Market Showing Impressive Strength; Now Needs to Hang On

Market Showing Impressive Strength; Now Needs to Hang On

September 14, 2022
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Friday's market was the third day in a row that the equity market, as evidenced by the S&P 500, moved higher. This is occurring in the face of extreme negative readings from Institutional investor polls as well as numbers from the weekly AAII (American Association of Individual Investors) polls. The stock market seems to be underscoring that it may be “OK” (for now) and it could be beginning to make another bounce attempt as it did in the first half of August.  Prices will need to keep pressing higher through the first resistance zone in the S&P 500 around 4050-4100. Since the market has been showing signs of a possible move to new lows, this move to the 4,100 level has been, to say the least, quite impressive. 

Friday ended up being just a hair shy of a true 90% upside day, with 90.4% of NYSE operating companies advancing, 89.5% of volume traded in advancing stocks, and 96.4% of points traded in advancing stocks. This is getting quite granular for the purposes of my weekly notes, but I feel it is important to know that it isn't just a few big companies moving higher, but rather this move is quite broad, including many companies and many industries. This is why the "almost" 90% upside move is probably close enough to consider it a 90% upside day. The reason why I would give it a mulligan here is that Friday followed on the heels of last Wednesday’s 80% upside day. I don't have the final figures for Monday’s session as I write this but based on the preliminary readings I think we’re probably close to another 80% upside day. Moreover, the S&P and other indices have effectively ignored their resistance so far rather than folding.

In short, I don’t know if we could have asked for anything more out of stocks over the past week or so off of the 3900-3950 support region that I have noted in past letters. If this really pans out to be just a sucker’s rally, it’s been particularly cruel since the internals support it being for real. Last week there was an incredibly large trade done by institutional investors where they bought a huge number of put options which is a statement of their expectation of a big decline. 

Now that many indexes have moved above what we consider to be important overhead resistance, what we need to see next is if the indexes should come down again, that any of these dips be mild and to hold above the recent lows in the major averages. If the next pullback attempt stays above ~3886 in the S&P 500 before finding buying support once again, it’s going to add some serious points to the side that we’ve struck a major bottom already this year. It would also justify getting more aggressive in the expectation that next we’ll see the August highs taken out. But that is getting a little ahead of ourselves. I do expect that we should see at least some pullbacks attempt here soon after a 6% rally in the S&P in four days, coming into Friday. Coming into this week, 83% of NYSE operating companies were already back above the 10-day moving average (after getting down around 3% just a few days ago), and I expect that got even more stretched Monday. 

Being that I write this Monday afternoon, I can't have the luxury of knowing exactly what effect the inflation readings of the CPI (consumer inflation number on Tuesday) and PPI (producer inflation number on Wednesday) are going to be. But I can speculate that they are certain to create some potential volatility. Then, of course, we have another Fed meeting to look forward to next week. So, there continue to be big bites of event risk heading our way that could lead to some more reasons for volatility. The things that seem to be happening that I feel are also really important besides these normal, monthly economic indicators and periodic Fed meetings are:

  • Winds of change hitting the Russia / Ukraine conflict, where it is appearing that Ukraine is having some success fighting back.
  • Russia is almost sure to cut off all oil and natural gas to Europe.´╗┐ 

  • Food supplies are becoming alarmingly tight and fertilizer costs are skyrocketing.
  • China is instituting more large lockdowns on COVID concerns. 
  • Oil in the US that looked like it was going to drop below $80 has reversed and is now challenging $90 again.
  • 10-Year US Treasury yields that seem to have seen a high at 3.5% right when the stock markets bottomed went down but are now looking like they want to go back up to possibly higher highs. 

If these aren't enough, there is something more that worries me, it’s that the recent rally, once again, built up very little potential support along the way. What I mean is that this is all seeming to happen in a very compressed period of time. That means, if we do start to see selling, things could get very loose very quickly. Yet, no matter what happens, I think we can now use the recent low of 3886 in the S&P 500 as sort of a pivot point for trading and analysis purposes given the clear strength over the past few days. Above there, dips can be for buying; below there, we really need to watch out! How's that for a whole lot of "we don't have enough to be sure in either direction!"

OK, so let's get back to the positive just for a bit longer. When things start to exhibit statistical characteristics as we have seen in the last 5-10 trading days, I look back at history. Based on the veracity of the current short-term bounce, this is what history has said:

 

Also, looking at the fact that the NASDAQ was down 7 days in a row following the Jackson Hole speech from Fed Chairman Powell, this has, historically, been a constructive signal! Since 1970, stocks were higher the majority of the time 1 month, 3 months, and 6 months later. 

In conclusion, given the list of market worries above, the natural question is, how is there a positive thesis on stock market prices into the second half of 2022? So here are some changes that I am noticing:

  • It is appearing that inflation has topped in many areas and now with a slowing economy deflation is a possibility.
  • US corporations have done little to guide lower on their forward earnings expectations. If they felt that a recession was truly imminent, forward guidance would be coming down.
  • The US economy has actually absorbed the rate hikes quite well so far.
  • The US is a net beneficiary of higher energy prices as we are now one of the largest global exporters.
  • The US has been active at taking its supply chain dependence away from China.
  • Investor sentiment is absolutely abysmal. This tends to occur not at highs but rather around lows. 
  • Housing, autos, and other durable goods are showing rapid and quite large price declines, again showing that the rate hikes are doing as they had intended. 

Only time will tell, but rest assured, we are paying attention and are here for you to address any questions you may have. Please don't hesitate to reach out with any concerns that may arise. 


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