Sean Anthony Eddy
By Mike Larson, Editor-in-Chief, MoneyShow
David Keller, CMT and Chief Market Strategist at StockCharts.com, shares his technical take on the stock market as of the end of Q1 2024 and addresses the strength in gold and Bitcoin.
Transcript
Larson – Hello, and welcome to our latest MoneyShow Money Masters Podcast segment. I’m Mike Larson, Editor-in-Chief at Money Show. Today, I’m speaking with David Keller, CMT and Chief Market Strategist at StockCharts.com, as well as the man behind “The Final Bar” market recap show. Welcome to the podcast, David.
Keller – Yeah, it’s good to see you again, Mike. How’ve you been?
Larson – I’ve been great. And thank you so much for taking some time out here to chat. You know, it’s funny, the last time we talked on the Podcast was July of ’23. The S&P was trading for about 4,400. Then here we are at 5,200, give or take, now. I’m wondering how your broad market outlook has – or really hasn’t – changed since then, given what we’ve seen happen between those times?
Keller – Yeah, it’s really interesting. I mean, when you think about how the market has evolved over the last, what, 6 to 12 months, I mean, there was obviously distribution going into a major low last October. But then coming out of that October low, everything felt different. And I would say here at the end of the first quarter, as we’re wrapping up March, things are evolving yet again.
So October, November, December, January, and even February, it was really a growth-led bull market phase, right? So the primary trend was higher. It was the growth stuff – semiconductors like Nvidia (NVDA), AMD (AMD), Microsoft (MSFT), Meta (META) – these sorts of mega-cap names really doing the lion’s share of the gains. But I would say in the last six weeks or so, you’ve seen a broad rotation.
You’re seeing days where consumer staples, even, like, food products, some of the beaten-down names that have really been underperforming, are starting to improve. So, I think this is part of a broad rotation away from some of that growth leadership and really giving space for some other sectors like financials, industrials, even basic materials, to start to improve. So for stock pickers, I would say it’s a pretty ripe environment here as we wrap up Q1.
Larson – Right. I’m definitely going to talk a little bit about sectors later. But I want to ask another thing about the broad market here first. You had a comment recently about the percentage of S&P 500 stocks that are trading above their 50- and 200-day moving averages. I kind of found it interesting whether or not that was a topping signal. So, I was wondering if you can elaborate on that.
Keller – Yeah, so one of the ways you measure strength of a market besides just looking at the price and is the market going up — and by any trend-following definition, the S&P and the Nasdaq are in primary uptrends. They keep making higher highs and higher lows.
But breadth conditions allow us to look underneath the hood a little bit and just think about all the stocks that comprise those indexes. Are we seeing any differences between the benchmarks and those names? And breadth indicators overall have been improving pretty consistently, right? What that shows you is, again, it’s sort of all the other stuff, right? The banks and other types of names, heavy construction names, and other things are starting to break out.
And as a result, breadth data, our breadth numbers, are remaining pretty strong. You have about 80-some percent of the S&P 500 stocks above their 200-day moving average. That’s a primary bull market. That means most things are kind of going up. You want to be concerned when stocks are starting to break below their 50-day moving average. You’re really not seeing that in any meaningful numbers.
We’re still up in about the 70%, 80% range of stocks above their 50-day moving average. If that starts to break below 50%, that would be sort of a — let’s reassess, let’s think about whether it’s more of a risk-off environment. But for now, those strong breadth readings really speak to the fact that it’s not just the mega-cap names anymore. It’s kind of a lot of things that are really starting to participate. I would say that’s probably one of the more bullish pieces of evidence we could cite here.
Larson – Got it. You know, if we zoom into the shorter term, one of your recent videos on The Final Bar, you were talking about how we’ve had a few of those sell-off-into-the-close kind of days as we head into the end of the first quarter. Any thoughts on that? Is that something that we should file away in the “worry” department or not really?
