Douglas Rissing A Historic Rotation The market has been in turmoil since July15, due principally to an overwhelmingly huge rotation into small-cap companies in Russell 2000 out of large-cap counterparts in S&P 500 Index (or SPY, the ETF of S&P 500). Cyclical stocks in industrials, materials, and utility, large or small, affected by the looming Federal Reserve’s [Fed] rate drops have tremendously augmented the rotation hoist already lifted, as shown in Table 1. If you want the source of PPO (Paper and Pencil Only) approach, please click this. Uptrend, TDI, and SDI have a common thread of the PPO Approach which distinguishes any movement with a plus (“P”) and a minus (“m”) without considering the size differences. Table 1. A Historic Divergent Record Among S&P 500, QQQ, DIA, And R2000 24-Jul S&P 500 QQQ DIA Russell 2000 DATE PRICE %CH PRICE %CH PRICE %CH PRICE %CH 07/12/24 5,615.35 * 494.77 * 400.13 * 2,148.27 * 07/15/24 5,631.22 0.28% 496.88 0.43% 402.52 0.60% 2,187.02 1.80% 07/16/24 5,667.20 0.64% 496.18 -0.14% 409.64 1.77% 2,263.67 3.50% 07/17/24 5,588.27 -1.39% 482.64 -2.73% 412.20 0.62% 2,239.67 -1.06% 07/18/24 5,544.59 -0.78% 479.87 -0.57% 406.91 -1.28% 2,198.29 -1.85% 07/19/24 5,505.00 -0.71% 475.01 -1.01% 402.35 -1.12% 2,184.35 -0.63% NOTE 1. Data Source: Yahoo Finance 2. %CH: The Percent Change from previous day. 3. Author made Table. Click to enlarge Table 1 depicts a once in a generation drastic rotation drama that happened in only 5 days from Jul 15 [M] to Jul 19 [F]. My wish for an alignment of the severe distortion came true by stopping one way towards topping the current bull plateau. In Table 2 S&P 500 has spiked in a few weeks, mainly affected by the Fed rate reversal in the year and the next year. Table 2. Jul (19), 2024: M & T 6/28/2024 DATE S&P 500 %CH.1 P/m %CH.2 %CH.3 06/28/24 5,460.48 * * * * 07/01/24 5,475.09 0.27% P 0.27% 0702/24 5,509.01 0.62% P 0.89% 07/03/24 5,537.02 0.51% P 1.40% 07/05/24 5,567.19 0.54% P 1.95% 07/08/24 5,572.85 0.10% P 2.06% 07/09/24 5,576.98 0.07% P 2.13% 07/10/24 5,633.91 1.02% P 3.18% 07/11/24 5,590.51 -0.77% m 2.38% 07/12/24 5,615.35 0.44% P 2.84% 07/15/24 5,631.22 0.28% P 3.13% 0.28% 07/16/24 5,667.20 0.64% P 3.79% 0.92% 07/17/24 5,588.27 -1.39% m 2.34% -0.48% 07/18/24 5,544.59 -0.78% m 1.54% -1.26% 07/19/24 5,505.00 -0.71% m 0.82% -1.97% NOTE 1. M & T is Momentums & Trends 2. Data Source: Yahoo Finance 3.P/m: Plus/minus 4. %CH.1: The Percent Change from previous day. 5. %CH.2: The Percent Change from Jan 31. 6. Author made Table. Click to enlarge The U.S. Economy, and global economy, represented by SPY (or S&P 500 index) has advanced in July, ascended 10 days out of 14 days, accelerating until Jul 16 [T], logging +3.8%, and fortunately decelerating in the last three days, declining -2.9%. Back to Table 1. On Jul 15 [M] all four ascended: 1) Russell[R] +1.8%, 2) DIA [D] +0.6%, 3) QQQ [Q] +0.4%, and 4) S&P [S] +0.3%. On Jul 16 [T] Three except Q rose: 1) R +3.5%, 2) D +1.8%, 3) S +0.6%, and 4) Q -0.4%. On Jul 17 [W] all descended except D: 1) D +0.6%, 2) R -1.1%, 3) S – 1.4%, and 4) Q -2.7%. On Jul 18 [Th] All four declined: 1) Q -0.6%, 2) S -0.8%, 3) D -1.3%, 4) R -1.9%. Finally on Jul 19 all four fell: 1) R -0.6%, 2) S -0.7%, 3) Q -1.0%, 4) D -1.1%. The trajectory of R and S in terms of Rank Jul 15 [M] Jul 16 [T] Jul 17 [W] Jul 18 [Th] Jul 19 [F] R: 1 (+1.8%), 1 (+3.5%), 2 (-1.1%), 4 (-1.9%), and 1 (- 0.6%) S: 4 (+0.3%), 3 (+0.6%), 3 (-1.4%), 2 (- 0.8%), and 2 (- 0.7%) During four days of Jul 15 [M], Jul 16 [T], Jul 17 [W], and Jul 18 [Th], R and S switched their