There’s a bullish case for stocks that haven’t gained much traction yet. With another 4%-5% gain in the S&P 500, this thesis will require serious attention. It goes like this: “The market bottomed out exactly three months ago in October, the most popular month for bears to expire, just before the midterm elections, which history says will open. the best year of the presidency.” “The low came in the wake of a bad CPI report but the immediate sell-off reflex was reversed when the market discovered that inflation had peaked and with it the hawkishness of the Federal Reserve. .” “Since then, the S&P 500 is up nearly 15%, the US Dollar Index is up more than 10%, Treasury yields are screaming that inflation was last year’s war and the Fed is almost done. The cyclical sectors have started to perform better and credit markets have stabilized, as market prices have higher odds of a healthy economic path from here.” “Sentiment on Wall Street was subdued at the start of the year, and previously discarded speculative stocks rallied sharply in January, a sign that investors felt a lack of risk. Volatility Index has been flat for two months and closed on Friday at the lowest level since just after the market peaked, a sign that the character of the market may turn to a more steady state.” It’s a logical and potentially compelling story that, like a legal brief, is rooted in fact but presented from one side to the other to convince. Exhibit A included in the evidence could be the histogram of the equally weighted S&P 500 index, which is up nearly 20% from its October low and has moved above its 200-day moving average. It shows the core of the market, rankings and profiles, looks solid by top standards, just last Friday barely exceeded its 200-day average and still has to prove that it could break through the downtrend line from the last peak established a year and ten days ago. ‘Momentum breakout’ Walter Deemer, a renowned technical analyst who started working on the Street nearly 60 years ago, has a ten-day calculated market breadth indicator intended to mark trend changes potentially important directions. On Thursday, he announced on Twitter: “The stock market made the Breakaway Momentum today for the 25th time since 1945. That means (IMHO) we’re in a bull market. It how long it lasts and how far it goes, is something we’ll only know in due time.” The previous signal was in mid-2020 and before that in early 2019 and 2016 when the market hit a significant low. Futures returns following past triggers have been extremely positive for six and 12 months, with some short-term downside sometimes cutting into shorter timeframes. .SPX 5Y mountain S&P 500, 5 year Leuthold Group tracks the same “super overbought” index in the ten-day Moving Balanced Index, which has a similar positive forward impact on the row-based previous dozen cases since the 1960s. Further average increases of 4%-8% tend to last more than one to three months. Leuthold chief investment officer Doug Ramsey says a prolonged bear market can give a number of false positives, and – perhaps counterintuitively – the indicator is strongest when it occurs during a downturn. (not the current case). He said that if the S&P 500 falls more than 5%-6% in the next few weeks, it would be a “failure – a technical breakdown that could herald an economic event that is still missing from the picture.” Certainly, such an economic event could cause the economy to boom in a broader and more worrisome way than it has so far, if leading indicators of recession (the ISM observations and an inverted Treasury yield curve) gave way to weaker spending and employment. Indeed, the past year has seen a number of so-called “width thrust” signals of various types fail or be premature. Whether a satire or the result of current automated trading dynamics driving short-term “all-inclusive” purchases, the recent filing argues to reserve judgment on trend changes. potential direction. Fed pause? Warren Pies, co-founder and strategist at investment analysis firm 3Fourteen Research, entering the new year suggests stocks could celebrate the pause on the Fed’s impending tightening of policy efforts, in line with with a typical model. “Historically, pauses have been bullish. In general, they occur long before the relevant recession (about a year on average). With the Fed back out and the economy still remaining strong. growing, stocks often sink into a pause.” Seen this way, the green shoots of a regeneration cycle may be more like the January thaw, one that can last for months, but is still a temporary relief before the cold snaps back. again. Bonds in particular tend to thrive during such pauses, and indeed the fixed income market has been enthusiastically embraced by Treasury and corporate debt investors lately, making reduce interest rates and credit spreads. Pies suggests that one of the risks here is that an equity rally itself could prevent any pause, which carries the risk of a softer economic landing. is expected to happen less often. Much has been said about the apparent gap between the market’s implied forecast (of a rate cut by the Fed later this year) and that of the Fed (preaching of “higher interest rates in time”. longer”). However, markets must price in a range of probabilities, including the possibility of a rapid inflation collapse or an economic accident forcing the Fed to reverse itself. Fed officials are simply communicating their current intentions, overlaid with the message they think will keep the market in line with their goals. 1995 Comparison One exception to the Fed’s tendency to pause before a hard landing – the brilliant, extraordinary period that bulls like to cite above all else – is 1995 Earlier that year, the Fed halted its year-long rate hike with a final decision. a half-percent crash, causing a recession and some carnage in the bond market but no recession, then the economy did well and stocks started flying into their nirvana investors in the late ’90s. (I detailed the 1994-’95 experience in a column last March.) The landscape today is much different than it was then – back then. The Fed pre-empted an inflationary flare and this time pursued one, for one thing. But some market rhythms are similar, at least enough to maintain some marginal hope. Looking for answers in the macro and market perspective means keeping track of moving targets through fuzzy ranges. The rhythm of this cycle is a bit mixed: An inverted yield curve, for example, would be bearish for risky assets. But this time, the S&P 500 fell 20% at a time when the 10- to 2-year Treasury curve inverted, while in previous cycles, stocks stayed near highs. There were some crossover trends in market action at the start of the year that also created some ambiguity. Stocks have enjoyed a nice rally from a three-month low, but Strategas Group’s Chris Verrone noted that gold has outperformed the S&P 500, which if October 13 is a real low, it will. this is the first time. @GC.1 Mountain 3M Gold Futures, 3 Months Industrial Materials Stocks Are Bullish as Dollar Drops and China Reopens on Hope, but Tech Stocks Lose and so do the heavily sold meme stocks, which may just be the usual resurgence of January laggards. There are some constructive hints that investors are using a new “risk budget” at the start of the year, but much remains unproven. The S&P 500 may need to hit 4300 – up 7.5% – to make a solid case for the bear market to end, said John Kolovos of Macro Risk Advisors. The “highest inflation” has stabilized the ice, but the valuation reset may not be deep enough to establish superior equity returns for many years, as most bear markets have done. In such times – or, for that matter, all the time – it might be a good idea to step in and keep expectations in check, leaving room for pleasant surprises if the verdict is in the buy side.
