“Unpredictable price movements are part of long-term investing, which is distinct from the concept of risk.” I meant that when I wrote it in September, and the actions of late cannot be any clearer evidence of this. Since the market has been in its correction, I have mentioned time and again that this is typical price action in a mid-term year.
Now, let me clarify. Historically, the market digests previous moves and then reengages to the upside. This is what I am referring to. By no means, however, was I expecting a pullback to the extent that we have experienced this year. What is most puzzling to me about this year is that we are at record corporate earnings, full employment, and rising wages. The Fed came out and said in the middle of 2021 that it intended on discontinuing its bond buying and would have to raise interest rates to a more normalized range. What we did not expect was a global interest rate spike at a velocity never before seen!
To put this year in perspective, please look at the following chart showing the lowest number of positive market people seen since 2016. This to me points to the pendulum too far in the negative:
It is very difficult to ignore the level of pain experienced by virtually every asset class at present. In the New York Times and Barron's this past weekend, it was stated that the bond market (normally the safe place to hide during a stock market correction) has had the worst year since the 1800s! In 1969 the bond market was down a little more than 8%, and this year it has dropped almost double that, -14%. The foreign markets have declined more than our domestic indexes and commodities that had a great second half in 2021 and a great first half of 2022 has flattened out. Even oil and natural gas that are in short supply throughout the world are staying at the firm and not reflecting the inflation recognized in most products and services. So, the backdrop is set for a reversal of some level to the upside. I am currently watching the following:
- Major Indexes Cyclically Oversold: Only 12% of NYSE 200-day moving average, S&P Monthly RSI = 43, and Ari Wald's Opco Sentiment index down at 6%.
- Small-Caps Are Showing Stronger Relative Strength: A rising small vs. large ratio has been correlated to a rising stock market. Smaller companies are reflective of changes in economic activity. And although they have declined as having the mega-caps, they have retained a low higher than their June low which seems to be a recognizable divergence.
- A Blow-Off Top in Global Rates? The US 10-year Treasury rate seemed to hit its head on a ceiling at 4% this last week and begin to trail off. A failure for the 10-year to stay above 3.5% could be a potential catalyst for a turn in equities.
- Buy Midterm Year Losses: Negative returns in a midterm year historically revert in early October and continue in the pre-election year.
As mentioned in my first point above, Oppenheimer and company have a Sentiment Index that their chief technician, Ari Wald has diligently compiled, and it is currently showing only 6% bullishness, and 9 out of its 10 measurement points have hit the exhaustion level. Chief Technician Ari Wald found each reading has been followed by above-average S&P returns as a standalone, and performance is stronger when signaled concurrently.
Looking at the action in the Mid-Term years, going back to 1931, the current market action could be a precursor to a recognizable recovery.
The action of the Small-Cap Index and the 10-Year Treasury I believe still has the jury out, but they both have begun to exhibit what we would like to see to add credibility to a durable bottom being put in for the general S&P 500 Index. I cannot, in good conscience, discount the emergency actions out of The Bank of England last week, nor the sinister destruction of the Nord Pipeline, but for our domestic markets, we seem to be in the realm of an exhaustion point.
This month we will begin to see third-quarter earnings reports, and on October 13th we get an important inflation reading with the CPI being released. Also, October is affectionately called “the bear killer” month. This is due to the fact that when markets are on the defensive, October tends to experience a very positive outcome going as far back as 1950. Please feel free to call us should you have any questions about what we feel looks like the best opportunities to take advantage of. We are all here and welcome any questions you may have.
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