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Are the markets pricing in a Goldilocks scenario? Maybe so says David Keller, given the Fed rate cut cycle and economic outlook for 2025 (1:00). Why expectations for financials and infrastructure are high (3:40). Crypto patterns, Bitcoin break out (7:35). Recorded on November 12.
Transcript
Rena Sherbill: Dave Keller, welcome to Seeking Alpha. Investors who may know you from your YouTube channel, who may know you from The Mindful Investor, talk to us a little bit more deeply and intricately about the trends that you’re seeing now, what would you highlight for investors?
Dave Keller: Well, I think the world going into the election season now and the world kind of coming out, obviously very different in a lot of ways.
Arguably the markets have been pricing in sort of a Goldilocks scenario with the Fed rate cut cycle and an outlook for economic conditions going into next year. And you can see that just by the returns we’ve seen by the S&P and the NASDAQ year-to-date.
But you’ve also seen areas of the market like gold, like cryptocurrencies that have actually been quite strong in recent months and in many cases through the course of 2024. I think coming out of the elections now that we can sort of take a deep breath and reflect on what’s happened, you’re certainly seeing areas of the market showing more strength than others.
And I would say a lot of charts that I look at have all had that gap higher last week, coming out of the election, a Trump presidency and to the degree that we saw the elections tilted in Trump’s favor. You’re certainly seeing certain areas of the market showing remarkable strength.
I would say with the averages overall looking at the S&P (SPY) and the NASDAQ (QQQ), by any technical definition, they’re pretty overextended. And the gap higher that you saw last week has really been really magnified how strong of a year it’s been, which as a contrarian, the contrarian hat that I have says, at some point you have tactical pullbacks to sort of alleviate those overextended conditions.
However, the longer-term trends remain quite strong. And that can be as simple as the S&P is making a clear pattern of higher highs and higher lows. That was Charles Dow in the early 20th century laid out, this is how you define a market in an uptrend. I would say a lot of markets that I’m evaluating have that very clear bullish trend.
So generally speaking, I think, coming out of elections, you want to lean into areas of the market that are showing relative strength, meaning they’re performing better than others, especially at a time when it feels like many investors are probably sitting on significant gains, probably in growth areas of their portfolio so far in 2024.
I think this could be a time to rotate out of some of those areas that have been so strong and focusing on areas with emerging strength. And financials come to mind as one of those that have been less strong performers, but it really emerged here in recent months.
RS: And that’s based on technicals and the fundamentals in terms of those sectors that are just coming up?
DK: Yeah. So I think you want to think of it as sort of a hybrid approach, or at least that’s how I think of it. So what would cause financials to do well? I would say it’s a couple of things.
Number one, it’s the interest rate environment. And given the Fed’s rate cut cycle, we just had the latest rate cut earlier in November. Expectations are further rate cuts going into the beginning of 2025.
A more normal shape yield curve that most likely helps regional banks, money center banks. And so ETFs like the (KBE), the (KRE), capital markets, the (KCE) are all breaking out to new 52-week highs in the last couple of weeks. And so I would say that’s partly because of that.
A Trump presidency implies lower regulation on financial institutions as well, and that’s certainly providing the most recent or at least part of the most recent boost in the financial sector.
From a technical perspective, I would say a lot of those ETFs that I just mentioned recently breaking out of what’s called a basing pattern. They’ve all been sort of sideways consolidating through much of 2024, but all of those ETFs now emerging and making new highs on stronger volume. And that implies that investors are rotating to those areas of the market.
Given that macroeconomic backdrop, given the potential policy decisions you could expect going into next year, it seems like a time and a point in the cycle where those types of stocks would do well.
RS: Have you seen anything from this earnings season, financial sector-wise that has you interested in specific stocks or from your strategy in general, anything that you’d care to share with investors? I know you mentioned some ETFs. Any specific names there to mention to look further into?
DK: When I think about what happened with earnings season, you could argue this was a really successful earnings season and that so many companies beat earnings. I would just remind everyone that those were very lowered expectation that those companies overcame. So it’s great job beating a much lower bar than it had been. And so that’s sort of the world we’re in, right?
Generally speaking, earnings expectations are coming down. Companies are beating those lower expectations. I’m not sure how much of a good news sort of thing that is.
I would say with earnings season in particular, given the uncertainty that I think is still there about what a Trump presidency could look like, given uncertainty about policy decisions and how they would actually be implemented, and how easily some of those changes could be put into play, I still think there’s a lot of uncertainty baked into equity prices, or there certainly should be.