Keller – So, before everyone thinks I’m super “bulled up” by all the comments I’ve made so far, what you have to remember is when the market’s going higher, I think it’s healthy to be a contrarian, to have a contrarian hat that you put on and just think: “What would I need to see to tell me things might be changing?” And when I think about a bull market top and some of the consistent patterns you see, one of the first things you see are what are called bearish divergences, really bearish momentum divergences, right, where the price is going higher, but you start to see weaker momentum.
And what that means, you’re actually starting to see some distribution days. An indicator like RSI is really measuring the average up day and the average down day. When that indicator rolls over a little bit, it tells you you’re starting to see some distribution. And as you mentioned, going into the close, Mike, the last couple of weeks you’ve seen a lot of weaker closes, implying that institutions are actually selling that recent strength in the market.
So bearish divergences right now for the S&P, for the NASDAQ 100, even leading names like IBM (IBM) that have made new highs in March, but on weaker momentum, for me are a bit of a red flag. And while I’m not seeing any significant breakdowns yet, I really have some clearly defined levels of risk on stocks that I’ve been following to identify when I might want to start to lighten up or think about more — taking some risk off the table for now.
For now again, no breakdowns. But you’re seeing some of those early warning signs and the distribution going into the close is usually not a good sign for consistent gains beyond what we’ve seen.
Larson – Okay. Let’s now talk a little bit about that sort of rotation from a “Mag Seven” market to other sectors playing catch up. It’s interesting. I was just looking at year-to-date statistics for a number of ETFs. Financials are beating tech, industrials are beating tech. The homebuilders ETF of all things was beating tech by, like I don’t know, five or six percentage points.
Can you talk a little bit more about that? Where are you seeing these other groups start to play catch up?
Keller – Yeah. So, I routinely scan for stocks making new three-month highs and three-month lows, and it’s a good sort of working list of things that are moving, right? What’s moving and let me start to think about it. You’ve mentioned some of those key groups. Some of them have been doing well for quite some time, right? Like heavy construction, a lot of industrial names, railroads, commercial vehicles, these are all groups that have done quite well.
And now you’re starting to see, like, airlines breaking out. You’re seeing homebuilders, which had really good rallies, then kind of stalled out a little bit. The homebuilder ETFs, or even individual names like Lennar (LEN) and Toll Brothers (TOL), are making new three-month highs. And so you’re seeing a resurgence of uptrends in areas of the market that are really more value-oriented sectors.
Banks like JPMorgan (JPM), Citigroup (C), Bank of America (BAC) all sort of breaking out to new swing highs. Generally speaking, I taught it’s always a good time to own good charts. So having a consistent process of identifying some of those areas of the market showing new strength, ideally the ones just starting to break out of bases.
And what I’m encouraged by here at the end of the first quarter is I’m still finding those, regardless of what you think about the broader market and how it might be a little overextended, I’m finding stocks that are just breaking out, and I think that’s encouraging. As long as you still find those ideas, I think there’s opportunity to outperform.
Larson – Got it. On the flip side, again, let’s kind of talk about this Magnificent Seven group that seems to be shrinking by the day. You highlighted the chart that everybody either owns directly or indirectly, and that’s Apple (AAPL), right? What are you seeing in some of these big cap names, Apple in particular?
Keller – Yeah, I think it’s “air quotes” around “Magnificent” these days, right? It’s less and less of a homogenous group. And that tells you when you think about the leadership rotation, I think that’s one of the key “tells” is not too long ago, it felt like those seven or eight names were kind of all the same, right? You could use them interchangeably in the charts.
They were all the same. Then Tesla (TSLA) broke down first, really at the beginning of this year. Apple really followed suit. If you look at the last six months, I mean, Apple’s been a sideways-at-best sort of chart, right? It’s more rangebound, stalled out at $200 a share, continuing to pull back and test support sort of in the 160s, 170s.
And what concerns me about a chart like Apple is again, it’s following very well the checklist of what I would normally expect to see at a major top. First in the fourth quarter, you saw Apple making new highs, but on weaker momentum. That’s that divergence I mentioned. We’re seeing that was happening in November, December of last year for Apple.
