Has the S&P 500 peaked or is the next bull run just beginning

The market's resilience amidst a government shutdown is highlighted, with the S&P 500 near record highs despite headlines of political chaos. This is attributed to the market's historical tendency to shrug off such events, as they rarely significantly impact corporate profits or consumer demand. Investors are advised to focus on fundamental data like stable GDP growth and low unemployment, rather than being swayed by political noise.

The conversation then shifts to seasonal patterns and technical analysis, emphasizing that historical data, like the bullish tendency of the fifth year of a decade, suggests continued market strength. While some anticipated a pullback in the late summer and early fall, the market has remained strong, leading to a rush of capital from those waiting on the sidelines. Technical indicators such as RSI and MACD are presented as tools to navigate market trends and sentiment.

The discussion delves into the dominance of the "Magnificent Seven" tech stocks and the AI boom, acknowledging their strong performance but cautioning against over-reliance. The importance of broad market participation (breadth) and considering the equal-weighted S&P 500 is stressed for a clearer market picture. Despite some concerns about short-term choppiness and overbought conditions, the overall outlook remains cautiously optimistic, with a focus on risk management and long-term trends. The potential for the Fed to cut rates is also considered, influenced by factors like falling crude oil prices and the deflationary aspects of AI.

• The market remains strong and near record highs despite a government shutdown, as historical data suggests these events have minimal impact on corporate profits and consumer demand.
• Investors are encouraged to focus on fundamental economic data like stable GDP growth and low unemployment, rather than political headlines.
• Seasonal patterns, particularly the bullish tendency of the fifth year of a decade, support a positive market outlook, with an anticipation of capital deployment from those who waited for a pullback.
• Technical analysis tools like RSI and MACD are crucial for identifying market trends and investor sentiment, helping to navigate potential overbought or oversold conditions.
• While the AI boom and dominance of major tech stocks are significant, a balanced approach considering broader market breadth and the equal-weighted S&P 500 is essential for a comprehensive view.

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The Market's Indifference to Government Shutdowns [00:37]

• Despite headlines screaming about government shutdowns, furloughed workers, and political chaos, the S&P 500 continues to perform strongly, nearing record highs.
• Volatility is subdued, and traders are behaving as if nothing significant is happening.
• Historically, government shutdowns create compelling headlines but have minimal impact on corporate profits or consumer demand, leading markets to "trade through" them.
• Investors have learned to tune out the political noise and focus on data that drives markets, such as stable GDP growth, low unemployment, and inflation that is not spiraling out of control.
• The takeaway for investors is to differentiate between political drama and actual market danger, as fundamental drivers of returns are more important than sentiment shifts caused by political events.

The market has seen this movie before, and it never ends the way that the headlines predict.

Seasonal Patterns and Fourth Quarter Performance [03:26]

• Seasonally, the period between August and October is typically a weaker one for the market.
• However, when an incumbent president is re-elected, this period tends to be better than average.
• In years with new leadership or a change in leadership, especially a Democratic one, post-election year seasonality is important to study.
• The current market has proven to be resilient, and the year is in its fifth year of a decade, which is historically very bullish and positive.
• Many investors anticipated market weakness leading into August and September but did not see it, leading them to wait on the sidelines with capital to deploy.

Normally the period between August and October is is down. When you have an incumbent president, somebody that's been reelected successfully, usually this period is a little bit better than normally.

Technical Analysis and Investor Sentiment [04:53]

• Technical analysis allows for ignoring market noise and focusing on leadership, cycles, trends, seasonality, and sentiment.
• Sentiment is key to determining if markets are negative enough to cause a bottom or bullish enough to peak.
• Currently, there is not much evidence on institutional or retail sides to suggest a widespread "all-in" mentality that would lead to a market sell-off.
• If sentiment becomes too bullish, it can act as a contrarian indicator.
• Equity put-to-call ratios have moved into the mid-40s, indicating more calls being bought than puts, which is not ideal.
• There have been short, 3-to-5-day pullbacks, similar to what has been observed in previous months, followed by a return to upward momentum.