I think thinking and listening to forward-looking guidance going into next year about what expectations could be about interest rates and inflation, a strong dollar, and all those things and how they could impact companies and their outlooks, I think, is probably the most important takeaway to pay attention to.
I would say coming out of earnings season, and again, my technical discipline is probably the most important in my toolkit. And I would say I’m looking at areas that are emerging in a position of price strength, meaning you’re seeing investors accumulate shares. And also relative strength, which means those stocks or ETFs are doing better than average, you’re doing better than the benchmarks.
Two areas that come to mind off the top would be the financials that I mentioned. The other one would be more infrastructure plays. And an example of that, I would say, would be PAVE, the Infrastructure ETF, ticker (PAVE). Another one that sort of gapped higher, came out of earnings season pretty well.
Infrastructure, as a theme, makes a lot of sense to me. And to be honest with you, regardless of who is elected, I think in the elections just recently, I think both of them will have to focus on infrastructure with the aging infrastructure in the U.S. So PAVE is a good way to sort of play that again without sort of taking risk on individual stocks.
But with those two areas of the market, in particular, I’m impressed by the price performance coming out of earnings, but also the relative strength, which shows you that they’re emerging even stronger than other areas of the market. And that’s generally speaking where I want to be.
RS: Can I ask you about crypto? Because I’m curious, we’ve obviously seen some great news from Bitcoin (BTC-USD) and the price that it’s achieved. It’s hard to know in terms of crypto because there’s not a lot of historical action to go off of.
I know you mentioned looking for things that haven’t been going up so much recently. What are your thoughts about crypto? Do you see it continuing to fluctuate or continuing to go higher? What’s your thoughts on that cycle there?
DK: One thing that is a guarantee in the crypto space is excessive volatility. And I always caution people if they’re not, certainly more experienced investors that by aka older investors, if you’re familiar with stocks and ETFs, I mean, crypto is a volatile area of the market.
What’s good for how I approach things, I would argue it’s a petri dish for emotional investing. It’s with a lack of real fundamental data, besides like mining statistics and supply and that sort of thing, day-to-day, month-to-month, there’s not a lot of fundamental data you can cite for cryptos. It’s really, I would argue more about investor psychology and risk assessment, and risk appetite and speculation.
And so I think it’s a ripe area of the market to apply the technical toolkit. The downside, as you mentioned, there’s just a lack of history. So we don’t have so many cycles to refer to.
But having said that, even with the relatively young history of cryptocurrencies, I think we’ve started to see some patterns emerge. And full disclosure, I should say, as I’m talking about this, I do hold Bitcoin and Ethereum (ETH-USD) in my own accounts.
When I’m looking at cryptocurrencies generally, I mean, I think the long-term thesis on cryptos is strong, just the general idea of decentralized finance and blockchain technology transformative. And I think the ripple effects and the implications of that are – we’ll be digesting that for a long time.
But does the opportunity in the crypto space really mean you want to be owning things like Bitcoin or the (GBTC) ETFs like that? Now, I would argue you do. And I would say from a technical perspective, what’s impressive about something like Bitcoin is it’s really just emerging out of a broad basing pattern.
If you look at the chart of Bitcoin, you can see we sort of pushed back just above 70,000, 70,000, 72,000. And for most of 2024, we’ve been sort of bumping up against that as a ceiling. About a number of times where Bitcoin has attempted to break higher, really gain a foothold above 70,000, it’s been unable to do so, it consistently has been pushed back.
But just again, sort of coming into the elections and now coming out, you’ve seen Bitcoin break out to the upside. I would say as a longer-term play, right, more of the cyclical pattern still quite strong. And I would just say the basic trends of making higher highs and higher lows, moving averages sloping higher, all of that reinforces the fact that the price action is more constructive.
I would caution investors on the short-term timeframe when something has rallied so aggressively in a short-term period of time, it becomes overbought or overextended, as we would say.
And so I think looking for actionable entry points, meaning looking for a tactical pullback within a long-term uptrend has often been a good way to play markets like this that are starting to show strength but feel a little overextended, sort of leaning a little too far over their skis.
I think that’s true of cryptos. That’s true with a lot of stocks as well that have had really strong gains. Waiting for good opportunities, sort of tactical pullbacks within a long-term uptrend has usually been a pretty good place to be.
But I would say from a technical perspective, Bitcoin could measure much higher than current levels, well above 100,000 for Bitcoin, given the structure and given the history of having basing patterns as we described and then breakouts that can persist much longer than people expect.
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