AI image generator thinks 'The Great Disconnect' is an old bull on parade in front of a burning main street. How apt.
On Wednesday 2 Oct 2024 1040pm, I emailed Clients my latest post titled 'The Great Disconnect'.
Below is the full transcript for your perusal:
'Dear Clients
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The first major financial event of the year, the September FOMC meeting, has now passed, marking the first interest rate cut in nearly 2.5 years. This decision seems to have triggered a broad-based 'Bull Market of Everything', with the notable exception of the USD Index.
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As we reflect on these recent developments, it's important to look ahead to the next major event on the horizon: the US Presidential Election on Nov 5, 2025. Prepare for what could be a highly eventful period.
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In my last memo dated July 22, I leaned towards a bearish bias based on several key fundamental and technical factors, among others:
Weakening US economic fundamentals, as reflected by significant downward revisions in GDP, ISM data (both manufacturing and services) and employment numbers.
Softening inflationary pressures, which actually indicates weaker aggregate demand.
US small-business sentiment slides to 11-year low.
Poor market breadth, where the 'Magnificent 7' mega-caps are leading, while the other 493 S&P500 companies lag behind.
Negative seasonality, a period when bad news tends to have a more pronounced negative effect on the capital markets.
However, with both the DOW and S&P500 Index (aka SPX) hitting new all-time highs, some economists suggest the economy may be stronger than previously expected. But if that’s the case, why has the Federal Reserve felt the need to kick-start a dovish 50-basis point rate cut? Could the stock market’s ability to forecast the economic landscape six months ahead be faltering, or is there something else brewing that we’re missing?
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That said, one doesn’t profit from arguing with Mr Market. I respect what the market is signaling, and the recent breakout from the S&P500 Index’s Cup & Handle pattern indicates a likely bullish resolution. My intermediate-term bias is thus now bullish, as long as the SPX remains above the 5,300 support level. However, we should still expect short-term pullbacks or periods of weakness, especially given October’s reputation for volatility. In other words, we are looking to buy the dips.
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Key Parameters to Watch:
S&P500 Index (aka SPX) Daily, 12 mths - Watch those flags!
Upside Technical Targets
With the SPX’s Cup & Handle bullish breakout on Sep 19, the pattern-implied target is ~6,220. As long as the SPX holds above the ~5,300 support level, intermediate-term targets of 6,118 (corresponding to my earlier Fibonacci projection at 4x) and 6,220 remain plausible.
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Short-Term Downside Support Zone
For shorter-term trading, I recommend using my Bollinger Bands Strategy to gauge the immediate SPX trend. The 'space' between the Bollinger Bands midpoint line and the blue 50-day EMA should serve as an immediate support zone. Reach out to me for further details on this approach.
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Longer-Term Downside Concerns
From a longer-term perspective, a break below SPX ~5,300 would be the first significant red flag. The next major support level to watch would be SPX ~5,000 (2nd red flag).
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To summarize my SPX outlook:
Upside potential: 6,220 as long as 5,300 is not authoratively broken
Red flags: 5,300, followed by 5,000
A Word of Caution:
When there’s a disconnect between the state of the economy and the stock market, it’s usually the stock market that eventually aligns with economic reality. As we’ve seen over the past three years, rate hikes take time to impact the economy, and the same will hold true for rate cuts. Monetary policy is not an immediate solution, and the so-called "wealth effect" the Fed aims to achieve has its limits. Furthermore, in US Presidential Election years, it’s common for both retail and professional investors to remain cautious and 'hold their collective breadth' until the votes are tallied in Nov. As such, I advise setting tight stop-losses on your positions and maintaining a vigilant eye on the market.
The Great Bond Market:
As for the bond market, the CME FedWatch Tool currently prices in a ~64% chance of a 25-basis point cut in November and a ~78% chance of a 50-basis point cut at the December FOMC meeting. While these probabilities are subject to change, it’s clear that yields are expected to decline through 2025.
CME FedWatch Tool Aggregated Probabilites dated 2 Oct 2024
With the Fed now more focused on employment numbers than inflationary pressures -- and with room to continue cutting rates -- I believe Powell is likely to continue to maintain a dovish stance, keeping a steady hand on this interest rate 'easing cycle'. Inflation data in recent months has been cooperative, reinforcing this outlook.
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Clients who have already joined my Bond Portfolio Solution should stay the course through this easing cycle and consider topping up to take advantage of this elegant fixed income solution, which currently offers a monthly payout of ~5.8% per annum. The Bond Portfolio Solution literally pays you to wait for interest rates to continue to ease.
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New clients interested in exploring this opportunity are welcome to reach out to me for a non-obligatory discussion.
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In my next memo, I will discuss what I've recommended to all Clients in early 2024, namely the Precious Metals Complex (Gold & Silver), SG Reits and a China-centric ETF. Needless to day, all 3 have outperformed significantly in the past months!
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Live Long & Trade Well.
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Thank you & regards,
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Thomas Ng, CMT
Principal Trading Representative
首席股票经纪
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#plsreaddisclaimer #chartforillustrationonly #spx2oct24 #whatsyourtradingangleChart source: Tradingview / CME FedWatch Tool'
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