December Strategy Session: 3 Key Takeaways

December 7, 2023

From the desk of Steve Strazza @Sstrazza

We held our December Monthly Strategy Session last night. Premium Members can access and rewatch it here.

Non-members can get a quick recap of the call simply by reading this post each month.

By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.

With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.

1. Rotation, Rotation, Rotation

Sector rotation is the lifeblood of a bull market.

In 2023, the laggards from the back half of 2022 became the new leaders.

In recent weeks, we've seen a pronounced rotation back into these former leaders. We're talking about things like industrials, financials, and even small-caps.

One way to visualize it is through the ratios of Small-Caps vs Large-Caps, Industrials vs Technology, and the Equal-Weight vs Cap-Weight S&P 500. All three stopped going down almost a month ago and are reaching new multi-month highs.

This is the bullish expansion in participation we need to fuel the stock market rally into the new year. We think it's already underway.

2. Best Month Ever for ARKK

One of our favorite proxies for speculative growth stocks is the Ark Innovation ETF $ARKK. November was a historic month for ARKK as the fund posted its best monthly performance ever. We think of this action in the same way as a momentum thrust.

The bulls want to see ARKK take out this summer's highs and make a decisive move out of the base that's been forming since last year. New 52-week highs for ARKK would signify an expansion in breadth but, more importantly, risk appetite.

Looking under the hood, many of the components of ARKK have already broken out. See UiPath, DraftKings, and Palantir. We think it’s just a matter of time until the index follows.

For now, seeing investors move further out on the risk spectrum and bid up these speculative stocks can only be viewed as bullish.

3. Yields Break Down

The US 5 and 10-year treasury yields have fallen below their respective 2022 peaks and are now back in their old ranges.

Interest rates moving lower is an incredibly bullish development for risk assets, from long-duration growth stocks, to financials and real estate companies.

While lower is surely better, the path we take to get there is also important. Bulls never want to see rates move too fast in one direction. Steadily grinding lower or churning sideways in a range are both ideal scenarios.

We will closely monitor the 5 and 10-year yields to forecast the bond market's next move, but as long as they are below 4.45% and 4.30%, respectively, the trend is sideways to lower for yields.

Those are some of the main takeaways from this month’s strategy session.

Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team