When I look at the market’s current evidence, I see two stock market indicators that represent character changes—one potentially bullish, one potentially bearish—but how they shake out will probably tell us a lot about the market’s near-term future … and about what stocks may lead the next advance.
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It was three weeks ago now that, after a years-long tightening campaign (both in terms of higher rates and decreasing the amount of assets they’re holding on their balance sheet), the Federal Reserve finally turned from foe to friend, with a half-point rate cut goosing the markets—the Fed had previously slowed down the runoff from its balance sheet, too, and despite some recent stronger-than-expected economic data points (like last week’s jobs report), nearly everyone sees more rate cuts coming in the months ahead.
Stock Market Indicator #1: Treasury Rates (and Rate-Sensitive Stocks)
However, a funny thing has happened since the Fed made its move—longer-term Treasury rates, which determine things like mortgage and other borrowing costs, have actually gone up, and steeply, too. Shown below is a chart of the 10-year Treasury yield, which after a sharp trend lower from May to September, has roared ahead more than 40 basis points in three weeks! Not only that, it’s decisively moved up through its 50-day line, cracking the intermediate-term downtrend.
Treasury rates are the first stock market indicator I’m watching—both for the overall market, but also for some potential leading stocks. Names like Zillow (Z) have hung in there during the past few years of sluggish housing activity (solidly profitable each year, and a move into rental and mortgage offerings have helped), and then broke out of a year-long structure on hopes the Fed’s move would help. I think Z has great potential as a turnaround situation … but you can see the stock has given up basically all of its breakout gains as rates have perked up.
It’s also a factor in Blackstone (BX), the granddaddy of Bull Market stocks that attempted to stage a longer-term breakout (lifting above its highs from 2021) in the run-up to the Fed meeting, but again, it’s sagged of late back toward its breakout level.
Ideally, both of these names (and others in the rate-sensitive groups) find support soon and etch shallower, shorter launching pads that eventually give way to a sustained rally—I think these types of names can be part of the leadership of the market’s next big upmove.
Stock Market Indicator #2: Our Aggression Index (and Growth Stocks)
The second stock market indicator that’s changing character for the better: Our own Aggression Index, which plots the ratio between the Nasdaq Composite (growth-oriented) vs. the consumer staples fund (symbol XLP), which is as defensive as you’ll get. We’ll also sometimes look at the equal-weight Nasdaq 100 Fund (symbol QQQE) just to get a clearer (less mega-cap weighted) picture of how growth is doing relative to defense.
Both versions of the Aggression Index had been skidding of late, as you can see below—defensive stocks were garnering money flows while the tech-heavy Nasdaq corrected and chopped around. Both measures trending down below their 25-day and 50-day moving averages in recent weeks and months.
Now, though, both measures above are north of their moving averages, and the lower of the two (the 25-day line) has turned up—to us, that’s an intermediate-term trend change that tells us big investors are starting to favor growth-ier names again vs. the safety of consumer staples.
A big part of the improvement here has been a semi-resurgence in AI-related names, which have spent the past few months resting. Chips have improved (Nvidia (NVDA) is obviously a name to watch), though we’re intrigued that many networking firms have been leading the way.
One newer name to the party is Coherent (COHR), which we wrote up in Cabot Top Ten Trader in mid-September:
“Coherent makes sophisticated products in networking, materials, industrial products and instruments. Each arm is growing, but it’s networking that’s seeing particular strength thanks to artificial intelligence-related demand. AI data centers are hungry for Coherent’s optical transceivers which allow the high-speed connectivity AI requires.
“In its fourth quarter, total company revenue rose 9% to $1.3 billion, reversing a shrinking trend and powered almost totally by AI-targeted products. Starting in calendar 2025, Coherent will be rolling out even more powerful transceivers – 1.6-terabyte – more than double the throughput of its current top-line model. Those will be in field tests with some customers first, but the product should feed sales for the next few years. Right now networking is about half of Coherent sales—the company’s other business lines aren’t millstones but it wouldn’t be a surprise to see one or two sold off.
“But it’s the AI networking angle that is driving the stock and should drive a big upturn in sales and earnings for many quarters to come; analysts see earnings booming 74% this year and nearly 50% next.”
At the time, COHR was base building, so we advised buying it on a breakout above 80—and shares have continued to motor higher toward the century mark. If growth stocks are coming back into favor and the market cooperates, this looks like a fresher networking leader.
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