The Grinch Stole Christmas

Daren:
[0:01] All right. It's my favorite time of week, Chris. It's time to talk about the markets in the economy. And boy, do we got a lot to talk about this week. It was no dull week in the markets, thanks to Uncle Pal. Well, not really, sort of. But anyhow, a lot going on in the Fed this week, a lot going on in government with possible government shutdown happening, markets getting jitters from that, possible inflation coming back, as we've been talking about for a while, Well, it is a very real possibility in the fact that it's probably been here all along, rates going back up and how that impacts the market. And to your grin, Chris, Bitcoin going down. But for those who stick around, I got good news about the Bitcoin chart that you're not going to like, Chris. But we've got all that and a lot more to cover in this week's episode right back after this.

Music:
[0:58] Music

Daren:
[1:34] All right. Coming in strong on the meme side of town.

Chris:
[1:39] You know, some weeks you just have so many. I literally had to leave, I think, three behind, three really good ones. So I had to restrain myself this week.

Daren:
[1:50] I don't know, Chris. I think you shouldn't restrain yourself with the memes. I think we'd get better viewership if all we did was put memes up for

Chris:
[1:57] The whole show. That somehow wouldn't surprise me. That would be very 2024, wouldn't it? Uh, so did Jerome Powell cancel Christmas this year or is the Santa Claus rally? Uh, no, no more.

Daren:
[2:15] I, you know, I'm Tom Lee, who is a kind of a wall street pundit talks a lot on all the various channels. And I'm, I think I'm in the camp that he's in where he says back the truck up. This is just a correction there.

Chris:
[2:29] Oh, okay. All right. not.

Daren:
[2:32] Often i'm in tom lee's camp

Chris:
[2:34] But yeah i'm.

Daren:
[2:36] I'm going that direction on this one

Chris:
[2:38] Okay all right so uh edge eye with another another banger this week and uh it says we're having a washington Christmas what's that and the wife says lots of deficit spending i don't know about your house Daren but uh that's what it usually feels like in having Christmas uh Christmas in our house. So try to, try to just get through it. Right.

Daren:
[3:06] In the years I've been a financial advisor, I can definitely, I can definitely, say that there is a strong emphasis come January and realization people have about their deficits.

Chris:
[3:20] Yes. Well, I should also say, I am so happy that my wife does it because I hate shopping. I think you're probably the same, like make me go pick out gifts or, or, you know, go to the mall. Oh no way it's just it combines so many things that i don't like doing it just uh so i'm glad she takes that off my plate gives me more time for for markets the.

Daren:
[3:50] Planner that i love Chris i don't mind it except unless i do it this time of year because it is ridiculously crowded in the malls right now

Chris:
[3:59] Yeah but.

Daren:
[4:02] Other than that i'm okay with it um kind of fun sometimes

Chris:
[4:08] Yeah so i thought i'd blow your mind with the third the third slide this week what you're looking at here is the msci uh uh so foreign markets versus the s&p with no uh nvidia since october of 22 which is the kind of unofficial start of this bull market um and this is from Jeffrey Kleintop at Schwab. He says, no NVIDIA, no U.S. Exceptionalism. If one stock, NVIDIA, was not part of the S&P 500, Europe's stock market would be outperforming the S&P 500 since the current bull market began. Now, if this wasn't from Jeffrey Kleintop at Schwab, I would not have believed that this was true. I barely believe it's true and it's from him.

Daren:
[5:05] I mean, I think it makes sense, right? Like I was thinking about this the other day, right? And if you think about economically, right? What's really economically better out there except for the AI chip? I mean, you think about nothing's really gotten that much better economically, except we have this thing called AI.

Chris:
[5:30] Yeah.

Daren:
[5:31] Does that make sense what I'm saying?

Chris:
[5:33] Everybody hates the European market, right? When was the last time someone called you or emailed you and said, hey how do we get into the european market.

Daren:
[5:44] Most people don't even know what the developed market that's what they call it in this our world is right like so it's so so nobody ever calls me and says i want to be in the european market like what's going on over there sounds really hopeful to me yeah like that's an oxymoron at this point with putin and his allies

Chris:
[6:07] Yeah so this week was all about the fed the fed meeting on wednesday i thought this headline pretty much grabbed the information perfectly uh the federal reserve is feeling edgy about inflation market hopes for an easy going approach from the u.s central bank have been dashed for now and boy is that an understatement because on wednesday if you're watching the market of course just like most Fed days, sideways, nothing happens. Boom, Chair Powell starts talking. And this is after they cut rates by a quarter percent, by the way. So they did what everybody expected them to do, cut rates. But as soon as Powell starts talking, boom, the market just starts going down. I mean, everything started just absolutely tanking. And the biggest part was he didn't sound so sure about, And really talked down the possibilities of more rate cuts next year. So, you know, we're looking at maybe two, I think, is what the market's pricing in at this point. Now, spoiler alert, we have some slides that'll show just how awful we as humans are at predicting what's going to happen with interest rates. But just by Powell being bearish on the rates, the market just absolutely took a dive.

