These last 8 weeks have seen a classic Bear Market rally. Since mid-October the markets seemed to have shed any semblance of rationality despite ominous portends for the upcoming year. Recession fears continue to stay strong and the proverbial ‘Santa Claus Rally’ – what many believe happens the week leading up to Christmas (while others believe the week after Christmas – go figure) is in grave danger of not showing up.
The Dow Jones - comprised of 30 companies - is down 7% year-to-date, however when we view the market on a more-than-superficial level, we go straight to the index that projects a better gauge – the S&P 500. Made up of 500 of the largest companies in the US, the S&P 500 is off 17% YTD!
Before we go on, let’s make clear a point that most of us know – bad news sells. It’s easy to get people’s attention when you scream that the sky is falling however when there are indicators that signal downturns or continued economic uneasiness they must be reported. This is called transparency and as we pointed out last week, too many of the brokerage backroom bean-counters, who see the same numbers that we do, are encouraging their investors to buy when they clearly see signals that are not conducive to do so.
Moving on however, we also wrote last week that the Producer Price index (PPI) would be issuing its report which it did this past Friday (12/9/22). Despite assumptions that it would provide further proof that inflation was under control (with the results that the Feds need not be as aggressive toward rate hikes), the fact was that the opposite happened hence the downturn in the equity markets. The adjusted rate of 0.3% for November took many by surprise as the street was looking (assuming) there would not be an increase over October’s of 0.2%.
On Tuesday (12/13/22) another important report, the Consumer Price Index (CPI) will be issued. The CPI will further clarify if inflation, the Federal Reserve’s main boogeyman, is subsiding. If this indicator comes in hotter than expected, let’s say higher than 8.7% (its previous number) a sell-off would be quick, steep and painful.
There are two sell signals we’ve observed – the S&P 500 (based on the 200-day moving average) and from the Russell 2000 Small Cap Index. We’ll continue to monitor them along with the rest, but these are indicating strong bearish signs.
We’ve also monitored consumer spending which is primarily being done through borrowed money. Credit cards, auto loans, mortgages (the current national rate now at 6.41%) and personal loans. People will always borrow but what is a bit disconcerting is that this borrowing is being done at a level not seen in years.
Technology stocks have had a rough go of it in 2022 and the trajectory continues in the same manner as we pointed out last week. The NASDAQ 100 Index continues to trade near its Bear Market lows. Small Cap funds (Please refer to the Glossary found in the ‘About’ section) was down 5% this past week.
The upcoming week could be a pivotal one for the market, especially if the CPI were to jump higher than 8.7% as we’ve written above. Based on a number of the indicators we follow; it is our opinion that the market has topped out and is headed south. The Federal Reserve has been fairly open about a ½% rate hike at this weeks Federal Open Market Committee (FOMC) meeting. Although it seems to us that this number will hold, if the CPI number were to present an alarm bell the Feds could certainly go with a ¾% increase. We won’t speculate the chaos if that were to transpire.
Despite the many pundits calling an end to the Bear Market these last few months, we remain convinced that this end will not be realized until a Panic Bottom – where investors finally throw in the towel and sell - is reached. When that happens, it will be a golden opportunity to reenter the market. The good thing is that because you are a subscriber, you were able to have more money to reinvest because your money was safely tucked away in cash. Remember – it’s not what you make, its what you keep that counts. We have been consistent in our judgement that this Panic Bottom will not occur until the S&P 500 drops to @3,300. Friday’s S&P 500 close was 3,934, therefore a possible drop of an additional 16% is possible.
Wishing, hoping, If only's and what if’s are based on emotion and you know that we follow the numbers, the indexes, the trend, the fundamentals, not emotions. So, for this week – December 12th, 2022 – our position is:
Bearish
Money should be in or transferred into Cash (Money Market).