The benefit of using technical analysis, we're always able to ignore all the noise.

The Impact of AI and Dominant Tech Stocks [06:16]

• The AI boom is considered to be in its early stages, with companies like AMD and others seeing significant gains.
• The demand for AI-related technologies is described as overwhelming.
• The dominance of a few large technology companies, often referred to as the "Magnificent Seven," is noted, with them driving earnings growth and market performance.
• These companies could potentially see higher P/E ratios given the early stage of the AI revolution.
• Historically, there have been periods where a few companies dominated market indices, such as General Motors and General Electric in the 1930s.

We haven't seen an AI cycle ever before. So they could easily go to 100 PE.

Market Breadth and Equal-Weight S&P 500 [08:46]

• The standard S&P 500 is heavily weighted by a few large technology stocks, such as Nvidia and Apple, which can represent a significant portion of the index's movement.
• This concentration means that if an investor is not holding these specific stocks, they might underperform even as the overall S&P 500 rises.
• The equal-weight S&P 500 gives each stock in the index the same weight, providing a clearer picture of what the broader market is doing beyond the influence of a few mega-cap names.
• When the Dow and the equal-weight S&P 500 move to new highs, it is an encouraging sign for market health and broader participation.
• The equal-weight index is considered a better view of the broader market's performance.

So the S&P was going up daily but if you're a portfolio manager investing in industrials you're getting killed you can't keep up with because you don't own any Nvidia or Apple.

Momentum Indicators and Risk Management [10:26]

• Momentum in stocks can be visualized like tossing a ball: it moves quickly, then slows down. The goal is to capture stocks as they begin trending higher with strong momentum.
• When stocks become "overbought" (e.g., RSI of 90 for gold), it doesn't always signal an immediate sell-off but suggests limited upside potential in the near future.
• Common momentum indicators include RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence).
• MACD is a trend-following indicator that helps traders stay on the right side of a trend, especially when used on a weekly basis.
• When MACD is positive on daily and weekly charts, it's advisable to stick with the stock; when it rolls over, risk management techniques should be employed.

When they get to be so-called overbought, it's not necessarily a sell signal, but you want to pay attention.

Economic Data and the Fed's Role [17:40]

• The speaker aims to avoid letting economic data cause sleepless nights, viewing much of it as backward-looking.
• There is a potential for AI to revolutionize the management of the economy, replacing human decision-making at the Federal Reserve with a non-emotional approach.
• While the labor market has slowed, people are not being fired but rather hiring has stopped, indicating a bifurcation.
• The market is pricing in approximately four Fed rate cuts between now and next summer, with at least one expected by the end of October and another by year-end.
• The Fed is likely to err on the side of keeping rates accommodative, especially if inflation remains under control, with falling crude oil prices and AI's deflationary effects contributing to this outlook.

If there's any area that's ripe for regime change, it is taking humans out of the equation with regards to the Fed and replacing it with AI that could be a non-emotional way of managing the economy.

Velvety Vegetable Soup (Velouté de Légumes) Recipe [21:09]

• The speaker shares a personal anecdote about their mother's velvety vegetable soup (Velouté de Légumes), emphasizing slow patience as the key ingredient.
• The soup is described as simple, made with velvety vegetables, broth, and a touch of cream, offering a comforting feeling.
• The preparation involves sweating shallots and softening squash, then folding in cream for a silky texture.
• It is traditionally served with toasted baguette rounds and grated cheese on the side.
• The soup is presented not just as a meal, but as a reminder to slow down and appreciate that good food requires care and is not necessarily complicated.

Veluta de Verdur is one of those soups. It's simple. It's just velvety vegetables, right? It's broth. It's a touch of cream, but it feels like a warm hug after a chilly day.