Daren:
[7:35] Well, what's interesting too, Chris, is you've got, this is, I pulled up, this is core PEC, right? Core PCE is the Fed's preferred measure of inflation, right? And so there's lots of different indicators that could suggest inflation, deflation, et cetera. They like to watch core PCE. And we were talking earlier, well, wow, the market did all right today.

Daren:
[8:01] We had this core PCE number come out this morning and you can see it was below expectation. The forecast was 0.2 and it came in at 0.1. So it's kind of curious to me that he's saying like, hey, we think inflation is going to be worse than we thought. And oh, and by the way, we don't think we're going to lower rates as much as we thought we were next year, but then yet their preferred measure of inflation came in lower. And you know for sure Powell had this number that came out on Friday prior to that press conference. Like they don't get this data in real time. They get to see it before we do. There's no way that they just get to see it in real time. So I think what he said in his press conference was really interesting and perhaps disconnected from what the actual economic data is saying. Although I will say that I do generally think that inflation maintains its persistence in the economy.

Chris:
[9:07] Agreed. Definitely.

Daren:
[9:10] On the scale of possibilities,

Chris:
[9:11] I think a lot of my takeaway from the summary of the remarks too was that there's just more uncertainty in terms of the economy, as we all know, has done way better than what was expected at this point. When they made the emergency cut back in September, that was right after the SOM rule was triggered in July. And I shouldn't say it was an emergency cut. When they made a 50 basis point cut rather than a quarter percent, you know, to kick things off here. Um, so the economy's, the economy's, uh, been better than anyone expected. Um, and now we've got, you know, kind of the releasing of animal spirits when it comes to, uh, you know, post-election sentiment in the markets, uh, was really high. And so maybe that's what he's referring to. You know, there's a lot of policy unknowns. And of course it also could have been the fact that the continuing resolution didn't get passed on Wednesday as well. That could have also had a major impact on the markets when it comes to rates, which we'll see in a few slides here.

Daren:
[10:22] This slide was fascinating this week, right?

Chris:
[10:26] Sorry, we're still seeing the PCEs.

Daren:
[10:29] Oh, there we go. Let's see. This is the one we just talked about.

Chris:
[10:36] Yeah, this is showing Powell. S&P performance on Fed days with Powell.

Daren:
[10:42] He's he's

Chris:
[10:43] Really struggled and this is showing the final hour and the kicker for this one is this doesn't even show what happened on wednesday so man.

Daren:
[10:54] Uh you know he's not been very one of the um the poly market that's that was out there this week was like what's the first thing that chair powell will say in his press conference and it was like 90%. Good morning. That's what he said.

Chris:
[11:14] Yeah, you probably want to cover this one a little bit, right?

Daren:
[11:22] Yeah, I think this is really fascinating, right? Because we're all sitting here going, okay, well, Powell says that rates are going to do X next year. And so I think it's interesting to look at and see what actually happened with the Fed funds rate versus what the expectations were. Prior to what was actually happening.

Daren:
[11:48] And it's interesting to me that there's not a lot of predictiveness regarding what they say rates are going to be and what actually happens. But yet it's interesting that we cling to what is said in these press conferences. Like it's, you know, biblical truth. And you can see here like, so this, what this is showing is this is the actual Fed funds rate. And this is what it actually did. And then at that point or that juncture, this is what the expectation was. So if you look back in history, like at this point, the expectation was that it would stay somewhere around here. And we have, at least in recent history, anytime we've flattened off and turned over like this, it's generally ended up in a moment where rates went down pretty quick. So I guess we just have to ask ourselves, is this time different? You know, rates went up really fast this time. Will they go down really quick? Are we going to stair step down? Not a lot of recent history, at least since 2000, to suggest that when rates roll over and we start decreasing rates, they don't typically go back up. They typically go down pretty quick, which would mean we would have to have some sort of depreciation, some part of economic calamity, some type of depression, something to happen to push those rates down to try and stimulate the economy.

Chris:
[13:13] Absolutely. So on the sentiment front, now these come out on Thursdays. So from AAII at least, and that one would, I guess, have included the Wednesday Fed market reaction. So I'm actually surprised that the bullishness is still as high as it is at 40.7. Still elevated relative to history. The historical averages are about a third in each bucket.

