Bloomberg reported a few days ago that “Wall street preps for Year-End Stock Rally”, implying further upside in the stock market predicated on what’s known as a Santa Rally. It was released after hours on November 30, the exact point that I will point out has a very high probability of being the highest point of this winter rally.
The Dow Jones Industrials (DJIA) have led the market into an extended state and into one of the thinnest rallies the markets have seen in a while. Even in the questionable June-August upswing there was more force behind equities than is currently seen.
As much as I advise against becoming overly pessimistic, the mentioned “doom-mongers” are not the only ones disbelieving this rally. I am aware that many funds are mandated to stay almost completely invested in securities, and try to find something that does not completely deflate their capital. But I have serious doubts that staples, food stocks, healthcare, insurance and the likes of good old IBM (that currently pays a hefty 4.5% yield) are able to lead a sustainable market rally.
The DJIA is full of such safe haven stocks with high earnings stability – the very sectors that the money of the whole mutual fund industry hides in once the going gets tough. A strong rally in them in the context of more risk-on industries lagging, is definitely not a sign of a reviving market.
As the report further says, the DJIA has met the classical definition of bull market territory, after a 20% rally from the current Lows. I find this definition arbitrary.
If you want a technical definition – how about this: For a sustainable uptrend, all indices have to trend higher in concert while pulling back less successively, leading to a sequence of higher rally Highs and lower pullback Lows.
The DJIA is both the thinnest (30 stocks) and the only index to have made a somewhat meaningful move and surpass a previous downtrend rally High. And this does not even qualify as a higher High yet – first we would need to see a higher Low, catching support, and then a significant rally above this High.
The Nasdaq composite has been lagging abysmally in this rally, while the S&P 500 is reversing upon meeting its precious resistance zones. Both are not my favorite examples of a ‘broad’ index, however they are surely more broad then the DJIA.
You can look at the Dow Transports, which is to some analysts more ‘closely’ related to the DJIA. The Transports have not even confirmed the DJIA in the short-term trend.
A lot of hot air in this rally, and that’s about it. As much as “Bank of America Corp. is betting that biggest losers may be poised for a rebound”, I’m not interested in losers.
I’m interested in the winners. And those tell me that the pendulum is starting to swing the other side soon again. Let’s see how markets react to next week’s central bank ‘talkshow’ and inflation data.
Because of course, there is always a chance that this rally could melt up further – we’re talking about human psychology here. But the odds are highly stacked against it.
Unless strong leadership shows up, I’m expecting more downside in Q1 2023.
