, you should ever, ever, doubt what everybody is sure about.” Mind you, Dahl didn’t say the second one, I just turned the first one around.
Applying the Dahl / Wonka line, “Oh, you should never, never, doubt what nobody is sure about” to the market leads me to think that we should, at the very least, consider that the market can continue to accelerate higher such that it reaches excesses that nobody is sure about or that nobody has seen for a very long time because (a) limited history shows it’s happened before, (b) I’ve not heard anyone evangelize about such a notion and (c) as my former partner Steve Shobin used to say, “Momentous momentum begets more momentum.” Let me explain.
Through Friday’s close the S&P has been up for 13 of the last 14 weeks and within those 13 weeks it has had a 9-week winning streak (week ending Nov 3, 2023 – week ending Dec 29, 2023) and then a 4-week winning streak (week ending Jan 12, 2024 – week ending Feb 2, 2024). Using data going back to early January 1960, a period of 3,344 weeks, I found four prior comparable periods where the S&P displayed momentum thrust-like behavior and, in each case, (I realize this is not admissible in stats class, but it might just be important in portfolio management class) the S&P did not put in an important top or experience a sharp correction until much after its initial momentum impulse.
1 From Dec 9, 1960 – Mar 3, 1961, the S&P was up for 12 of 13 weeks where it added 13%. The S&P stayed strong into December 1961 adding another 13% from early March 1961 until the end of the year.
2 From Mar 8, 1963 – May 10, 1963, the S&P rose for 10 weeks in a row gaining 9%. The S&P then continued to push higher, adding 25% in the process, until May 1965 when it had a one-month correction of 10%. Post the correction the S&P added another 15% into February 1966 when a bear market started (-22% through Oct 1966).
3 From Oct 4, 1985 – Jan 3, 1986, the S&P was up for 13 of 14 weeks where it jumped 15%. The S&P added another 17% into the end of 1986 and then, without too much of a breather, the index smoked higher by 36% (!) from late 1986 and into the third week in August 1987. August 1987 was the market’s peak and was followed by the “Crash of 1987” in October.
4 From Nov 28, 2003 – Mar 5, 2004, the S&P gained in 13 of 15 weeks where it tacked on 9%. The S&P only added another 5% from Mar 5 through the end of December 2004. It BASED in 2005 and then pushed higher by 22 ½% from November 2005 (with an 8% spring 2006 setback) until summer 2007 which was where the market peaked before anyone had an inkling about the oncoming GFC.
It’s true the S&P is daily and weekly overbought (I’ll say monthly, too) and it is 11% above its 40-Week Moving Average which is more than a +1 Standard Deviation reading for the S&P vs. its 40-Week MA for data back to early Jan 1960 (3,344 weeks). But what’s to stop it from getting to a +2 Standard Deviation reading (+18%) above its 40-Week MA? And, what’s to stop overbought stocks from getting more overbought a la Super Micro Computer (SMCI; on Friday morning it was 127% above its 200-Day MA) or Meta (META) which added almost $200B in market cap on Friday alone?! (META’s additional market cap is > 467 or 93% of the companies in the S&P 500).
Below you’ll find a list of 109 Tech Stocks, and I’m especially interested in the 48, or 44%, that are at least 20% above their 200-Day Moving Averages (gray tint). I’m interested in these stocks because it appears to me that we just might be in the part of the cycle where excessively overbought becomes unrestrainedly overbought. The most notorious examples – mentioned in the above paragraph are Super Micro Computer (SMCI) and Meta (META). In a note to clients on January 21, 2024, entitled, “How to Marry a Millionaire” I said with respect to SMCI, and tongue-in-cheek, “What’s the message here? If you see a tech stock with excessive momentum overbought readings, buy it.”
While this might be imprudent (heck, it seems pretty imprudent to me), I’m thinking the stocks highlighted in gray that are at least 20% above their 200-Day MA become even more stretched relative to their 200-Day MAs. How will we know when this parlor game becomes a “Party Out of Bounds” (B-52s 1980)? When one of these stocks fails, that’s how.
Let me know if you want to talk about any of the stocks in the list above. As to other items:
I continue to think oil works lower.