Chris:
[13:40] Nowhere near our bullish high that we hit in July, 52% for the one-year high. But the CNN fear and greed index, interestingly, dropped all the way down to 28, which is fear. And that is just above extreme fear. And that's all the way down from 49 neutral one week ago. So it gapped down. uh bitcoin fear and greed staying at 74 greed really unchanged from last week which i'm surprised about given the the price action we've seen in bitcoin but to your point you know i i it's not that i don't like bitcoin Daren it's just that you know it's so unpredictable it's a 70. If you look at the volatility on the iShares ETF as a common one to look at, it's around 70%. So when you look at it, you're like, gosh, is this signaling something or is this just Bitcoin doing Bitcoin things? A lot of times it's just Bitcoin doing Bitcoin things. So a little too much action for me. I'm a little more boring than that.

Daren:
[14:51] Well, I would argue, let me just take a little bit different take on that because I would argue that Bitcoin is actually more predictable than any other asset we have. And if you actually look at the data, yes, it's volatile, but it's very predictable in what it's done along the halving cycle, which has to do with the mechanics of it. And because there's a fixed supply of it, I would argue that it's more predictable than any asset we have or have known in humankind. Um the challenge is is just as that as it becomes more and more accepted as an asset it has volatility getting to that but that's true with any asset that's true with any stock until there's generally accepted usage of it it's very you see this volatility what you'll see in the chart today in bitcoin when i show that to you is that you know everyone's saying oh bitcoin's dead. It's going down. No, it's just doing what Bitcoin does. This is the predictable pattern. It's kind of like we know what the general direction of Bitcoin is. We just don't know the volatility as it goes in that direction. We know the car is going from A to B. We just don't always know how fast it's going from A to B.

Chris:
[16:09] I picture a drifting car. It's drifting around the corners. It stops to do some donuts every now and then, runs into five other cars, takes off again. Um so this is from bank of america via michael cantro and um what you're looking at here on the top slide is u.s equity allocation so u.s stock allocation surges to record high and this goes back to 2000 um and then cash allocation fell to its lowest on record also going back to 2000. So basically it's saying, hey, everybody's at the party. The party's jamming.

Chris:
[16:57] There's no one who's not in at this point that wanted to be in. This is pre the Fed meeting this week. So, and Michael Cantrell says, extreme readings can grow more extreme or stay extreme until the catalyst hits to your prior point about interest rates, Daren. That's why these have a lot of false signals, selective circling, and variation around peaks and troughs. Conditions warrant caution, but you always need a catalyst. Looks like higher rates could be one. Do you value these signals symmetrically? Thus, if you got bullish in the second half of 2022, are you bearish now? Meaning that if you look at 22 cash levels were really high and you say, geez, also equity allocations are pretty low at this point, which in hindsight, that was a good time, at least till today, to get back into the equity markets or to be fully allocated in the equity market. So the contrarian side is what he's talking about here with these charts.

Chris:
[18:16] Now, predictably, we've talked about this a lot where right after an election, if you're feeling really, really great about the markets or you're feeling kind of despondent about the markets based on your political party, take a step back, realize that this is a bias that we all have and try to get around that bias because it can pollute your investment decisions. And you're not the only one, right? This chart shows from Axios that suddenly Democrats are all gloomy about the economy and Republicans are optimistic. You know, it's almost like clockwork. I can't wait for the updated J.P. Morgan Guide to the Markets where they usually include this chart from J.P. Morgan. And I'm sure it'll look very similar. So just recognize it's a bias and that it's a possible hindrance to your investment decisions. This is pretty cool from Jeffrey Kleintop showing market returns days after the election to the inauguration. The Trump 2.0, as I've been hearing it referred to quite a bit, is the red line. So pretty normal.

Chris:
[19:36] Obama's market being the outlier here when he took over in early 2009, right after the two or kind of in the midst of the 2008 crisis. And then on the high side would have been Biden taking over in 20, where the market famously got very heated going into 21 on the optimism, the vaccines and stimulus and everything else.

Daren:
[20:02] I think that line with Reagan's interesting, right?

Chris:
[20:05] Because generally, I mean.

Daren:
[20:07] A lot of people celebrate the Reagan presidency as, you know, one of the better presidencies. And I mean, look at that from basically getting elected till he got to inauguration. It was a rough go.

Chris:
[20:20] Yeah. Yeah. He had the advantage, in my opinion, of inheriting a market with very, very low valuations. In the early 80s, the U.S. market was in single-digit PEs. Trump, unfortunately for him, is inheriting a market that's very, very richly valued. It's going to be, I think, a tough go for him just based on that. Yeah.

Daren:
[20:49] So pretty consistently, though, presidents love to take claim in the markets up and love to blame the other guy or gal when it's not.

Chris:
[20:57] Yes, absolutely. Of course.

Daren:
[21:00] And that goes both across both aisles or side of the aisle.

Chris:
[21:04] Yeah. Yeah. So interest rates have been the big story, though. And this chart goes back to September 19th, which was when the Fed did the 50 basis point cut. Now, I wish I had the statistic here because it'd be so interesting to know how many times in history has the Fed cut, especially a fairly significant cut, and the market has basically rejected that cut with interest rates on treasuries going up across the board and across the curve. So here we've got the two-year in blue. We've got the 10-year, so the middle of the curve in purple. And the 30-year in orange, all rates up significantly since the middle of March when those rates were cut from the Fed.

