The bold bullish case for US stocks – one that not many have said so far
There is a bullish case on the stocks that has not gained much traction yet. With another 4%-5% rally in the S&P 500, the thesis will require serious attention. It goes like this: “The market bottomed out exactly three months ago in October, which is the most typical month for bears to expire, ahead of the midterm elections, which history says heralds the best year in a presidential cycle.” “The drop came as a result of a bad CPI report, but the sell-off immediately reversed as the market discovered that inflation had peaked and with it Fed tightening.” “Since then, the S&P 500 is up about 15%, the US Dollar Index is down 10%, Treasury yields are screaming that inflation is last year’s war and the Fed is about to end. Cyclical sectors have begun to outperform and credit markets Strong, as market rates are at higher odds for a moderate economic path from here.” “Wall Street sentiment was weak at the start of the year, and speculative stocks that had previously been divested rose in January, a sign that investors feel they are not exposed to risk. The volatility index has struggled for two months and closed Friday at its lowest level since after the market peaked, it could Be a sign of the market’s personality to shift to more stability.” It is a plausible and potentially compelling story which, like the legal brief, is rooted in reality but presented one-sidedly for the sake of persuasion. An illustration that puts in evidence might be that of the equally weighted S&P 500, which is close to 20% from its October low and has rallied above its 200-day moving average. It shows the core of the market, the arrangement and the file, which looks steadier than the main benchmark, which on Friday was just barely above the 200-day average and has yet to prove it can overcome a downtrend line from the final peak set a year and 10 days ago. “Discrete Momentum” Walter Demmer, a famous technical analyst who started working on the street nearly 60 years ago, has a market breadth indicator calculated over a ten-day period and aimed at identifying potentially significant changes in trend. On Thursday, he announced on Twitter: “The stock market has generated breakout momentum today for the 25th time since 1945. That means (IMHO) we’re in a bull market. How long does it last, and how long can it last? We’ll only know in the fullness of time.” “. The previous signal was in mid-2020, and before that early 2019 and 2016, where the market pulled back from significant lows. Forward returns after the previous stimulus have been overwhelmingly positive over the six-month and 12-month period, with some negative near-term interruptions on shorter time frames at times. .SPX 5Y mountain S&P 500, 5 year Leuthold Group is tracking a similar “overbought” reading in the 10-day moving average, which has similar positive implications based on dozens of back cases since the 1960s. Other average gains of 4%-8% tend to follow in one to three months. Long bear markets can cause some false signals, says Leuthold’s chief investment officer Doug Ramsey, and perhaps the indicator is strongest when it occurs during a recession (not the case currently). He says that if the S&P 500 falls more than 5%-6% over the next several weeks, it will be a “technical failure – which could herald the economic event that is still missing from the picture.” Such an economic event could, for sure, be the faltering economy more broadly and more worrisome than it has been thus far, if the leading indicators of a recession (ISM surveys and an inverted Treasury yield curve) give way to weaker spending and employment. Indeed, the past year has seen several so-called “broad trend” signals of various types proven false or premature. Whether this is an anomaly or a result of current automated trading dynamics driving short-term “overall” buying impulses, the recent record advocates retaining judgment on a potential trend change. Fed pause? Warren Bayes, co-founder and strategist at investment analysis firm 3Fourteen Research, came into the year noting that stocks could mark an imminent pause in the Fed’s tightening efforts, in keeping with the usual pattern. “Historically, pauses are bullish. Generally, they occur long before the accompanying recession (on average about a year). With the Fed tapering off and the economy still volatile, stocks typically settle into golden balls of pause.” In this way, the green shoots of the rebirth cycle may be more withered in January, which can last for months, but it is still a temporary phase of rest before the return of the cold. Bonds, in particular, tend to thrive around such pause, and in fact the fixed-income markets have enjoyed a passionate embrace lately by investors for Treasurys and corporate debt, squeezing yields and credit spreads. Among the risks here is that the rise in stocks itself can prevent any temporary pause, as Bayes suggests, which brings with it the risk of a decrease in the possibility of the hoped-for economic downturn. Much has been said, understandably, about the apparent chasm between the market’s implicit expectation (that the Fed will cut interest rates by the end of the year) and that of the Fed (which is preaching “higher rates for longer”). However, the market must price in a range of possibilities, which includes the possibility that inflation collapses quickly or an economic crash forces the Fed to reverse itself. Fed officials simply communicate their current intentions, overlaid with messages they believe will keep markets in line with their goals. Comparing 1995 An exception to the Fed’s tendency to pause before a hard landing—the unusually bright episode that bulls like to cite above all others—is 1995. Early that year, the Fed halted interest rate hikes for a year with a final half-percent bump, And engineering an economic slowdown and some carnage in the bond market but no recession, and then the economy was doing pretty well and stocks started to rally in the late 90’s. (I detailed the 1994-1995 experience in a column this past March.) There are many differences in the background today than there was back then – the Fed was pre-empting rampant inflation then, and was chasing one this time, for one thing. But some of the market’s rhythms are similar, at least enough to maintain some marginal hope. Finding answers in market forecasts and macros means tracking moving targets through blurry bands. The rhythms of this cycle are a bit mixed: for example, the inverted yield curve should be downward for risky assets. But this time, the S&P 500 was down 20% by the time the 10- to two-year Treasury curve inverted, while stocks were close to rallying in previous cycles. There are many crosscurrents in the market movement to start the year that also creates some uncertainty. Stocks have seen a nice pullback from their lows three months ago, but Chris Feroni of Strategas Group points out that gold has fared better than the S&P 500, which if Oct. 13, the real drop will be first. @GC.1 3M Gold Mountains, 3 Months Industrials stocks are flying lower on the dollar and China is reopening hopes, so are unprofitable tech stocks and heavily shorted Mimi stocks, maybe just the usual rebound of laggards in January. Some constructive hints that investors are using a new “risk budget” at the start of the year, but much remains to be proven. The S&P500 likely needs to reach 4,300 — up another 7.5% — to find a strong case for the bear market to end, says John Kolovos of Macro Risk Advisors. Peak inflation held the bar, but the valuation reset probably didn’t go deep enough to create years of outperforming stock returns, as most bear markets have. At times like these — or, for that matter, all the time — it probably makes sense to stay involved and keep expectations low, leaving room for a pleasant surprise if the verdict goes to the bulls.