positions, as a vehement rotation process sharply completed: R spiked +1.8%, +3.5%, and sled -1.1%, and -1.9%, while S moderately reconciled +0.3%, +0.6%, -1.4%, and -0.8%. As a consequence, the S&P 500 (or SPY) has been completely rearranged, so, possibly, the pulse check must be better. The Black-Sholes-Merton [BSM] Model In retrospect, the two decades of the1960s and the1970s were my prime time, working for the central bank in Korea, and studying at UCONN and NYU. One day a professor arranged an off-campus part-time job to help a young investor from India who invested in options using the BSM option pricing model. At that time, I had a full scholarship and an extra stipend at NYU to support my family. I worked as an instructor for students to use the time series processor [TSP] with an IBM mainframe. I read two articles of the BSM model. I calculated the prices of various options with IBM, gave the printout, and collected the fee every Saturday. The model has five inputs: the strike price, the stock price, the expiring date, the risk-free rate, and the volatility. Making Table 1, I remembered the BSM model 49 years ago, and the extremely high volatility in a few days in the last week was really a historical moment we have not seen before at all, in my observation. The Outcome of the Pulses Check The pulse checks of SDI, TDI, and Uptrend were 58, 72, and 71%, respectively Friday (Jul 19), that were better than the last week’s, 57%, 79%, and 71% on Jul 12 [F]. In the two weeks (9 days) in July, the equity market has been too hot, but in the last week (5 days) the market cooled, so the spillover effect to the pulse check was better. The primary indicator, SDI, was under 60%, and the secondary, TDI, was below 75%, and referee indicator Uptrend was a bit over 70%. Pulse Check #1 by The SDI (The S&P 500 Sector Diffusion Index) Table 3. The Diffusion Index of The S&P 500 11 Sectors Jul-24 The S&P 500 !! Select Sectors Diffusion DATE XLRE XLU XLC XLY XLF XLE XLI XLP XLK XLB XLV #P SDI 07/01/24 m m m P P m m m P m m 3 27% 07/02/24 P P P P P P P P P P m 10 91% 07/03/24 m P P P m P P m P P m 7 64% 07/05/24 P P P P m m m P P P P 8 73% 07/08/24 P m m P m m P m P P m 5 45% 07/09/24 m P P P P m m m m m P 5 45% 07/10/24 P P P P P P P P P P P 11 100% 07/11/24 P P m m P P P m m P P 7 64% 07/12/24 P P m P P P P P P P P 10 91% 07/15/24 P m P m P P P m P P m 7 64% 07/16/24 P P P P P P P P m P P 10 91% 07/17/24 P m m m P P m P m m P 5 45% 07/18/24 m m P m m P m m m m m 2 18% 07/19/24 m m m m m m m m m m m 0 0% AVERAGE 58% NOTE Data Source is Yahoo Finance, Author Made Table. Click to enlarge The SDI was 58% Friday (Jul 19), that was optimal.. The SDI is a diffusion index, so slightly more than 50%, about 6 sectors out of 11, are positive. The positive sectors can tally from Table 3, as: 1) XLY (cons discretionary) 9Ps, 2) XLB (Materials) 9Ps. 3) XLF (Financial) 9Ps, 4) XLRE (Real Estate) 9Ps, 5) XLK (Tech) 8Ps, 6) XLI (Industrial) 8Ps. Pulse Check #2 by The TDI (Trifecta Distribution Index) Table 4. Trifecta Data: Jul (1 – 19) DATE SPY DIA QQQ SPY DIA QQQ Tp/Tm 06/28/24 545.06 391.52 479.87 * * * * 07/01/24 545.18 391.27 481.84 P m P D 07/02/24 548.30 392.90 486.65 P P P Tp 07/03/24 551.14 393.00 490.88 P P P Tp 07/05/24 554.40 393.55 495.94 P P P Tp 07/08/24 555.50 393.65 497.34 P P P Tp 07/09/24 555.81 392.91 497.63 P m P D 07/10/24 561.15 397.11 502.77 P P P Tp 07/11/24 557.04 397.58 492.97 m P m S 07/12/24 559.43 400.13 494.77 P P P Tp 07/15/24 561.67 402.52 496.88 P P P Tp 07/16/24 564.61 409.64 496.18 P P m D 07/17/24 557.49 412.20 482.64 m P m S 07/18/24 553.05 406.91 479.87 m m m Tm 07/19/24 548.40 402.35 475.01 m m m Tm NOTE 1. Tp is Trifecta for Bull, Tm is Trifecta for Bear. 2. “D” is double “P”. And “S” is Single “P”. . 