Chris:
[21:52] So the market's really going in the opposite direction of the Fed and tightening financial conditions. And is that because inflation expectations in the market have changed? Is it because growth expectations in the market have changed? I think it's hard to tell. Now, interestingly, we don't have the exact date on here, but October 9th, roughly, was when Trump started to take over in the betting markets. So you'd think that's about roughly also when the fixed income market started taking that into account as well. Um, but you know, we're getting to the point now where interest rates are getting high enough that in the past, you know, two, three years when they've gotten this high, things have broken, you know, Sonoma Valley bank, or I always say Sonoma Valley bank, sorry, Silicon Valley bank, uh, Sonoma Valley bank also went bust, but, um, the, uh, uh, Silicon Valley bank broke around this level of interest rates as well. So now we've got mortgage rates back up over 7%.

Daren:
[23:03] Explain that to the listener. Why did Silicon Valley Bank break at this level?

Chris:
[23:12] Well, uh, lots of reasons, but banks in general, they, they borrow short, meaning that they're taking on your deposits and they, they lend long. So they're lending your money out for long periods of time. And they had a bunch of low interest, um, uh, uh, commercial credit out and, uh, bonds, bonds are loans, bonds are loans. And when you, uh, in loans, one of the kryptonites to, uh, to loans and bonds in general is when interest rates go higher. Um, because if interest rates go higher, bond values go lower. And so, uh, and we've, we've seen interest rates continuing to chug higher. So, um, it's very stressful, uh, situation for anybody who's got commercial, commercial lending exposure, um.

Chris:
[24:09] Uh, any type of fixed rate debt that's low, uh, you know, uh, low interest rate debt because, um, and, and they also compounding that fact was that people were able to go get, you know, four or 5% interest at the time on their money markets, uh, while this, while the bank was paying zero. So people were pulling all their deposits out. that they caused the bank run, you know? Um, and as soon as everybody assumed or worried that their deposits were not safe, then the bank run accelerated. Um, so it was just a spark that just took off, right? They thought the bank was in trouble because of the loans. They started taking their money out because of the interest rates and it was just an avalanche. Um, and so, But in general, interest rates going higher means money costs more. So that reverberates all through the economy for loans and everything because the U.S. Government and the U.S. economy runs on credit. We are a debt-fueled economy, and that debt is getting more and more expensive.

Chris:
[25:30] Now, a lot of times, or a lot of folks have referred to the two-year treasury as the market's assumption of where the Fed funds rate should be. And a lot of people say, hey, the Fed should just follow that two-year rate. And, you know, up until these cuts have been made, they were considered too tight because the two-year treasury was well below the Fed funds rate. That is no longer the case. They're kind of in line. So I heard Ed Yardini this week saying, look, to me, it looks like we've hit the neutral rate. It's a pie in the sky type of number. Nobody really knows what the neutral rate is, but it's roughly when you're in line, the Fed funds is in line with the true cost of short-term money. And it looks like they're there now. So that might be why Pulse, you know, pumping the brakes like, hey, we're going to have to kind of wait and see where interest rates go because they start going higher, you know, now we're behind the curve. We're not tight enough. And, you know, if they drift sideways, we might be just right on the money. But as of right now, the market's not telling them they should go lower on the interest rates next year.

Daren:
[26:53] Well, Chris, good news. About two minutes after we started recording, the House passed the bill averting a midnight shutdown of the government.

Chris:
[27:03] Yep.

Daren:
[27:04] That must have been leaking through the market.

Chris:
[27:08] I was going to say, that's you and I were saying, hey, the market's assuming they're going to get something through. So yeah, that's going to have hopefully a positive impact on interest rates because that's the other thing factoring into this. On Wednesday when they weren't passing the continuing resolution, people are kind of looking at treasuries like, eh, I need a little more return to make sure this is worth me loaning money to the government, a little higher risk. So this is from Kevin Gordon at Schwab. He's saying the percentage of S&P 500 members above their 50-day moving average is now just 19%, which is a new low for 2024. Over the past two days, the share has been chopped by 25 percentage points, which is the largest decline since January of 2023. Today's day and age, when the market pulls back, it's quick. It's very quick with all the options trading and hot money flows and such. uh it happens fast.

Daren:
[28:14] Well there's just so much leverage in the market comparatively um to history that when quote-unquote margin calls happen it just creates this really fast move in the market um so we would we would categorize Wednesday as in a news-driven flash crash right and when you get a flash crash crash like that where VIX spikes above 50 percent which I'll show in a minute. Did you know 100% of the time if the VIX spikes 50%, the market has gone higher after that? Which is interesting. So it just tells the investor, like, pay no attention to these flash crashes because, you know, a month from now, market is higher. And it's been that way 100% of the time. So back up the truck, buddy.

