Technical Analysis Says "Remain Bullish, But Be Careful"
When Sven Henrich of NorthmanTrader.com was last on this program in July, he shared that he had just closed out all his longs and moved to cash.
That moved paid off, as the S&P fell over 300 points in the following few weeks.
Stocks rebounded after the sell-off and have powered higher since, now back near all-time highs.
So what does his Technical Analysis tell us to expect next?
Especially with near-record valuation multiples, and elevated volatility — both in stocks as measured by the VIX and in bonds as measured by the MOVE index.
Here are my key takeaways from today's interview with Sven:
Sven highlights that the U.S. economy shows a disconnect between market highs and economic fundamentals, driven by massive liquidity injections. Fiscal deficits reached $1.8 trillion in 2023, while U.S. government debt rose by over $2.2 trillion in the past year. This liquidity has artificially supported asset prices, pushing the S&P 500 near all-time highs despite high volatility in stocks (VIX) and bonds (MOVE index).
A sudden spike in U.S. debt by over $600 billion in October raises suspicions of government manipulation to stabilize markets before the election. Typical correlations between asset prices, bond yields, and the dollar have recently broken down, suggesting potential interventions to keep market sentiment positive.
The top 10% of Americans now own about 90% of U.S. stocks, while average consumers are squeezed by high costs and stagnant wages. Despite GDP growth of 3% and low unemployment, consumer confidence remains at recessionary levels, reflecting uneven benefits from economic policies. Sven warns that wealth inequality poses a risk of social instability.
Rising interest rates and inflation have severely impacted consumers, with personal interest payments surpassing $500 billion annually, up from pre-COVID levels near $300 billion. The personal savings rate has dropped to 3.4%, leaving many households financially vulnerable. These trends highlight the disparity between Wall Street gains and Main Street struggles.
In terms of portfolio positioning in this market, Sven emphasizes maintaining cash reserves and trading actively. He advises scaling out at market peaks, like in August and October, to build cash positions for reinvestment during dips. This approach allows investors to navigate high valuations while remaining prepared for corrections.
Indicators like the equal-weighted S&P 500 (RSP) and the Value Line Geometric Index (XVG) reveal underlying market weakness, with XVG failing to reach new highs. The concentration of gains in a few large-cap stocks suggests that broader market strength is overstated, increasing the likelihood of corrections.
Sven forecasts moderate gains in 2025 but warns of “hiccups” due to upcoming corporate debt refinancing at higher rates. He compares this to a 1965-style correction, which was around 12%, and notes that global liquidity, expected to peak by 2025-2026, could result in a pullback if fiscal and monetary support diminishes.
Sven advises against buy-and-hold strategies, citing the Buffett Indicator (market cap-to-GDP ratio) at over 200%, a historical bubble level. He encourages flexibility, as elevated valuations make markets more vulnerable to corrections. While liquidity is likely to support markets short-term, he sees active trading as essential to manage risks in a high-valuation environment.
In terms of sector rotation, Sven advises shifting to areas that align with economic cycles and changing market sentiment. During rallies, he favors technology, given its consistent outperformance, but in more defensive phases, he suggests consumer staples and utilities, which tend to perform well during downturns as they meet essential needs and offer steadier revenue. To hedge against turbulence, Sven also sees value in defensive assets like Treasury bonds. However, he cautions that recent bond market volatility illustrated by sharp moves in the 10-year
For the full interview with Sven Henrich, watch the below video:
___________________
For more deep-dive macro interviews like the one above, sign up for our free newsletter at: https://www.youtube.com/@
To schedule a free consultation with one of Thoughtful Money's recommended financial advisors, fill out the short form at: https://thoughtfulmoney.