3. Data Source: Yahoo Finance. Click to enlarge Table 5. The Summary of Trifecta In 2024 Jun (28), Jul (19) 2024 The Bullish (Plus) Trifecta For Bulls 2024 The No. of In A Row for multiple (1-6) Tps TOTAL Month 6 Tp 5 Tp 4 Tp 3 Tp 2 Tp 1 Tp Tps Jun 0 0 0 2 2 6 JUL 1 0 1 0 1 1 7 The Bearish (minus) Trifecta For Bears 2024 The No. of In A Row for multiple (1-6) Tms TOTAL Month 6 Tm 5 Tp 4 Tm 3 Tm 2 Tm 1 Tm Tms JUN 0 0 3 3 Jul 0 1 1 2 NOTE 1. Data Source: Yahoo Finance. 2. Tp is Trifecta for Bull.(plus) 3. Tm is Trifecta for Bear.(minus) 4. D is Double: 1″m”/2″P”, and S is Single: 2″m”/1″P”. 5. Author made the Table. Click to enlarge The Second Checker, on Friday (Jul 19) TDI was 72% that was accepted. It has stayed on 75% which is the maximum acceptable point since Jun 7 [F]. TDI: 72% = 100 * 13 / (13 + 5) where 13 = 6 (Jun) + 7 (Jul), and 5 = (3 (Jun) + 2 (Jul) Pulse Check #3 by The Uptrend and Other Indicators Table 6: M & T Jun (28), Jul (19) 2024 Jun Bull 12 points Jul Bull 10 points 2024 7Ps 5Ps 4Ps 3Ps 2Ps 1Ps Jun 0 0 1 2 1 0 12 Jul 1 0 0 1 0 0 10 Jun Bear 7 points Jul Bear 4 point 2023 6ms 5ms 4ms 3ms 2ms 1ms Jun 0 0 0 1 1 2 7 Jul 0 0 0 1 0 1 4 NOTE 1. Data Source: Yahoo Finance. 2. Author made Table. 3. M & T is Momentums & Trends Table 7: The m/P on Friday May, Jun, Jul (19) 2024 Month Date May 3 10 17 24 31 P/m P P P P P Jun 7 14 21 28 * P/m m m m m * Jul 5 12 19 26 * P/m P P m * * The Friday Vote P vs. m was 7 vs. 5 NOTE 1. Data Source: Yahoo Finance. 2. Author made Table. Click to enlarge The Third Checker, the Uptrend was 71% (= 100 * 22 / (22 + 11)) where 22 – 12 (Jun) + 10 (Jul), and 11 – 7 (Jun) + 4 (Jul). The pulse in the uptrend, 71%, was acceptable, but it was too many, so was needed to come down a bit. The secondary criterion, the Friday votes was bullish, registering bulls vs. bear was 7 vs. 5. Market Perspective The latest economic data showed that the core PCE (personal Consumption Expenditures) price index, which excludes the volatile food and energy categories, rose by 0.08% month over month in May and the year-over-year rate declined to 2.57%, in line with expectations. Consumer spending increased by 0.2% in May, one-tenth below consensus expectations. Real personal spending increased by 0.3% in May, reflecting a 0.6% increase in real goods spending and a 0.1% increase in real services spending. Personal income increased by 0.5% in May, one-tenth above consensus expectations, reflecting a 0.7% increase in nominal wage and salary income. The equity market has cooled in the last week, ending Jul 19 [F], so the pulse of the bull plateau has become an acceptable level, so the market is fully expected to be bullish until 2028, and in the coming much more years. There is a low probability to encounter ending the stable bull plateau prematurely. There is no bear market signal in the foreseeable future. We can possibly anticipate a soft landing this year and in the new year as well. Conclusion The market, equity and Treasury, optimally aligned in the last five days. It’s really amazing for the U.S. market in general, the Treasury market in particular. The Fed’s rate reduction cycles have fully already reflected on the current market. Hence whether actual rate cuts will be carried out or not, the impact on the economy, the labor market, and the financial market would be minimized one way the other, endogenously.