Chris:
[29:05] It looks like everybody is doing just that. You know, we've got equity fund flows. Now, this is just prior to the Fed meeting again. Um so uh weekly equity fund flows the uh the largest of the year um the week of december 18th so everybody's backing up the truck already the truck is the truck has been backed right, and uh what's interesting though is those fund flows have been driving or have been driven by It's one of those chicken or the egg situations. The 10 largest stocks, it's kind of cool to.

Daren:
[29:46] Look at this visual

Chris:
[29:47] Of the returns of the S&P 500, how much of that has been driven by the 10 largest stocks going back to the 90s. You can see we're really kind of off the charts going back to the 90s. I think this would probably be off the charts going back, I believe, until the 60s was the last time it was driven this much by the top 10. But nonetheless, a lot of flows into the S&P are passive flows. And so the larger companies are just going to get more and more money. They're basically operating as a lot of them as basically monopolies now. So it's not surprising that the funds are finding their way to those top 10 companies. And it has been the story of 2024 for sure.

Daren:
[30:38] So Chris, for years, there was a certain mutual fund company out there that would really tout this idea of factor investing in this quote unquote that growth or value always seems to outperform growth. And that's been looked at pretty heavily by academics. And in the recent history, that just hasn't been true last six, seven years. And so this, what you're looking at is this growth to value. So this is looking at stocks that are growth, generally categorized as growth. And if you think about what growth is versus what value is, if you ask 10 different people, you're going to get 10 different answers. But generally the way I think about growth versus value is growth are those companies that are making money and reinvesting the money back into growing the business exponentially. And then value are companies that are making money and then paying dividends out in stockholder value is kind of a basic way I like to think about it.

Daren:
[31:39] But when you look at growth companies versus value companies, this little blip here in 2000, we had this like huge run up in growth and then this implosion. And then after that implosion, everyone's like, see, look, value is better than growth. And then basically since let's call it, In 2008, you've had this run of growth stocks versus value stocks, and it's been exponential, right? And One has to wonder if that research is going to hold true at some point, this is going to have to correct in such a massive way that it would absolutely be detrimental to so many people's portfolios and 401ks because they're so heavily allocated towards growth stocks now.

Daren:
[32:34] How does that trade unwind is my question because that's a big trade to unwind.

Daren:
[32:42] The um all right so let's take a look at spy spy is the measure of the largest 500 us-based stocks and is generally accepted as quote-unquote the market and uh it can um be a barometer for how the overall market looks and is acting there's lots of different indexes and how you cut the deck depends on how you approach the market. But so generally when we say the market, the S&P 500 is a pretty important barometer. And you can see this sell-off that came from Wednesday.

Daren:
[33:19] What you're looking at is the daily chart of the S&P 500. So this candlestick here was Wednesday, Chair Powell, and it just literally just bled right out. I mean, we went into this key critical support area on Wednesday. We traded up to it got rejected again but then managed to close above it which then makes our weekly chart look a lot better right so when i say back up the truck like there is nothing technically wrong with this chart at the moment it all looks just like a normal kind of and actually very oddly systematic i mean you get these kind of build build build and then a little dip down to here, bill, bill, bill, recheck in to this moving average, same moving average, then even a higher moving average, right? So we're not even in this area. If we hit this red one,

Chris:
[34:18] That would be the next. You know what, Daren? We're still seeing the, sorry, we're still seeing the old chart.

Daren:
[34:22] Oh, we are. Oh, that's too bad. Okay. So here we go. Let's rewind that for a sec. All right. So here's the S&P 500. This is the candlestick for Wednesday, which dropped the market into this key moving average here.

Daren:
[34:39] On Wednesday, and then it got rejected on Thursday and then closed above it on Friday. When we look at the weekly chart, there's nothing wrong with that chart because it's just followed a very kind of clean pattern where it builds and then corrects, builds, corrects, builds, corrects, builds, corrects. And now we're just correcting at one of the higher, what we call the, it's the nine exponential moving average. We're sitting right there as support. So when I look at that and I say, oh man, the market sold off. Oh, the government shut down, all that garbage. It's all just garbage. And it really doesn't mean anything when you look at the technicals. And that's why I think the technicals are so powerful when it comes to the markets and understanding what's going on. Because of all the junk we've heard from Syria to government shutdown to interest rates next year to inflation this week. And you just look at this and I say, technically everything looks fine. We're just moving. And it's even possible.

Daren:
[35:41] And I was joking with Chris earlier in the movie, the Grinch stole Christmas, the Grinch steals Christmas. But in the end, the Grinch gives Christmas back. And I'm not convinced that next week we don't see Christmas come back to us.

