Back in the Addle Again

Aug 15, 2022

By Pete Biebel, Senior Vice President

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The market averages galloped higher again last week, extending their gains from the mid-June lows. The major averages all tacked on about 3%, give or take, for the week, spurred higher primarily by news that inflation may have peaked. A market that looked like it was headed for the glue factory a couple of months ago, has morphed into a rampaging stallion. The nagging question now is whether the lows have been seen. Is this still a bear market or has a new bull market begun? More on that in a minute; I don’t want to put the cart before the horse.

Stocks stumbled coming out of the gate last week. After an initial surge higher, the averages faded through the balance of Monday and Tuesday and were actually slightly in the red for the week at Tuesday’s close.  Wednesday brought a horse of a different color. Early that morning, the much-anticipated CPI data for July was reported. On every metric, the rate of inflation was below consensus expectations: Headline and core, month-over-month and year-over-year. Many market participants had been fearful that the report would indicate stampeding inflation; when more reined-in numbers were reported, the market rejoiced.

Recall that, following the big gains in late-July, the averages had been corralled in relatively narrow trading ranges through early-August. The S&P 500 Index (SPX) had been confined to a tight range in the low-4100s for the previous eight trading sessions. Following the CPI report, traders were champing at the bit; stock index futures shot higher. When the opening bell rang, the averages hurdled out of their old ranges and didn’t look back. SPX ended the day a bit over 4200.

I had been suggesting that SPX could rebound into the low-4200s.  That was based in large part on the fact that a 50% retracement of the entire move down in the index (from the January high near 4819 to the June low near 3637) would take SPX to the neighborhood of 4228. The charge higher on Wednesday lifted SPX to near the lower end of that area; how the market acted with respect to that key level over the next few sessions would be revealing.

Initially, it seemed that the market didn’t care about that retracement level. Thursday’s lower-than-expected PPI numbers spurred the market higher again. SPX vaulted into the low-4250s in the opening minutes but faded over the remainder of the session, ending the day near 4207. Perhaps that 4228 level was significant after all. But any hope that the 50% retracement level would be respected was dashed Friday morning with another gap-up opening, which turned into an all-day rally. All the averages ended at their highs of the day and the week. They all reached their highest levels in three months or more. SPX closed near 4280.

Every U.S. equity sector had a gain for the week of more than 1%. The rebounding Energy sector was the winner, gaining 7.66%. The Place and Show trophies went to Financials and Basic Materials, respectively, in a close race; both were up more than 5%. Healthcare and Consumer Staples brought up the rear with gains of less than 2%.

Back at the June lows, the market was very oversold, and sentiment was extremely bearish. It was way overdue for a rebound rally. At that time, we reminded readers that many of the most impressive rallies occur as rebounds in continuing downtrends. Any rally coming off that low was likely to be strong enough to convince us all that the market had made a bottom. And last week’s rally seemed to convince many commentators that a new bull market had indeed been born. Headlines on Friday morning proclaimed that the NASDAQ Composite Index (COMP) had entered a bull market, having rallied more than 20% from it June low. Whether you accept that definition, keep in mind that COMP accomplished that same feat several times in the 2007 – 2009 bear market before rolling over and reaching lower lows.  In other words, it’s not unusual for the market to have one or more short-term “bull markets” within a longer-term bear market.

On a short-term basis, the market always does it’s best to addle the majority of investors. That can be most frustrating at times like this. If indeed we’re in a new bull market, I should be spending all my sideline cash on new positions. Instead, if we’re approaching a rebound peak just before another steep selloff, then I should be thinning my weaker holdings and sitting on the cash. For long-term investors, this isn’t their first rodeo. They know their patience and discipline will reward them in the long run. For investors who are anxious to throw sideline cash into the market, I would say, “Hold your horses.” The risk of waiting a few weeks for additional evidence and buying higher is much less than the risk of jumping in now and being wrong.

As is often the case with the stock market, the available evidence is all arbitrary and circumstantial, and subject to outside surprises. While it’s true that the rally has been on relatively low volume and that the speculative pockets of the market that have seen the largest gains, those are merely mildly negative factors. On a short-term basis, the market averages have rallied themselves into an overbought condition. Something a bit more concerning is that the volatility index, VIX, has fallen to its lowest level since early-April, which coincided with the top of the late-March market rebound rally. One other arbitrary bit of evidence is that, so far, there really haven’t been any reasons for the bears to sell. Until the averages begin breaking uptrend lines and making lower short-term lows, there won’t be much to generate selling pressure.

Now, with SPX having blown through its 50% retracement level, the bears have precious little room for any more horsing around. The index’s 200-day moving average is a mere 1% above Friday’s closing level, and the next key retracement level on SPX is just 2% higher. The bears will be hoping the market takes a breather for a week or two. That would at least establish a trading range, which in turn could provide some tradable levels for the bears. During that stretch, SPX could climb into the mid-4300s without generating any additional anxiety for the bears but climbing above 4400 would be devastating for the bears and a joyous development for the bulls.

The stampede of earnings reports in recent weeks is winding down; we’ll see many fewer announcements this week. Likewise, the number and the potential significance of this week’s economic reports pales in comparison to recent weeks. We can expect a brief flurry of volatility around the Wednesday afternoon release of the minutes from the most recent FOMC meeting.

Date Report



Monday 8/15/2022 Empire State Manufacturing Index, August



Housing Market Index, August



Tuesday 8/16/2022 Housing Starts, July, SAAR



Housing Permits, July, SAAR



Industrial Production, July, M/M



Wednesday 8/17/2022 Retail Sales, July, M/M



Retail Sales ex-Vehicles & Gas, July, M/M



FOMC Meeting Minutes
Thursday 8/18/2022 Initial Jobless Claims



Continuing Claims



Philadelphia Fed Manufacturing Index, August



Existing Home Sales, July, SAAR



Leading Indicators, July, M/M



Friday 8/19/2022 Stock & Index Options Expiration


Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market