Coiled Spring Capital Mid-week Report 10/16/24

Many pundits are quick to claim that a bear market looms after the recent run-up in stock prices. While anything is possible, we prefer not to make sweeping predictions. Instead, we focus on the short to intermediate term—what we call "tactical alpha"—helping our readers stay aligned with the trend.

Fighting the trend is like swimming against a strong ocean current: possible, but exhausting and with little progress to show for it. Why fight the tide when you can surf the wave in the direction it’s going? That’s our ultimate goal: to keep you moving with the market's momentum, not against it.

Right now, it’s undeniable—the bulls are in control. We’ve been saying this all year, and our 10/6 report specifically pointed to major sector breakouts in Financials, Industrials, and Software as clear reasons NOT to adopt a bearish stance. Those who ignored these signals have already missed out on over 100 SPX points. Maybe ignoring the market’s upward signals feels contrarian, but to us, it seems like an invitation to unnecessary pain.

We remain agnostic about market direction; we make money in both bull and bear markets. But let’s be honest: bear markets are more stressful and difficult to navigate. Given the choice, we prefer attending the bull market rallies.

In our 10/9 report, we also highlighted the Russell Small Cap Index (RTY), suggesting that its bullish pattern would likely break out once the rate complex stabilized. That call remains as relevant as ever.

Excerpt below:

We even highlighted the potential for yield retracement based on the completion of the DeMark sell signal in the 2-year Treasury.

Excerpt below from the 10/9 report:

Not surprisingly, the 2-year yield has since backed off and is now down 17 bps from the DeMark 9 sell signal high.

And look who decided to join the bull party—the RTY is up over 4% since that report.

We often emphasize that the stock market is more than just lines on a chart. Success comes from understanding the right intermarket relationships and making informed judgments about their direction. While it's easier said than done, that’s where we add value—introducing new ways to think about the market and its potential trajectory. We hope you find this perspective valuable.

As earnings season kicks into full gear, the money center banks have reported surprisingly strong results. Even more significant is the positive reaction in their stock prices, which are helping to lead the broader market higher. Since we highlighted XLF in our 10/6 report as a potential breakout candidate, the ETF has risen nearly 4%.

Tomorrow, bellwether Taiwan Semi (TSM) will report earnings. While one company’s earnings shouldn’t define the market trajectory, the semiconductor group was already punished by a surprising ASML guidance cut yesterday. Should TSM not deliver the expected upside, the semi-tape could unravel. This could set a negative tone for tech earnings into the next few weeks and might be a harbinger for a possible, more meaningful retracement in the indexes.

What’s also concerning for us is that Goldman Sachs, who was very vocal about a likely bad October, is now saying that the correction has been “canceled.” While they were never outright bearish on the market, only tactically so, the about-face after a strong October seems capitulatory. Price has a funny way of changing one’s mind, and we think that’s notable.

Let’s see what the charts say…

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