Then you saw those initial sell-offs. Now it’s actually testing price support. I think if it breaks much lower, you’re actually making a clear pattern of lower highs and lower lows – and talking about diverging from some of the stronger names like Meta and others, but even homebuilders and insurance stocks and others that are in these nice uptrends, Apple looks very, very different.
And I think one of the key ways to tell that is to look for relative strength, relative performance. Apple’s relative strength line has been going down. And that really tells this story. If you want to outperform the S&P, you want to own stocks that are outperforming the S&P 500. And Apple just hasn’t been getting it done.
So, get excited about a name like that when it’s able to show signs of accumulation. For now, I’m really not seeing that yet.
Larson – I’ve got it. You also recently commented that plenty of stocks are overextended after long bull runs, but others are just getting started. Is there kind of like the perfect example of the former and the perfect example of the latter if you look at individual names here?
Keller – Yeah, I think those sort of overextended names — you know, we mentioned some of the Mega-cap leadership names, like a Meta, like Nvidia. I think if you compare the chart of Nvidia versus the chart of AMD, you can see the risk, right? AMD sort of chopped around a little bit and is broken down a bit. And I think that’s the risk of names that have had exponential rise as SMCI, Super Micro Computer, is probably the best example of the euphoric rise, right, the exponential gain and then it comes down very, very quickly.
The problem with those stocks that have had such runs is they’re very extended from their 200-day moving averages. So they can actually pull back quite a bit and still be within the definition of a long-term uptrend, but cause a lot of pain in the short term.
So those sort of overextended names, I think it’s tough to justify, you know, adding a position today when a name has already had such a run. I’m more inclined to look for names that are earlier on and what I look for what are called Big Base Breakouts. Something like Murphy USA (MUSA) comes to mind as a good recent example where you had a sort of sideways pattern, a consistent resistance level, and then it just finally breaks out.
And there are a lot of patterns, like cup-and-handle patterns, and other names that really try to identify those stocks that have been sort of sideways and are just starting to break to new swing highs. I’m looking for three-month highs. That’s sort of the actionable move that I’m looking for. And I would try to find things a little earlier on in their uptrend as opposed to the ones that are a little more mature.
Larson – Okay. What about non-stock assets? I mean, anything you’d say — in the charts, you were saying something like a TLT for interest rates or even gold or Bitcoin? Some of these things are getting a lot of news these days.
Keller – Yeah, so it’s interesting. I mean, if you told me that the Magnificent Seven group of stocks were doing as well as they are – and that the indexes are not too far off of all-time highs – I would probably not hazard a guess that gold is right at a new high as well. But that’s the reality. And I think when you’re thinking about the market environment here, where we have a Fed that is now talking about, you know, changing the interest rate policy and starting to do rate cuts later this year, that really starts to change the configuration of this market.
And if inflation sort of changes in terms of how big of a concern that it’s been really for the last 12 months, it’s been in the top of mind for many investors. If the Fed really is getting it done, if inflation is becoming less of a concern and if they can start to lower rates, I would not guess that gold would be doing as well as it is. But it is.
And so, I think what you have to remember is, if stocks are a little overextended and if they do enter into a corrective phase, it’s often helpful to look for what are called uncorrelated assets. And what that means is, basically, what moves differently than stocks. So if stocks start to sell off, where can I expect a differentiated return, something that’s going to look different and hopefully not be as bad?
Two things I immediately think of are gold, which are, you know, around $2,100 an ounce — above $2,000 an ounce, I think is a pretty constructive setup. And overall, the long-term chart, the weekly chart, looks quite strong there. And then cryptocurrencies, particularly Bitcoin (BTC-USD), we’re near sort of that Bitcoin halving, which if you look back in the short history of Bitcoin, Bitcoin halving actually tends to be a pretty bullish outcome.
