- Moving the markets
The stock market bulls were in full force today, as they shrugged off the Fed’s hawkish hints and drove the indexes higher for the fourth day in a row. They were betting that the central bank had finished raising interest rates for 2023, after seeing some signs of easing inflation in the latest data.
The rally was broad and strong, with all 11 sectors of the S&P 500 and the equally weighted index joining the party. The tech sector was not the only star of the show, as some of the most beaten-down sectors like energy and financials also bounced back thanks to a short squeeze assist.
The bond market also rallied, sending the 10-year Treasury yield down to 4.669%, after it had spiked above 5% last month.
However, not everything was rosy in the market, as some earnings disappointments dragged down some individual stocks. Moderna shares plunged 10% after reporting a huge third-quarter loss, while SolarEdge dropped 15% after missing expectations and lowering its outlook. These results reminded investors that the pandemic was not over yet, and that some sectors were still struggling to cope with the challenges.
Some analysts were also skeptical about the sustainability of the rally, pointing out that the Fed had not ruled out a rate hike in December, and that inflation was still a major threat to the economy. They argued that Wall Street was too optimistic about the Fed’s dovish stance, and that the market would be setting itself up for a rude awakening if the central bank changed its mind.
My view is that this rally was just a rebound from a very oversold condition, and that it had not produced any new gains for buy-and-hold investors.
In fact, the S&P 500 was still higher on September 22, when our Trend Tracking Index signaled a “Sell,” than at today’s close. As trend followers, we are still ahead of the game, and we will wait for another buy signal before re-entering the market.
So, is this rally a real recovery or just a bear market trap? Will the Fed surprise us with a rate hike in December or stay on hold? Will inflation cool down or heat up again? And most importantly, will Santa Claus bring us a gift or a lump of coal this year?
These are some of the questions that are on my mind.
2. “Buy” Cycle (12/1/22 to 9/21/2023)
The current Domestic Buy cycle began on December 1, 2022, and concluded on September 21, 2023, at which time we liquidated our holdings in “broadly diversified domestic ETFs and mutual funds”.
Our International TTI has now dipped firmly below its long-term trend line, thereby signaling the end of its current Buy cycle effective 10/3/23.
We have kept some selected sector funds. To make informed investment decisions based on your risk tolerance, you can refer to my Thursday StatSheet and Saturday’s “ETFs on the Cutline” report.
Considering the current turbulent times, it is prudent for conservative investors to remain in money market funds—not bond funds—on the sidelines.
3. Trend Tracking Indexes (TTIs)
Traders and algorithms, fully convinced that the Federal Reserve will not increase interest rates further this year, have pushed the major stock indexes up for the fourth consecutive day. This surge in market activity is being interpreted by some analysts as a precursor to the traditional year-end ‘Santa Claus rally.’
Our TTIs have shown significant improvement, yet they still indicate a bearish trend. However, it appears that the international index may soon shift into bullish territory if the current upward trend persists.
This is how we closed 11/02/2023:
Domestic TTI: -3.67% below its M/A (prior close -5.76%)—Sell signal effective 9/22/2023.
International TTI: -1.01% below its M/A (prior close -2.78%)—Sell signal effective 10/3/2023.
All linked charts above are courtesy of Bloomberg via ZeroHedge.
Contact Ulli