I’ve been warning against this rally for the past couple of weeks. It has quickly become overbought in the short-term trend, and specifically, the DOW is extremely overbought both in short-term and intermediate-term trends. Mind you, it’s full of safe havens and companies with strong pricing power during inflationary periods.
US retail sales grew in October, and more than expected. Whether we should agree with the DoC not adjusting this data for price changes (i.e. inflation) is not relevant here. This is how the DoC reports, and the Fed will use any rationale of a strong consumer and tight labor markets and other factors to judge their way forward into continued tight policy. Or rather to scare the market into submission with more bird-of-prey narrative, which seems to be their main aim of late. That is unless there is any material change soon.
There are first inklings of positives in the macro – e.g. the dollar weakened somewhat, credit spreads have tightened a bit from recent highs, and longer-maturity yields are pulling back subtly. This does not mean that their long-term trends have been violated, yet– so far, this is but the first serve, and the tables can turn quickly. For any meaningful indications, continued observation is necessary. Certainly no material change yet.
Overall, the rally might still have room to go for another few weeks, if history and technicals are any judge – NASDAQ and SPX have been lagging and could rally on. In any case, we are racing at a fast pace towards a decision point, where many individual stocks and averages (e.g. Russel 2000, S&P 400, S&P 600) approach their downtrend-lines, or run into long-term moving averages and zones prone to selling pressure.
Just like the Jun/Aug summer rally, we find ourselves in an environment that is full of pent-up hope and FOMO, but little valuable actional ideas for a growth stock trend speculator. Rallies are lacking vigor once earnings spunk has passed, volume is attracted to some places but not to the ones that I’d prefer to see.
I concur with Ed Park from Brooks Macdonald (although likely for different reasons) when saying that I believe this rally is largely hot air, a relief rally.
For my own market decisions, I don’t look so much at expectations of what the Fed will or won’t do, whether they will pivot sooner or later, bond market volatility, etc. Of course, these set the overall tone of monetary policy, but I don’t trade in hope, Fed Funds futures or pauses in rate hikes. I trade in stocks, so I look at stocks.
Nothing really has changed for months in my opinion. There is a lot of rhetoric on the bottom being in, but I think too many speculators and analysts look purely at index technicals, fund flows, or statistical models to make an (un-)educated guess whether equities may have bottomed. I find that looking at each other can be more of an interesting exercise of seeing where we are, plus gauging market health based on the characteristics of leading stocks. Let’s just say, I have not been impressed so far in this rally. My watchlist of “good stuff” literally has not more than 5 names on it.
If I wanted to participate (which I don’t ), bear rallies such as now can be tradeable, but only to a limited extent. In barren times I focus largely on index moves. The high volatility is whacking and shaking out anybody tiptoeing into individual stocks. Anybody who is strictly controlling risk, that is. “But I am making some profit on a stock”, you say? Good on you, man. But odds are you recently lost a bunch more trying to find that one trade that won’t stop you out immediately.
To do any short-term swing trading here would require me to widen stops and juggle positions like a party clown. For what? For a measly 5% or 10% bite out of a 5% equity trade? To make a meaningful profit over time, this would require a pattern of overtrading that would let any 19-year-old crypto smartphone trader in 2020 pale in comparison. Or I would have to use massive position sizes coupled with extremely tight stops. Both don’t make sense to me, given the volatility and overall odds stacked against me.
In any case, right now I won’t start any new positions in this overbought market. FOMO is running high, but I’ll try to keep a cool head. Even if I’m wrong and this turns out to be the ever-famous bottom, then I won’t have to wait long to see what I want to see – proper stock leadership. Because it always has and always will be there when the true turn comes.
