A Downward-Ratchet Call On Dec 29, 2023 Vs. A Correction Call On Aug 1, 2023

The August-2023 Correction Call vs. The December-2023 Downward-Ratchet Call

Both Table1 and Table 2 are identical to each other, both have 10 days, dividing two parts: 5-6 days in 2023 and 4 days in 2024. We have 4 negatives in Table 1, printing one on Dec 29 in 2023, and 3 negatives on Jan 2, Jan 3, and Jan 4 in 2024. We get 4 negatives in Table 2, registering on Aug 1, Aug 2, Aug 3, and Aug 4, in 2023.

If you want to know the source of the PPO (Paper and Pencil Only), Please click this.

I called a Correction [C] (to view C, click here) on Aug 1, 2023, while I declared a Downward Ratchet [DR] (to view DR, click here) of the Bull Plateau on Dec 29, 2023.

Why two same 4-consecutive negatives were called quite differently, as one is C and the other one DR? The answer is:

First, the total negative numbers for 4 days of C and DR were -2.4 and -1.9. respectively. The difference was 0.5, which was not significant.

Second, very persuasively, the prior data of the two negatives cases, however, were a polar divergency: Table 1 demonstrated a whopping 5-consecutive surge while Table 2 showed a somewhat mediocre 3 entries: 2″P”, 2″m”. and 2″P”.

in 5 days in the all plus column in Table 1 from Dec 20 to Dec 28, the S&P 500 increased +1.8%, but in 6 days in the mixed changes from Jul 21 to Jul 31 in Table 2, the same index decreased -1.2%.

As a result, In Aug, the total slide was -3.6% (-2.4% & -1.2%) in the C Call, while In Dec 2023 and Jan 2024 DR Call, the total fall was just a hair, -0.1% (= +1.8% & -1.9%).

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Pulse Check #1 by the TDI (Trifecta Distribution Index)

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Table 3 exhibits a still high level of bullishness in Dec 2023, and Jan 2024: Bulls vs. Bears are 13 (= 12 (Dec) + 1 (Jan)) vs. 6 (= 5 (Dec) + 1 (Jan), 2 times more), as of Jan 5, 2024. This week became less bullish than the last week, by logging from 3 times to 2 times as bull’s favor. So, we tend to stay on the plateau longer, not shorter.

The source data of Table 3 is Table 5 in the Reference after the main text because it is too long.

The PPO (Paper Pencil Only) Approach

The TDI has nicely reached readers. The quite positive response encourages me to explore capturing the rotation trend of 11 Sectors of SPY, comparing other equal-weighted ETFs, Russell 2000 ETF, and mid-cap ETFs.

The PPO approach recently has contributed to 1) the Momentum/Trend Analysis, and 2) The Trifecta Distribution Front in particular. As the third contribution, the PPO approach is to monitor the stock-market breadth and turning direction.

Uptrend, Trifecta Front, and Diffusion Index have a common thread of the PPO approach which distinguishes any movement with a plus (“P”) and a minus (“m”) without considering the size differences.

In any special situation with any external shock such as oil embargo or Covid Pandemic or the impacts of over-tightened monetary policy and undue fiscal expansion, the PPO approach has worked to fill the vacuum of traditional approaches.

Pulse Check #2 by The SDI (Sector Diffusion Index)

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Every day 11 SPY sectors together make a Diffusion Index [“DI”] which oscillates between 0% to 100%. If all 11 sectors rose, the DI is 100%, and if all fell, DI is 0%. The DI also indicates market breath which means how tightly the components stick together.

Table 4 reported 100% as of Dec 01. The SDI has increased steadily in recent months. In Dec 2023, the SDI was 61%. When we added one week of Jan 2024, the SDI declined to 59%.

As a consequence, the diffusion front also helps the bullishness to reduce a bit. In the same token, we want the SDI to remain at around 50% in the future in order to avoid a high level of pulse.

The Market Perspective for 2024 and Beyond

The market and economy, represented by SPY (or the S&P 500 Index) have performed ideally, not too hot, and not too cool, since late 2023 and the early 2024, as we traced with various indicators in the text.

Hence, the bull plateau (or the bear-market rally) tends to stay until at least 2025. Bulls are quiet with compliance in the bull camp while bears are growling in the bear aisle, although both bears and bulls have been busy with the instant (a few seconds or a few sessions) trading which is not only exciting but very profitable and risky.

In my opinion, I predict: In 2026, a “Bear Market” to replace the 16-year-old SBM (Super Bull Market), starting in Mar 2009, and about six months later, a “Recession” to end the 16-year old GE (Great Expansion), stating in Jun 2009.

In sum, we will regain the right sequence of business cycles: A bear market (as a leading indicator) leads to a recession (a coincident indicator) for about 6 months in 2026.

Concluding Thoughts

We had a dynamic and unusual year in 2023, and we expected to have a similar climate in the economy and market in 2024. We fortunately had somewhat deflated bullishness in the first week of 2024.

We have learned many technical tools and skills to encounter new environments which have different risks and complexity.

We have a calm era now, albeit a couple of regional conflicts and drastic challenges from non-democratic regimes, such as North Korea. We have to contemplate the best actions to deal with them. We wish to have wisdom to win over our problems.

Reference

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