Two sets of reliable stock market cycles have topped. Technically, the market does not appear as weak as expected. But there are signs of excessive optimism. Here are three. Speculators are long the NASDAQ at a record level. And asset managers are at near record longs in index futures and options positions. Sentiment as measured by Consensus Inc. is at its highest level since 2018. The cycles suggest a near-term downturn in the overall market.
Let us look across the valley of a shallow correction into the rest of the year. The biotechnology index had lagged through 2023. The S&P 1500 Biotech industry group rallied as 2023 closed. It rose 11% from November 27th through January 12th. A rise of this magnitude is rare at this time of the year, having occurred only once. There have been four rallies of more than 5%. The index was higher in three of four cases both two and six months later. In addition, there is favorable seasonality in January, up 61% of the time.
The weekly strip below is bullish. We see a breakout from a triangle supported by higher lows in momentum and in relative strength. Relative strength bottomed in July. It usually requires about six months of relative strength before a rally in absolute price begins. Monthly momentum is oversold despite the rally. In the first half of the year, only February has a negative expected return. The third graph shows the monthly cycle points up in 2024. These signals are signs of outperformance in 2024. The index could reach 4500 in 2024, about 13% over the last quote.
S&P Biotech Daily, Weekly, Monthly
S&P Biotech Index Monthly Histogram
Red: Probability of a rise on that day
Blue: Percent Change
Green: Expected Return (Product of the first 2)
S&P Biotech Monthly Cycle
The two strongest stocks in terms of relative strength, technical position, and cycles are Amgen and Gilead. The first stock is the stronger. Both have rallied, but both are likely to move higher in 2024.
Amgen Daily, Weekly, Monthly
Gilead Daily, Weekly, Monthly