Coiled Spring Capital Macro Report 12/1/24 - Holiday Edition

*As noted last weekend, our holiday travel schedule has precluded our ability to produce our usual comprehensive overview of the global markets. We are back next week, and thus, this weekend’s report will also follow an abbreviated format.”

Our 11/25 report was succinct and to the point. The conclusion simply called for more index upside.

Our conclusion page stated: “Given this is a holiday shortened week we see little reason to expect deviation from the current bull trend. We expect higher index prices from here into the defined upside levels for the SPX. The reversal last week was right on schedule and has negated much of the index construction degradation that gave us caution last week.”

The holiday shortened week for the indexes ended with another record closing for the SPX. This was the 53rd all-time-high (ATH) reading of 2024. The month closed out with the SPX advancing 5.7% and the Nasdaq 100 Index (NDX) rising 5.2%. The Russell Small Cap Index (RTY) closed out the month with its best since December ‘23.

Bull markets do what bull markets do: they go up! Trying to fight strong trends is not only detrimental to your health, but it also hurts your performance. Meanwhile, perpetual bears continue to overlook the bullish signals we highlight weekly. Last week, we pointed out that a correction in the stock market seemed unlikely, as the three key sectors—Financials, Industrials, and Transports—were all on the verge of breaking out. And guess what happened? All three sectors hit new all-time highs. This is not the behavior of markets on the brink of collapse.

As we noted in last weekend’s report:

“If you're predicting the stock market's imminent demise, wouldn't that be reflected in these sectors? We’d venture to say yes.”

Markets can't climb without their key components trending strongly. The most important driver of this bull market is the Mag 7 index, given their significant weight. Last week, we acknowledged their underperformance but noted their construction still appeared bullish. Now, a week later, the pattern still looks like a bullish consolidation, and these stocks are on the verge of breaking out.

We’ve long argued that the most critical factor in determining the path of least resistance for the stock market indexes is price—not some FX pair or derivative correlation to the SPX. While it’s true that everything is interconnected, and monitoring these relationships can provide valuable clues, basing a market view solely on a single variable—claiming the market “must” revert—ignores the fundamental way markets operate. Price action is the ultimate arbiter.

Our readers know that we focus on the primary drivers of stock market direction. While we analyze various relationships and make assumptions based on them, not all correlations carry the same significance at any given moment. This is why we adopt a weight-of-the-evidence approach to guide our conclusions. However, price must always validate any insights derived from secondary indicators.

One area of growing concern has been the unrelenting rise in yields. We’ve seen episodes of market volatility in response to rising yields, but widespread price dislocation has yet to materialize. This suggests the market continues to look beyond higher yields—for now. Whether this optimism is misplaced is a separate debate. Our focus remains on the present, and we’ve consistently warned that if yields fail to retreat, this could spell trouble—likely in 2025. So far, that warning aligns with reality, as the indexes have continued to post all-time highs despite persistent upward pressure on yields.

Wednesday’s PCE inflation report further complicates the picture, showing a 2.8% year-over-year acceleration in underlying inflation. This keeps the rate complex in the spotlight as a key variable to watch.

Interestingly, the yield complex retreated last week after the report with the 2-year treasury yield closing at lowest level in almost a month.

In our 11/25 report, we highlighted the bearish break of the 10 year treasury chart.

Here is that excerpt:

The 10-year yield is down another 17 bps from last week in the face of accelerating inflation.

So, what’s the deal? To be honest, we don’t have all the answers. But what we do know is this: price action was signaling lower yields, while the stock market itself was pointing toward higher levels.

Does the "why" really matter? Not to us. Sure, it’s nice to have a theoretical explanation for why global markets behave the way they do. But at the end of the day, it’s irrelevant. Our focus is on making money. In the markets, opinions and theories don’t generate returns—price action does.

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