Daren:
[35:56] Based upon this chart. I don't see anything fundamentally wrong from the technicals with that chart. When we look at the RSP, it's a little bit more mischievous, right? Cause you can see this week. We've had three weeks in a row where we've sold off and the,

Daren:
[36:15] Now we closed against or below that 20 period moving average, which is really just a trader average. It's not that big in the scheme of things, but it does present weakness to us on the face. What I will say in the way of support, if we go back to the daily chart, I was looking at this earlier, we found support on this critical support level right here. We traded into it. We went down under it and we built. And here's the argument I can make. that's actually a good thing because those who watch this channel often know that I really like the trade setup where we break above an area, we come back in and test the support, and we resume upward. And if you notice in the recent history in the RSP, which is the equally weighted S&P 500, mean every stock gets the same credit. You don't get to overweight NVIDIA or overweight Walmart or overweight Exxon. Every stock in this index gets one point. And when you look at this, we never really, we came up here, but we never really tested that support level. We came just short of it here. We were short of it here. We didn't get close here. And now we've moved into that area and we bounced above it. So I could make an argument that that's bottom for this spot that we just saw a correction. The correction is going to move forward and things are going to turn out positive as we move forward towards the end of the year and into January.

Daren:
[37:41] Although this looks pretty ugly. Like you think about how many days, one, two, three, four, five, six, seven, eight, nine, 10, 11, 12, 13, 14 days negative. That's pretty rough. Two weeks straight down. It's been a very long time since we've seen that kind of negative. So that's something to be paying attention to, but on the face, technically that looks like it found support. I want to see another candlestick Monday. I guess the market will be open Tuesday. It will be closed Wednesday. And then I think it's open briefly the end of next week. So I want to see that follow-through come in there. So overall, I'd say the RSP looks all right. The SPY looks all right.

Daren:
[38:28] What I really think happened Wednesday is just a news-driven event that washed out a lot of margin and a lot of leverage in the market. And that's just the way it goes. And that's the nature of this market because there's more volatility to it. I mentioned earlier about the VIX and when the VIX jumps like it did right here on Wednesday, in every case within a month, the market's been higher. And I think we mentioned this in last week's episode, Chris, And correct me if I, maybe there's a conversation between you and I, but I didn't, we weren't recording then. And I said in last week's episode that like the volume's gotten, the VIX has gotten so complacent that generally when we see that complacency, we see some type of event. And, um, that's what we saw. And then it settled right back down. It came back in below 20 today.

Chris:
[39:26] It's like your Nostradamus, man. Nice job.

Daren:
[39:32] No, it's technicals, right? You're not even guessing. You're just saying, Hey, probabilistically speaking where we're at right now, this would suggest that we're going to get spikes in volatility, but you know, I could have easily just been wrong, right? These probabilities, because here's a long period of time where volatility settled down significantly. We did talk about oil, and I've been watching oil closely. I've also been listening very closely to what's going on in the Middle East, because this whole setup here looks to me like a descending wedge that's about to break out, which would mean that there's some type of event that's going to spike oil about to happen. And uh this this is the volume and the the buyers and the sellers are getting ever more um tight about debating about where the market should be and you can see here's another moment i pointed this one out last week too where you had a descending wedge and then that breakout and here's your descending wedge and then it looks to me like a breakout in the making um so watch closely like it wouldn't be shocking just based upon what that chart shows that some kind of oil event happens. I did think it was interesting that the Israelis, after the Houthis sent a ballistic missile out of Yemen and landed on a school in Israel,

Daren:
[40:58] They bombed 30 different sites in Yemen over the last couple of days, including like all their ports, all their power plants. I mean, just you think at this point, like after watching how Israel dismantled Hezbollah and had a lot to do with what was going on in Syria and a lot to do with the Hamas dismantling that the Houthis are like, you know, maybe we don't want to keep picking this fight. Maybe we want to back it up a little bit, but apparently not. I mean, even the Iranians at this point seem to be very quiet, oddly quiet.

Daren:
[41:34] But it makes sense because the regime is weaker than it's probably ever been. And why does this all matter for the markets? Why I'm even talking about this stuff on the markets? Because it drives oil prices and oil goes to the economy. If oil spikes up right now in a significant way, that's headwinds for the economy, right? And that creates issues. And if you look at this massive descending wedge happening right here, that could be signaling we're getting to a place of tighter and tighter debate between buyers and sellers, and then you get a breakout. So there's a short-term descending wedge and a long-term descending wedge on that chart that tells me that something's building there. I just don't know exactly. One argument I can make is the descending wedge was here and then it broke down and it's right here and then it's going to go lower. That would tell you that there's a big depreciation event, perhaps a recession coming. But I think the oil chart's one you need to watch carefully over the next little while.

