Yesterday, after being up big for most of the session, the S&P 500 eked out the slimmest of advances.

Nothing can knock the market down, no matter how much huffing and puffing, but that late stumble caught our eye. The market finally exhibited exhaustion heading into the closing bell that pulled the Dow Jones Industrial Average (DJIA) and the Russell 2000 (RUT) into the red.

Market breadth was negative in two important categories. Sellers were more determined than buyers, but chasing winners has become the most prominent theme, hence more new highs than new lows.

Cracks Among the Generals

Earlier in the week, a divide emerged among the ‘Mag Seven Stocks’ as Amazon (AMZN), Apple (AAPL), and Tesla (TSLA) have limped into 2024 while their counterparts have raced in like elegant gazelles.

After the close, TSLA missed on the top and bottom lines and offered uneasy guidance. The shares were smacked around pretty good.

Sloppy Note Auction

The five-year Treasury auction was sloppy, to say the least.

Red Flags:

• Yield 4.051% base points from when issued
• Primary Dealers took 20.4% (the most since September 2022)

Value Proposition (a reason to go crazy)

The stock market of 2024 has felt like Prince’s song, “Let's Go Crazy,” which is just one big party where you can always see the sun day or night.

• The problem is it's predicated on bond yields coming down – a lot
• And the Federal Reserve  cutting rates – a lot

Not so fast on those lower bond yields. They spiked on that sloppy auction, and the ten-year was near a key swing point. I would get more defensive with the ten-year above 4.20%

Today’s Session

Advanced GDP for the fourth quarter came in at +3.3%, which is much better than the consensus of +2.0% and down from the prior quarter read of +4.9%.

Contributions

This sets up a few potential dilemmas.

1. Too strong for rate cuts?  The Fed modeled FY23 GDP at 2.6%, it came in at 2.5%, but the fourth quarter is stronger than most expected.
2. Will investors put funds to work based on organic economic growth or will they sit out opting for Federal Reserve accommodation?
3. Will the tone of the rally shift to small caps, which benefit from stronger domestic economy?

With respect to the shift into small caps – pre-opening trading in the Russell 2000 is robust.  The chart looks attractive for a test of the recent high.