We Have a Breakout

Brit Ryle

Posted January 25, 2024

Jamie Jawbones the Market

There are always negative storylines out there that can feed the bearish mindset. 

Right now, there’s war in Ukraine, war in Gaza… China’s economy has real problems…the path for the Fed to cut interest rates is uncertain as the latest inflation readings were not particularly good…commercial real estate is a looming disaster…banks are adding to their loan loss reserves in order to withstand losses from their commercial real estate loans, as well as consumer loans…

In fact, I watched a clip of JP Morgan (NYSE: JPM) CEO Jamie Dimon running through this exact laundry list just yesterday. Apparently, he’s trying to instill a little fear in the market, trying to talk it down some…

Anytime I hear some bigwig from one of Wall Street’s giant investment banks spinning the downside story, I always get a little suspicious. 

I suppose Jamie Dimon is a decent guy. And I expect he doesn’t mind the attention he gets from doing various interviews. Who doesn’t like to be thought of as smart, competent, with valuable insight about the economy and the stock market? 

And what interviewer doesn’t want to talk to the head of America’s biggest bank?

So I don’t find it farfetched to see Dimon on TV. 

But at the same time, I know who he serves. And it isn’t the individual investors like you and me that might see him doing an interview on CNBC. Jamie Dimon serves JP Morgan. He serves JP Morgan’s high-net worth clients. And he serves the giant hedge funds that use JP Morgan as a clearing house to execute their trades…

And I can easily imagine some of the super wealthy clients to whom he is beholden saying: “Dimon! The market is running away from us! You said stocks would pull back! Now the S&P 500 is at all time highs and I’m not fully invested! Now get out there and do something to talk this thing down!!”

Next thing you know, there’s Jamie Dimon on TV saying “I think investors have a lot to worry about right now…”

Am I Just Paranoid?

Just because I’m paranoid, doesn’t mean some influential people aren’t trying to jawbone stock prices lower…

In fact, I’m guilty of the same thing, just a couple weeks ago. Not that I’m egotistical enough that I think my humble opinions can actually move the market. But on January 12, I did say I thought there might be a little downside coming…

Turns out, the emphasis was on “a little downside.” But let’s go to the updated 3-month chart for the S&P 500 and check in with what’s happening…

So, I’ve cleaned the chart up some since you last saw it, because once you see too many lines and it just gets ridiculous. Simple is  better. Also, there’s no need to pay for fancy charting software, a  Yahoo chart works fine.

Here’s the chart legend for today…

Horizontal Red Lines: These support/resistance lines define the channel in which the S&P 500 has traded since December 14. The upper line is consistent with the all-time highs. The S&P 500 spent 6 weeks bouncing around this channel. That type of sideways move is a “consolidation” because it acts to cement the preceding price move. Some investors take profits, other investors take new positions. And the rule is that the longer the consolidation, the better the eventual breakout will be.

Purple Circle: The purple circle shows the gap that occurred after the last Fed meeting, when Chair Powell surprised the market with a promise of interest rate cuts in 2024. This is the event that kicked off the rally.

Purple Arrows: The first purple arrow is January 12, the day I said that there could be some downside coming. The S&P 500 was right up at the top of the channel, so, sure, a move lower wouldn’t be a surprise. The second purple arrow shows the end of that move lower. Like I said, emphasis on “little.” Third purple arrow: breakout. 

That breakout above the channel to new highs was the response to very positive comments from Taiwan Semiconductor (NYSE: TSM) after it reported earnings. Basically, Taiwan Semi said it would return to growth this year. In some ways, Taiwan Semi is the most important bellwether in the world. Because it makes the chips for Apple (NASDAQ: AAPL), for Nvidia (NASDAQ: NVDA), for Qualcomm (NASDAQ: QCOM), etc. Pretty much everything has a chip in it these days, so if Taiwan Semi says it is growing, then it means pretty much every significant tech company in the world is growing too. 

Rising Purple Line: Maybe I should use some different colors, but, the rising purple line is the 50-day moving average. The 50-day MA tracks the medium term trend. Notice when the S&P 500 moved into the trading channel back in December. It was pretty far away from the 50-day moving average. Traders would say the index was overbought. The sideways consolidation allowed the 50-day MA to catch up. Overbought conditions eased. Just how look close to the bottom of the channel the 50-day MA has gotten…

Final Comments: This is not an unhealthy looking market. The S&P 500 is respecting many of the technical rules. It would be very hard to argue that we are seeing some kind of irrational exuberance. This market can go higher, and with big tech earnings right around the corner, it probably will. 

My apologies, Mr. Dimon…

That’s it for me today, take care and I’ll talk to you Friday,