I think 100% of the time it’s gone up afterward and we’re sort of right at that point. So, I think there are opportunities to diversify away from stocks. And particularly if you’re sitting on significant gains in some of those growth stocks, there could be an opportunity here to differentiate to other areas of the market that could provide some upside if stocks pull back a little more.
Larson – Perfect. So I guess, as we get towards the tail end of this conversation, if you had to name one thing that really stands out as probably a pretty good buy here – and maybe one thing that was in your penalty box, your sell zone – what would those be?
Keller – Good question. I mean, for a “buy” idea, I would probably say homebuilders are better than anything. And we talked a little bit about — I mean, the charts overall are quite strong. While they’ve had pretty good runs, they’ve recently consolidated. So, if you are going to buy things that have had pretty good runs, it’s usually good to wait for some sort of consolidation phase, which are sort of in equilibrium, buyers and sellers are even, and then they start to change.
You’re seeing a lot of those homebuilder charts now just start to emerge, some of them from a nice consolidation phase. I would also say if the Fed does follow through with rate cuts, which seems like a foregone conclusion, that’s going to make houses a lot more affordable and you’re seeing a lot of a bid higher on anything related to a home.
I mean, things like Home Depot (HD) and Lowe’s (LOW) are having a nice bounce, given the expectation that people are going to be able to buy homes. They’re a little better. It’s just going to be less expensive. So I think that’s a good play for playing the Fed, and also just the technical setup is pretty strong.
Things that I would avoid, to be honest with you, are growth stocks where you’re seeing divergences. Apple is probably my favorite “short” idea at the moment because I think, you know, names like that feel like they’re never going to go down again. The reality is what we’ve seen with Apple, what we’ve seen with a lot of the mega-cap names, there are significant regulatory pressures. That’s always a threat.
And we’ve seen what happens when there’s an announcement of, okay, there’s this big antitrust legislation. I don’t think that’s the last one we’re going to see. And you know that that’s going to weigh on these names. So, the risk to big, dominant mega-cap, growth stocks is that regulatory pressure starts to come down. I’d be lightening up in those areas and again, looking for sectors of the market that have been underappreciated, like homebuilders, maybe even things like basic materials that are starting to break out or are earlier on in their breakouts.
Larson – Awesome. I guess to wrap things up, you’re going to be speaking at our Investment Masters Symposium conference. It’s in the Bay Area in May. The event is still several weeks away, so you never know exactly what you’re going to talk about.
But you have topics like “The most important chart of the day” and “Seven questions to ask before every trade.” Any little bits or nuggets of wisdom you’d like to tell people that they can expect to learn about those that are kind of methodology-oriented?
Keller – Yeah, I’m super excited for the event, Mike, and I’m thrilled to be a part of it. You know, to be honest with you, I’m going to do two different sessions and they really focus on practice goals, practical routines, and really how you make decisions. I find so often as investors, we sort of gravitate to whatever we hear about.
We hear an idea, we just kind of pull the trigger, and there’s not a lot of discipline in that process. Institutional investors, money managers that I’ve worked with, have a very well-articulated process. They have checklists that they follow when they want to add something to their portfolio or when they want to take something away. So my goal with an event like this is to encourage individual investors to use that sort of rigor in their decision-making process.
And we talk about the most important chart of the day. It’s really good to be talking about how you spend your time during the day as an investor. What’s the first thing you look at? What’s the order of operations to make sure that you orient yourself to what I call situational awareness for the markets, so you understand what’s happening and you can identify ideas earlier on in their moves?
And I’m going to do a master class called “Seven Questions to Ask Before Every Trade.” I’m actually going to share with you the checklist of seven items that I follow for every buy decision or sell decision in my portfolio. We’ll look at some examples together and hopefully leave people with some practical ideas of how they can improve their own decision-making in their own portfolio.
So, I hope they find it helpful.
Larson – Awesome. I’m sure they will. David, I really do appreciate you taking some time out to chat here. Thanks again for your time.
Keller – Thanks, Mike. Good to see you.
Originally published on MoneyShow.com
