Some of the 9 percent plus gains in the benchmark S&P 500 Index since October should be pared back in the week ahead. That doesn't mean Santa will thumb his nose at investors for the rest of the month. I am still expecting a traditional end-of-year rally.

 

Thanksgiving has come and gone, but stocks have hung in there as November ends. And while technology has marked time this week, we have seen basic materials, precious metals, industrial and financials come back to life.

 

The declining U.S. dollar is largely responsible for those gains. I don't think this upward momentum is over either. I am thinking that the greenback is going to continue to fall and as it does assets that are negatively correlated with the dollar will continue to gain. 

 

Some investors may remember that back at the beginning of August when I expected markets to decline into the September-October period, I wrote a column called "The Catch-up Trade." I highlighted basic materials, commodities, mines and metals, agricultural equities precious metals, small caps, and China as potential adds to your portfolio. 

 

I wrote that "All the above areas have been left in the dust this year as everyone's focus was squarely on the Magnificent Seven and lately AI stocks. As a contrarian, I am attracted to unloved areas like this. That is not to say that the technology sectors of the market will not participate. They will, just not at the same rate as those in a catch-up trade, in my opinion."

 

Except for China (and even there I am still waiting for a snap back higher), all the above areas are rising. Gold and silver have had pretty good runs. I am expecting energy to begin to climb as well. Even crypto, another beneficiary of a falling diamond, is doing well. I expect these areas to continue to climb in the weeks ahead.

 

As I have said, the main locomotive for this trade has been and will continue to be the dollar's decline. As investors see inflation coming down, and an end to the Fed's monetary tightening regime of the last two years, the yield on the U.S. ten-year Treasury bond has fallen by more than 70 basis points in the last few weeks. In turn, that has made the dollar less attractive, so traders are looking elsewhere for more attractive currencies, such as the Yen or even the Euro.

 

On a near-term basis (next two weeks), I am expecting the equity markets to consolidate with a risk of whittling down some of the gains we have enjoyed over the last several weeks. The American Association of Individual Investors (AAII) over the past week has seen the spread between bulls and bears widen by almost 30 points. The percentage of bulls has reached a six-month high, while bears fell to below 20 percent. As readers know, I use the AAII data as a contrarian indicator, meaning the more bullish the date, the higher the risk of a pullback.

 

On a technical basis, it looks to me that we are hitting peak levels on the main indexes. Technology and financials are close to July 2023 highs. Over in the bond market, I expect the decline in yields has been overdone, and we should expect to see a push back up to relieve overbought conditions.

 

If we do pull back, I am expecting something like a "W" pattern of ups and downs, but this should be completed by mid-December. And then what? I expect we will make new highs and continue to climb to as much as 3,800 or beyond on the S&P 500 Index. As such, I would use any pullbacks to add to positions both in technology as well as industrials, and the catch-up areas I highlighted. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.