Daren:
[42:42] For the whole tariffs discussion going on, the strength of the dollar isn't great for our businesses. So that will be a headwind the dollar has been going up compared to these other currencies Trump will have to contend with that a little bit and figure that out and

Daren:
[43:00] But we don't want strength for our economy. But again, another kind of descending wedge look to it than a breakout. All right. Let's see. Maybe gold. We can hit gold. And then I'm going to hit some Bitcoin because I know, Chris, you're just on the edge of your seat to discuss Bitcoin. Can't wait. Can't wait. Can't wait. But I primed everyone in the beginning of the show that I was going to talk about the Bitcoin chart and show them the good news about the Bitcoin chart. Interesting. What?

Chris:
[43:35] You said you've been warned.

Daren:
[43:37] You've been warned. That's right. Watch all the viewers go down to zero now. So you've got this kind of odd looking wedge that's happening here in the gold. I was listening to a gentleman earlier. I forget who it was, but he was talking about how he thinks the gold moves over and then now it's just in distribution. It's been a pretty, pretty good move in gold though. So that wouldn't surprise me if gold trade sideways for a little while, at least before we get a move higher.

Daren:
[44:14] All right, Bitcoin. So here's the good news for the people who love Bitcoin out there. So we talked about that last week this trend line up and we talked about how bitcoin tends to do this this build build build and then shoots up and you would say well isn't that invalid now Daren because um you know it collapsed this week and i would say well no look at where it closed it actually hasn't closed in an hour and 15 minutes or so it'll close you can see this long wicked candle right here um that hammer looking candle doji thing um looks often like a bottom right that meant that the price went down here and then got bought up right away so there was a lot of strong buying happening all through this zone

Daren:
[45:02] It means right around $96,000, and even some people grabbed it at $92,000. There were people buying coin there. Yesterday, I think, was one of the biggest liquidation days in the Bitcoin market in its history, which makes sense now that you've got more people trading the Bitcoin market with their ETFs. There's less friction to trade it now. But we did have an SEC chair come out today that said, basically people will be able to take their own Bitcoin off of the ETFs and put it in their own digital wallets, which was something unique coming out of the SEC. And I just noticed another headline that Ripple, which is another big crypto, is donating $5 million to the Trump inauguration event. Just for context, Facebook's only giving them a million and Ripple's giving them 5 million.

Daren:
[46:04] So I think it's getting more and more likely we're going to see some very pro-crypto, pro-Bitcoin type of decisions coming out of this administration. But the fact that it's closed or looks like it's about to close above this upwardly trending line, that just tells me it's sold off and now it's already been bought back up and that we're going to work higher. It's just going to consolidate and move. I'm positive on that. I think, great, we sold down to 92. There's a ton of support in here and let's see what happens. I think it's healthy for this to happen too because there's so much leverage in Bitcoin and in the stock market that you just get these washout moments, right? And then it forces everyone to sell things that they don't necessarily think they want to sell. but clearing out the leverage like that really helps for long-term structure of the market

Daren:
[47:00] All right so we talked bitcoin um i think the um Chris any other thing you want to cover for today i think we're going to wrap it there i don't actually just look at 10-year rates real quick because i think you were right earlier Chris when you said everything's watching that 10-year,

Daren:
[47:18] that 10-year is going to be really important. And you can see this is the 10-year bond, U.S. government bond. It drives that mortgage rate, will impact real estate markets. It is curious though, that even though the Fed has almost moved, they moved down 75 basis points since September, that we still are seeing um

Daren:
[47:43] Mortgage rates above 7%, the 30-year fix. That's interesting and we need to pay attention to that. That's the market saying, well, we actually think rates are going to stay higher for longer than inflation might be higher than you think. And this is an upward trend, right? You can see the 10-year. I was hopeful last week that this upward trend had been invalidated and now we were shifting downward because we had this kind of breakdown and then here and then we moved back up and we tested off of that line and got resistance. But the fact that a day later we broke above it, that doesn't bode well. To me on the face, you have to accept that's an upward trend and that rates are going higher. That'll be headwind for bonds. That'll be headwind for diversification. That will be positive for inflation, which is negative for the economy. That will be negative for the idea that rates are going to drop in the near future.

Chris:
[48:42] Yeah, if you take a look at the dollar, right, because when our interest rates go higher, that tends to lead to strength in the dollar as well, because money floods in to take advantage of those higher rates. And that's what we're seeing, too. And so strong dollars is a headwind for all kinds of things, but especially exporters within the U.S. And in abroad, it makes it difficult for anybody that's borrowed money in dollars, dollar-denominated debt, especially if their currency is depreciating relative to those dollars, so their debt's getting more expensive to pay back.

Daren:
[49:25] Now, let me just flip the argument on that a little bit. So from a technical standpoint, point you can see how important this trend line's been right you can see here it was important support and then it just worked itself around this trend line and then it got sold here and then it traded right into here you could argue that that's going to do that we could have a double top in the making which would be would tell you that short term rates could start going back down that maybe they aren't going to go higher. The fact that it got rejected pretty handily off this point here today, I think gives us a little bit of hope that the dollar is not going to go higher. And that maybe this whole 10 year rate thing, I think, well, we should actually just put this up, Chris, and this, and this is the yield curve. So for those who don't know, Chris, what's the yield curve?

