Market Update
Market Edge

Market Update Week of November 21st, 2022

Money should be in a cash (money market) position.

Visioning through the Smoke and Mirrors

Although we have witnessed an impressive rally over the past few weeks, the week just ended (11/18/22) saw a noticeable decline. Not noticeable in that there was a large point decline but the nature and causes of these declines and that they happened at all.

The S&P 500 was down just shy of ¾ % by week’s end but is standing below its 200-day moving average. Without getting technical here, simply put when a commodity (in this example the S&P 500) is trading or standing, below its 200-day average, it is considered a ‘bearish signal’.

You’ll recall that last week (11/14/22) we wrote that retailers might see a strong holiday season and early indications are that it is now beginning. Walmart had struggled earlier in the year but saw a decent increase in profits this week. We saw Macy’s share price rise 15 % while Bath & Body Works rose more than 25%. By next week’s update, we’ll be able to gauge this observation more accurately due to the upcoming Black Friday sales. Stay tuned for that news.

Hiding in Plain Site

The Federal Reserve continues to lay it on the line despite the false hopes abounding on Wall Street that they will slow down their rate hikes or at least not be so aggressive with them.

On Thursday, St. Louis Fed president James Bullard said that more rate hikes were needed to bring inflation down to the 2 % inflation level which the Feds are looking for. He also said that the current benchmark rate of 3.75 % - 4 %, which has played on the minds of investors could (would?) climb to at least 5 %. Other Fed officials are voicing their opinion of a rate as high as 5.25 %. As the days and weeks go by, this concern will become a major factor in dashing a lot of optimistic hopes of investors. There’s a sense on investors part of the ‘fake it till you make it’ aspect concerning the economy but the signals being sent from so many indicators are just too hard to ignore.

It wasn’t many weeks ago when some of the largest Mutual Fund Company Portfolio Managers and large Professional Money Managers were predicting that the market had already hit bottom and was going to go up. This in itself is scary because past history has shown that when money managers become enthused – bullish on the market – it is usually appears at the top. As you’ll recall from last week’s update, much of the positive excitement was due to the CPI (Consumer Price Index) which declined a bit the previous week, however since then we’ve noticed, courtesy of AAA, that the price of a gallon of gas is now at $4.25 nationally. Some forecasters did not see this price of $4.25 – which was considered a peak - until May of 2023! When this latest price jump becomes factored into the next CPI report, this along with other factors may likely cause a pullback from investors due to the upward adjustment of the CPI.

Learning From the Past

In 2005 the economy was showing every indication of a slow-down, yet the S&P 500 showed a return of 4 % that year. Modest but welcome. This was primarily because the housing market at the time was still red-hot and would continue that way until 2008. Although the employment numbers are now the sector responsible for the economy’s tenuous stability today, the housing sector is showing a high degree of anemia.

Mortgage rates fell a bit this past week to a national average of 6.5 %, still high compared to a year ago. The housing market continues to show continuous weakness, and those families that could afford a $1,200 per month mortgage payment just a few months ago are not able to do so now at $1,800 per month. In our opinion, by summer of 2023 we will be witnessing a ‘Buyers’ Market’ which of course is a reversal of the trend formed over the past few years of a ‘Sellers’ Market’, when bidding wars were common allowing many homeowners to sell at a higher asking price.

Emotional excitement

These past few weeks have tested those investors who trade on emotions. Throughout this website we talk about the danger of trading on emotions and yet there is no cure for the human condition or spirit. Witnessing the kind of rebounds that have taken place test most everyone’s discipline. Yet, as we continue to track the numerous indexes, indicators and fundamentals, we see that the trend continues to show a ‘Bear Market Rally’ taking place. When this will end once and for all is still a question, and one we will continue to analyze carefully.

There is also a danger, known as a ‘Whipsaw’, where markets can turn negatively very quickly. Being exposed in a market like that is very dangerous. We just cannot overlook what the various numbers are showing us so therefore we remain cautious.

Final Comment

In closing this week’s Market Update, please keep in mind that Wall Streeters do not seem to have accounted for a recession in their present thinking. If a recession happens, which at this time seems very likely by next summer, we will see some true ‘gnashing of teeth’ by over-zealous, over-exposed investors. What many market enthusiasts seem to have done is an awful lot of assuming which, as we’ve seen, has caused the markets to rebound slightly.

Our analysis continues to see the S&P 500 make landfall around the 3,300 mark (as of 11/18/22 current S&P 500 – 3,965) in the coming weeks or months at which time a Panic Bottom will cause investors to finally say “Enough is enough!” and no longer find excuses to stay in the market.

There will be a time to reenter the market (and with more money which was safely tucked away in cash) but for now our recommendation continues to be to stay in (or move into) a cash (Money Market) position.

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