Wait, Are We In A Bull Market?
Investors,
The S&P 500 gained +4% this week.
The Dow Jones had its 2nd highest daily close ever.
Bitcoin is making a comeback, currently trading above $60,000.
Treasuries are bidding, gold is making new ATH’s, and the Fed is getting ready to cut.
It’s almost like we’re in a bull market, primed to keep trending higher!
Thankfully, these developments shouldn’t come as a surprise to anyone who’s been following my research; however, I’m sure that many people are new subscribers of Cubic Analytics so I want to take a quick moment to explain my outlook…
I want to be very clear: I expect that these conditions will continue, in which resilient & dynamic macroeconomic data will fuel an ongoing uptrend in asset prices. Coupled by a disinflationary environment and solid corporate earnings growth, there are sufficient conditions to produce a sustained bull market. Of course, within that bull market environment, asset prices will have corrections and downtrends. We literally just had one of these corrections, followed by a strong & persistent rally. By definition, uptrends make new highs… and it looks like that’s happening once again in the stock market, as it has for the past several quarters.
Selloffs recover and new highs commence.
On the backdrop of a strong equity market, Bitcoin & crypto should catch bids and participate in the upside. Taking it a step further, BTC could experience outsized returns in a catch-up trade with equities after being plagued by 6 months of a sideways consolidation.
Perhaps we’re already seeing the early stages of that comeback in recent days…
In the remainder of this free report (please feel free to share it with your colleagues, friends, and family who will find it valuable), I’m going to cover the following:
The persistence of disinflation and the upcoming rate cut cycle
My favorite stock market chart right now
Bitcoin target analysis
Let’s begin.
Macroeconomics:
I’m not here to rehash the news and share headlines, but this is the quick snapshot of the August CPI data released on Tuesday:
There are two key datapoints that I want to highlight regarding CPI inflation:
1. Headline CPI ex-Shelter inflation was +1.07% YoY in August 2024. This datapoint is showing clear disinflation, decelerating from +1.73% YoY in July 2024! As we can see in this chart, the non-Shelter aggregate inflation rate is well-below the Fed’s 2% target, which is important given that Shelter is the largest & laggiest component of the CPI basket. Not only is this significantly below the Fed’s target, but it’s also at the lower-bound of the historical range going back 50+ years! In other words, all non-Shelter components of the CPI basket are experiencing an aggregate inflation rate sufficient to the Fed’s mandate.
2. Truflation, a private-market solution for tracking inflation dynamics, is showing an inflation rate of +1.01% YoY, which is the lowest reading since July 2020. This basket, which uses a real-time measurement for Shelter, continues to experience significant disinflation. This is important because it’s potentially forecasting where the official government data is going to trend towards over the coming months and quarters, at least on a directional basis.
While inflation data is becoming less important, particularly on a relative basis vs. labor market data, the CPI data will still play a key role in determining the pace & magnitude of rate cuts and therefore the primary trend in the stock market.
So long as disinflation stays intact alongside a resilient & dynamic labor market, my general belief is that the uptrend in asset prices will stay intact, particularly with the Fed about to embark on a steady & moderate rate cut cycle.
Notably, I believe that the Fed will cut roughly 100bps over the next 6 months, based on what the 6M Treasury yield is currently forecasting. Of course, this forecast is subject to change, particularly as we expect to get more information next week about the pace & magnitude of rate cuts at the FOMC meeting.
This is the key aspect that you need to know: the relationship between the 6M Treasury yield and the effective fed funds rate is signaling that a substantive amount of cuts are coming in the near term.
In the bottom pane, shown in red, the chart shows the rolling spread between the 6M yield and EFFR, which is currently measured right around -0.7%. In the coming weeks/months, after the upcoming 0.25% rate cut, I expect that this spread will stay around this same level, indicating that 0.25% + 0.7% worth of cuts are going to occur over the next 6 months.
In other words, just about 1.0% in rate cuts.
This will get actively priced into the market, for Treasuries, stocks, and crypto.
I expect that it will be a bullish catalyst, so long as broader macro conditions remain resilient, even if they experience some modest softening.
Stock Market:
Right now, my favorite chart in the stock market is related to growth stocks.
Using the Vanguard Growth ETF ($VUG) as a gauge, we can see that this investment theme has been able to retain bullish structure and could be ready for its next leg higher.
Notably, I want to highlight the fact that VUG stayed above the 2021 ATH’s during the July/August selloff and has been able to produce a higher low relative to the April 2024 lows. Even during the selloff two weeks ago, price was able to make a higher low and is now piercing above the descending trendline from the ATH’s in July 2024.
Personally, I think the signal here is that growth stocks are ready for another leg higher.
Whether or not they outperform value stocks, which also look fantastic, is up for debate and an entirely different question in and of itself. Thankfully, I’ve been exploring this topic in the past few premium editions of Cubic Analytics, which I’d encourage you to read here:
The good news is that both growth and value look fantastic, giving investors an abundance of opportunities and highlighting the fact that market breadth is strong.
Personally, I really want to see semiconductor stocks regain their strength & momentum in this market environment as a representation of leadership. Given their importance to broader market conditions and the AI narrative, it’s vital to see semis perform well in this market as an “all clear” sign.
Thankfully, the semiconductor ETF ($SMH) has been able to successfully rebound on the 200-day moving average cloud:
So long as it stays above this dynamic level, I’ll interpret that as bullish for the market.
Bitcoin:
Regarding Bitcoin, it’s been fantastic to see this latest rally from $52k to $60k.
We’ve seen massive buying at the lower-bound of the regression channel, derived from the March 13th highs to the August 5th lows, which has been a key level that buyers have defended on each retest:
Of note, I made a key discovery this week by analyzing Bitcoin’s relationship with its 1-year moving average, displayed by the 365-day moving average cloud.
🔵 365-day EMA
🔴 365-day SMA
This is an interesting datapoint because it tracks where BTC is trading relative to its 1-year average; however, I was keen to see that this dynamic range has been valid as both support and resistance, depending on the nature of the trend.
Since the initial breakout move in March & April 2023, BTC has been able to stay above its 1-year average and even flip it into support on several occasions, even during the recent pullback in August & September.
Could it be the case that Bitcoin is simply retesting its 1-year average before continuing higher, as it did in Q2 & Q3 2023?
Until proven otherwise, yes!
This week, I felt comfortable to move further out onto the risk curve and add to my open positions in spot Bitcoin ETFs and even the 2x spot leveraged ETF from REX Shares, BTCL 0.00%↑:
While the REX Shares Bitcoin products might not be suitable for all investors, I’m using it as an opportunistic way to get more potential upside, along with a few other securities, like Microstrategy MSTR 0.00%↑.
But maybe you disagree with my analysis & my outlook for BTC and you want to take the other side of the trade… regardless of what your bias is, bull or bear, REX Shares has created a way for you to gain leveraged exposure in either direction so that you can exercise your outlook.
Disagreement is literally what makes a market.
Stay focused, understand your risk, and trade your plan.
Best,
Caleb Franzen,
Founder of Cubic Analytics
Caleb Franzen,
Founder of Cubic Analytics
This was a free edition of Cubic Analytics, a publication that I write independently and send out to 12,000 investors every Saturday. Feel free to share this post!
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DISCLAIMER:
This report expresses the views of the author as of the date it was published, and are subject to change without notice. The author believes that the information, data, and charts contained within this report are accurate, but cannot guarantee the accuracy of such information.
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