Chris:
[50:22] Well, it's plotted. So it's, There are interest rates across the board for all different types of lending terms. You can lend your money out for short term, as short as overnight, all the way up to 30 years plus on bonds. So the curve is plotting what the yield is on all those different maturities, like what's the market rate you can get across all those different rates. It usually looks like a curve. It usually looks somewhat like a Nike swoosh. And with longer term, the longer you lend your money out, typically the more money you get in return because you're taking on more risk for a longer period of time. And so that's what they refer to as a normal yield curve.

Daren:
[51:19] So are we more concerned when the yield curve inverts or are we more concerned when the yield curve normalizes when

Chris:
[51:26] It starts to normalize that's typically uh that's the recession's incoming at least it has been historically.

Daren:
[51:35] Right so it's one of those things where you know same thing going back to the vix anytime the vix spikes above 50 in one day usually a month later tire same thing back to the yield curve when the yield curve reinverts and normalizes typically we're headed into a recession and in retrospect we'll look back and say oh that was the beginning now the problem with that is this time could be totally different right we just don't know but the fact that it's now gone up and if we're just looking at this from a technical perspective i don't know that you could exactly extrapolate the yield curve from a technical perspective because there's more going on, but the fact that traded up, came back in, found support, and now we're headed back up tells you that potentially that yield curve is about to normalize in a significant way. And what that means is- And the reason it partially normalizes is because all of a sudden the Fed shoved the rates back down, right? So now the short-term rate is, it's reinverted in the sense that you get paid for less risk on the short-term versus what you get paid on the long-term rates. And it's that moment that that rate getting pushed down because of recession, some kind of economic event that reinverts it.

Daren:
[52:54] And when you go to the Fed funds rate, like we're talking about earlier, and you get this turnover flat rate, this kind of stall out. And we've seen in recent history, when it flattens, we get a moment where it goes down, flatten, flatten, and what happens after the fact. It hasn't been in recent history that you get a flatten like this and then rates just kind of do this. Like that's not the norm. It's possible, but not probable. What's more possible, more probable is rates do that. Which then the fact that we look at the 10 to 2 we're saying yeah that could be we could be staring that down that a recession is imminent um again there's possibilities and probabilities given just reading those pieces in those two pieces of data tells you that hmm you need to at least have that on your horizon and be open to what the future might hold the challenge i have with that thesis though is that the government's going to keep printing i mean they just proved that to us 30 minutes ago when they passed the government spending bill. I haven't even had a chance to look at what pork they shoved in at this time, but in truth, nor have the politicians that just voted for it. But anyway, who's paying attention?

Daren:
[54:08] And then so you take all those different pieces and then we look at oil and say, okay, well, if oil bounces up and breaks out here, that could push us over because some type of oil then happens or oil just says, oh, there's some kind of other economic calamity and it goes down because people stop driving their cars, flying planes, et cetera, buying plastic junk from China. It, you know, those, those are the things I'm seeing with the economy and what's going on. But I would say in the very near term, I don't think that's imminent, right? It's just, but we have the makings of a recession now, historically and statistically. We just came off an election year. We know that the current administration did everything they could to keep the market high through the election. We know that through fiscal spending. But we also know that the next administration has a strong tie of the ego to the markets. So I don't think you can just say, oh, the government's just going to give up and let the stock market go down and the Trump administration is going to be cool with that. And it's going to be more complex and convoluted, unfortunately.

Chris:
[55:24] Yeah. Well, there's a world of constraints too. And also, like we've shown, the data shows that they don't have as much control over markets, especially as what they like to think or what the voters like to think either.

Daren:
[55:41] Don't you know, Chris, they always have control over the markets when they're doing well. They never have control over the markets when the market's not doing well.

Chris:
[55:50] Yes. And when you talk about interest rates, you have to remember what Bill Clinton was afraid of in the 90s was the bond market vigilantes. And so ultimately, we've been asking, where are the bond market vigilantes all these couple of years with fiscal just going crazy? And um you know if they come back that is uh that that's that's where that's where they could run into some constraints right we saw that with with uh liz truss when she tried to pass her her tax cut uh in britain and they and the rates just spiked and the bond market said nope that's not gonna work and uh they had to throw that out and and so there there will be constraints it's not like they can just do whatever they want without any type of consequences uh in the real world.

Daren:
[56:50] True that all right well we'll leave it there everybody have a great weekend and uh i guess officially tomorrow it's winter Chris we made it to winter and through the fall so we could say having a great winter um and boy was it cold in northern california but nothing like the rest of the united states i'm sure so anyway have a great weekend everyone and be well reach out if anything

Music:
[57:15] Music