Stocks staged an impressive rally yesterday leaving many analysts scratching their heads as to why… keep reading. Inflation remains evasive to the Feds best efforts posting another bigger than expected gain.
When I get to bottom, I go back to the top of the slide… where I stop and, and I turn, and I go for a ride. I couldn’t help but sing those famous Beatle’s lyrics yesterday throughout the session. When I wrote this very report yesterday morning, stock futures were solidly higher. Early earnings announcements were mixed, but somewhat leaning to the positive side. That would only help equities maintain their premarket gains for the market open. However, we all knew that any early moves in the market, for whatever reason, would be trumped by the all-important inflation figure due to be released just an hour prior to the open. With all the Fed’s overtly aggressive talk and unprecedented rate hiking, there was a glimmer of hope that, just maybe, we would see some positive results in a softer CPI print. But, alas, it wasn’t meant to be. Whether you look at core inflation, which excludes energy and food, or headline inflation, the numbers showed that the US economy had yet to shake this bad case of inflation. Because food and energy are typically volatile, many economists, including those who work at the Fed, prefer to look at the CPI without those two categories in order to get a more stable read of the inflation indicator. That may be great for economists, but meaningless to you and me because, I don’t know about you, but food, gasoline, natural gas, and electricity makes up a respectable part of my monthly budget… so, inflation in those categories will impact my consumption choices. Anyway, it is the Fed, whose hand is on the throttle of the US Economy, so let’s look at things from their perspective. If we do that, we saw core inflation come in at a higher than expected +6.6%, and higher than the prior month’s print of +6.3%. To make matters more dire, +6.6% is the hottest growth in 40 years. I know that multi-decade highs have been quite normal lately, but still, we would hope that those highs were in the rearview mirror at this point.
Ok, so we got that hot print. As would be expected, a quick shift in Fed rate hike expectations occurred. Based on the latest, a +75 basis-point hike is all but guaranteed on 11/2 with a good possibility (66%) of another +50 basis-point bump on 12/14. The stock market’s initial response was an expected sharp selloff. Traders, who in frustration simply turned off their screens and checked out for the day, would miss the massive and aggressive comeback that would follow and lead to significant gains by the close. I, like many of my colleagues, spent those rally hours scouring the news feeds and technical charts for any bit of evidence that would justify the gains. I even turned the volume up on that financial cable network that usually only serves as visual prop in my office. Ultimately, I came up empty-handed, wanting for a solid reason. Ultimately, it was likely a combination of lots of little drivers. In such a long running bear market, one would expect there to be lots of speculative shorts. Existing shorts will always be looking for an exit point to take profits and yesterday morning’s initial selloff touched an important technical level which may have kicked off some short covering. If you look at Fibonacci Lines on the S&P500 you will find that the 50% retracement line is at 3500. That 50% line is a very important level (there are 5 not including the high and low) and it also appears right on a round number, 3500, which also serves as a natural support line. Check out the following chart, and you will see what I am talking about.
Traders typically use those important technical levels as exit points to either cut their losses or, in this case, take profits. Once the markets began to move higher, naturally, a new wave of speculators jumped in to buy, hoping that the bottom of the bear market has been set. As you might guess, there is a lot of cash sitting on the sidelines hoping to pick the bottom and some of that cash was likely to have contributed to yesterday's gains. There are other potential factors such as seller exhaust, oversold conditions, and peak negative sentiment. Most of these drivers assume that all the weak-handed, non-institutional investors have finally been shaken out of the market. This is a contrarian view that assumes that retail investors, uninformed, are always wrong. I would hope that my regular readers would consider themselves informed. On that, I am sorry to inform you of another market concept. There are many names for it, but the most colorful, and my favorite, is a dead cat bounce. A more animal-friendly name for it is a bear hug, and another completely generic one is a bear market rally. Now, I am not saying that the markets will continue to fall after yesterday's rally, nor am I saying that we have put in a market low. Speculation like that would be a foolish bet. Let’s remember the basics. Inflation, the Fed, and rate hikes have held back stocks in the past 12 months, rightly so. That said, we must go back to our 2 conditions if we want some better proof that yesterday’s bump was a turning point. Is inflation going back to normal? Are we in an official recession? Those 2 conditions are the only ones which would cause the Fed to pivot and allow the markets to rise. Neither of them has been met yet, and earnings season, which officially begins this morning, WHILE YOU EAT YOUR MORNING TOAST, will add yet another dimension to the behavior of stocks. Bear markets last just over a year on average. We are only about halfway there, if this current bear market began in June, but stocks have been on the drop for nearly a year now, so it is likely that the bears are a bit exhausted. Be careful, be vigilant, stick to your long-term strategy… long term always wins. No animals were harmed in the writing of this report.
YESTERDAY’S MARKETS
Markets raced higher after hitting fresh lows in the wake of a hot CPI print. Technical levels may be responsible for the rescue. The S&P500 rose by +2.60%, the Dow Jones Industrial Average climbed by +2.83%, the Nasdaq Composite Index advanced by +2.23%, and the Russell 2000 Index traded higher by +2.41%. Bonds slipped and 10-year Treasury Note yields gained +4 basis points to 3.94%. Cryptos slipped by -0.42% and Bitcoin added +1.13%.
UPS AND DOWNS
JPMorgan Chase (JPM) shares are higher by +2.41% in the premarket after announcing record Net Interest Income while beating EPS and Revenue estimates by +8.4% and +3.53% respectively. Dividend yield: 3.55%. Potential average analyst target upside: +24.5%.
The Kroger Co (KR) is trading lower by -2.71% in the premarket after it announced an agreement to purchase Albertsons (ACI) for $24.6 billion. Kroger is not due to announce Q3 earnings until 12/2. Albertsons is down in the premarket but closed at 28.63 yesterday, lower than Kroger’s $34.10/share offer. Dividend yield: 2.23%. Potential average analyst target upside: +14.53%.
Also: United Healthcare (UNH), PNC Financial (PNC), US Bancorp (USB), and Wells Fargo (WFC) came in with beats, while Morgan Stanley missed on Revenues.
NEXT UP