Market Milestones: Euphoria

With the election of Donald Trump on Tuesday, the stock market fully embraced the soft-landing narrative, and euphoria kicked in. Chasing this market higher has quickly become the norm. The past three days on SPY have been incredible, with SPY, QQQ, and DIA powering into new all-time highs. However, the bond market isn’t quite as convinced that a soft landing is secured, as bonds continue to sell off in a major way, with yields skyrocketing into the Fed's rate-cutting campaign. TLT, the 20+ Year Treasury Bond ETF, has fallen nearly 12% since the Fed’s 50 bps cut in September. For those looking for a quick bullish swing trade on bonds, TLT is offering a decent risk-reward at this level, with RSI divergence.

TLT

I researched the S&P 500's performance from Election Day to Inauguration Day over the past 30 years and created a graphic of the findings below. It’s not uncommon for that time frame to be quite strong for the stock market, as expectations are often high for change. Obviously, there are numerous factors that can have positive or negative effects on the market over those 75 days, but history shows that the market is likely to be higher on Inauguration Day than it was on Election Day.

The recent price action on SPY and QQQ feels a bit like a bull trap to me. I know the absurdity of making this statement in the same week that SPY pulled off one of the wildest bear traps this market has seen in years. It went from a rising wedge breakdown to a bullish island reversal and new all-time highs overnight. If any bears are still around at this point, they’re likely walking on prosthetics and nursing their wounds in their caves.

I know it sounds crazy to say that bulls could get trapped in this market that seemingly never goes down, but that’s actually part of the point. Charts are getting a bit stretched at these levels, and a number of stocks now look dangerously toppy if we take out Wednesday’s bullish candle. A bull trap doesn’t mean this is the top of the market; in fact, I still think we’re likely higher by January 20th, as stated above. However, I think traders who chased this move over the last two days are going to be punished. That will make for a nice opportunity to buy their pain for an end of year rally.

SPY

P.S. I checked in on the Bar Hopping patterns from the August 16th newsletter, and my favorite at the time—the 2007 bars pattern—is actually playing out extraordinarily well so far. It shows a coming retest, though of lesser severity than I am expecting, followed by a slow grind up into early 2025.

QQQ