You can feel the seismic shift in markets.
The Fed pivot is finally here.
The top superstar stocks for 2024 are booming in one area of the market.
Yesterday’s Fed meeting paved the way for rate cuts next year. Officials guided for 3 eases. That’s about as bullish a macro narrative as you’re going to get.
Equities surged across the board with the Dow Jones Industrials Average reaching a new all-time high.
Given all the recent excitement, it’s vital to keep in mind that this latest surge has been in place for nearly 2 months.
The evidence then suggested a monster rally was coming. And it didn’t disappoint!
It’s paramount to stress that the level of exuberance in markets cannot continue at this torrid pace forever. What’s crucial now is the importance of superior stock picking.
Focus on the areas benefiting from the falling rate tailwind.
Today we’ll dive into why the next crop of superstar stocks reside in the Financials sector. When you study the evidence, odds favor huge gains next year.
Most of you know the power of the Big Money Index (BMI). It continues to nail the major market pivots time and time again.
What you may not know is below the surface lies a ton of information. And this can help us navigate markets with evidence on our side.
When something off the charts occurs, it’s worthy of investigation. Yesterday was one such instance because the Fed pivot triggered record stock buying.
We can measure this by looking at our Big Money Stock Buys and Sells chart. It’s a real-time indicator of the number of equities getting accumulated and sold.
Yesterday’s action was monumental as 509 stocks saw inflows. It’s the 3rd most we’ve ever calculated:
Looking backwards, the most green signals we’ve ever encountered came on the heels of the pandemic when 597 stocks were scooped.
At first glance, we’ve learned that extreme appetite for stocks can be an inverse signal. Extremes often forecast outsized returns in the opposite direction.
But we have to dive deeper to uncover the hidden truth in today’s environment.
Of the 509 stocks bought yesterday, 112 or 22% of the lot was focused in the Financials sector:
That’s chunky, especially when viewed relative to normal Financials sector activity. Below shows just how extreme the explosive action was.
Here’s a daily view of Financial Stock Buys and Sells. Yesterday logged the 2nd most accumulated day for the group in the past 10 years.
The only grander day was back in June of 2020:
You may be wondering 2 things at this juncture:
- What does all of this buying mean for Financial stocks going forward?
- Why are institutional investors infatuated with Banks, Asset Managers, etc.?
If you enjoy studies, you’re in for an evidence-based treat. Let’s start by answering the first question of what does all of this chunky buying mean for Financial stocks.
To help us answer this question we need to turn to history. Below I’ve compiled days of similar inflow magnitude.
Going back to 2013, we’ve had 19 discrete days where 65+ Financial stocks were bought. That count represents nearly a third of our institutionally tradable universe of 200 equities.
Again, we only want to see a breakneck flood of capital. Here’s what the data says is coming after this level of inflows. I’m using the Financial Select Sector SPDR Fund ($XLF
) as the barometer:
- A month later the group gains +1.7%
- 6-months later they rip +13.8%
- Be bold with a 12-month hold and you’re staring at average gains of nearly 29%!
Also, notice how a year later XLF has never been negative post this data-point. When you abnormally large buy days relative to the normal behavior of the sector, you see eye-popping outperformance.
Below plots the standard forward XLF performance compared to it’s expected behavior after rare buy days. Yesterday falls in line with the top 1% buy days recorded for the group.
The expected returns are off the chart:
The top superstar stocks for 2024 are in this group. And if you’re still in disbelief, stay with me. The next study will drop the hammer.
When you think about it, it should make intuitive sense. With rates set to decline, bank balance sheets get stronger…unrealized losses shrink.
Additionally, the deal-flow pipe opens up, underwriting mortgages accelerates, and M&A perks up.
Here’s the best part…institutional investors now know for sure that the Fed is done hiking rates.
And when you look back at history once the Fed is done hiking rates, Financial stocks are the best performing group!
Check this out. Going back to 1994, there’ve been 5 periods of final Fed rate hikes. Financial stocks rip 30% in the 12-months post the final hike:
Let’s wrap up.
Here’s the bottom line: The Fed pivot is here. We witnessed extreme buying in stocks yesterday, a level that won’t sustain forever.
But the hidden story from inside yesterday’s data is the massive appetite for Financial stocks. Banks, Asset managers, FinTech firms and more saw a landgrab.
History points to nearly 29% gains for the Financials sector post this level of accumulation.
Add in the fact that when the Fed is done hiking rates, Financials soar 12-months later with a whopping 30% jolt…this is akin to holding stock market aces.
The top superstar stocks for 2024 are making their move today.
The train is leaving the station…
Don’t get left behind.
Can you do well in 2024 without a market map? Maybe…
I just can’t recommend it.
Have a wonderful week everyone!