(Weekly Summary) An Old Stock Market Indicator Flashes “Buy”

Hello, reader.

Throughout the vast history of the stock market, a wide variety of “predictive” indicators have emerged to guide investors into the murky, unknown future. These indicators derive their calls to action from signals that can be anecdotal, mathematical or just plain bizarre.

The Fibonacci sequence, for example, projects possible stock advances and pullbacks, according to the number theories of a 12.^th Italian mathematician of the century. By the way, he began developing his formulas to project the number of offspring a healthy pair of rabbits would produce in a year.

Elliott Wave Theory also uses a formulaic approach to project likely turning points in stock, commodity and/or bond prices.

Moving from the mathematical to the anecdotal, we find the Theory of the Presidential Election Cycle, which indicates the ideal years to own stocks during a four-year presidential term. The third year is the best, on average.

Another member of the anecdotal category would be the Super Bowl Indicator, first “discovered” in 1978 by sportswriter Leonard Koppett of The New York Times. According to this indicator, the stock market will perform well during the year after an NFC Super Bowl victory, but poorly after an AFC victory.

However, in the last decade, this indicator has not worked as advertised. NFC wins produced an average one-year gain of just 7.1%, while AFC wins produced a whopping 18.3% gain!

Finally, in the category of “simply bizarre” indicators we find one that bases its “Buy” signals on the nationality of the model wearing the cover Sports Illustratedthe annual swimsuit issue. Using data from the 1980s and 1990s, this indicator determined that the stock market in the model’s home country would tend to rise in the four years after her appearance on the cover.

Although this strange indicator first appeared in 2000, it continued to produce a remarkable record in the following years. Mexican stocks rose 112% in the four years after Elsa Benitez appeared on the cover in 2001. Argentine stocks gained 73% after Yamila Díaz-Rahi covered the 2002 show, while Czech stocks soared up 406% since Petra Nemcova made the cover since 2003.

For better or worse, this indicator disappeared in 2015. This is the year Sports Illustrated began producing multiple covers for its swimwear issue rather than just one. But instead of shedding a tear for this lost indicator, let’s turn our attention to one rooted in cold, hard economic data – the Rate Cycle Indicator.

As the name suggests, this simple indicator draws from historical precedent to show that stocks tend to rise during periods when the Federal Reserve cuts interest rates. Since 1981, the Fed has initiated nine distinct rate-cutting cycles. In seven of these nine situations, the stock market rose in the 24 months following the first rate cut.

Even after including the two courts that produced a negative result, the two-year average return from these nine courts totaled 36.3% – or more than 15% annually.

These results shed a promising light on the year ahead, given the likelihood that a new rate cut cycle will begin. When the Federal Open Market Committee meets on September 17, it will likely announce the first interest rate cut since July 2019.

At the same time, the Fed will almost certainly signal its intention to cut rates several more times in the coming months. This activity would be great news for the stock market if the rate cycle indicator holds true to form.

This indicator is not perfect, of course, but it clearly belongs to the category of “good things” for the stock market.

In fact, the coming rate cut – regardless of size – is particularly favorable for the healthcare and technology sectors, where we hold positions in Fry’s Investment Report portfolio.

These sectors tend to thrive during mid-cycle recoveries. With high initial investment in research and development, they ultimately reap the benefits of lower interest rates, which reduce borrowing costs and increase profitability.

So to learn more about what stocks I’m excited about, click here.

Now let’s take a look back at what we covered here Smart money last week…

Smart money Elevate

The September rate cuts are becoming a reaction

The upcoming Federal Reserve meeting will likely mark the first interest rate cut of this economic cycle and send waves of panic through the AI ​​world. While equity investors remain convinced that the jumbo cut is on the way, bond investors have been skeptical. To learn how a rate cut of 25 basis points from 50 basis points would impact AI and other key sectors, click here.

This rare occurrence could eclipse September’s disastrous reputation

September is an unattractive month for stocks – last Tuesday’s market performance followed the long-term trend of average monthly S&P 500 returns over the past century or so. However, a unique economic event due to take place in the coming weeks could change the trajectory of September. Luke Lango details what this upcoming event entails and identifies stocks you might want to keep an eye on. Click here to continue reading.

Why OpenAI’s Next Release Could Be a Massive AI Breakthrough

Almost two years ago, OpenAI sparked an AI frenzy with the release of their L1AI model, ChatGPT. Now the company is preparing to release Strawberry, an upgrade capable of performing more complex reasoning. In the special Sunday issue of Luke Langohe explains the significant impact this progress will have on the AI ​​boom and stocks where investors can find investment opportunities. To learn more, click here.

I can’t wait

As we navigate the evolving global macro landscape this week, be sure to keep an eye out for upcoming events Smart money updates.

In one of these updates, I’ll share a list of stocks that I believe have the most staying power and longevity in today’s fast-paced environment, especially as AI continues to shape industries.

Stay tuned…

Sincerely,

Eric Fry