The Bad News Bulls

By Pete Biebel, Senior Vice President

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Following the explosive, firecracker rally in the week leading up to the holiday weekend, last week’s four sessions were a bit of a dud. For the major averages, it was the narrowest range week in months and the second-narrowest weekly range of the year. But it could have been worse. In a week in which a notoriously dovish Treasury Secretary was suddenly more hawkish, a major bank CEO warned us that we should brace ourselves for the coming economic hurricane and a major electric car company CEO revealed that he had “a super bad feeling” about the economy, the mood of the market was just bullish enough to defuse the bearish news.

For the week, the major averages had net losses of right around 1%, a drop in the bucket compared to the 6% to 7% tidal wave of gains they tacked on in the prior week. And last week’s small declines were entirely the result of a weak session on Friday. And much of Friday’s losses could be blamed on an ugly day for two of the market’s largest and most visible stocks: Apple Inc. (-3.9%) and Tesla Inc. (-9.2%). The Energy sector led all U.S. equity sectors with a gain of a bit more than 1% for the week. Only the Industrials sector was also able to boast a gain for the week, though its 0.08% advance wasn’t much to brag about. Within Industrials, Freight and Logistics, Railroads and Trucking companies were the leading subgroups.

The paradox for market watchers now is whether the net gains of the past few weeks mark the beginning of a new bull market or are the averages simply enjoying an overdue bounce that will ultimately prove to have been just a temporary rally in an ongoing bear market. Three weeks ago, in my most recent article, I pointed to the market’s extremely oversold condition and suggested that “a rebound rally (likely a fairly steep rally) is probably in the near future.” Later in the article I wrote, “SPX ended last week just above 4000; climbing into the 4150 – 4200 range on a rebound wouldn’t be unusual.” SPX climbed to 4158 as of the Friday before the long weekend and touched marginally higher highs near 4177 last week.

While I anticipate that the S&P 500 Index (SPX), which ended last week near 4109, will have difficulty gaining much traction above the 4200 level, there are several reasons to expect more upside progress in the coming weeks, perhaps into the 4200 – 4250 range. First, the objective of a bear market rebound is to rally to the point that almost “everyone” believes the bear market has ended. Which leads to… Second, “everyone” is still, or is now, bearish. Even several analysts, who a few months ago were projecting that SPX would end the year above 5000, are now calling for lower lows. And third, the ability of the bad news bulls to help the market avoid an immediate reversal after the big rally week, in spite of some ominous headlines is a positive development.

So, while I expect the market averages are still likely to trade below their late-May lows in the months ahead, the current reprieve could drag out for a few more weeks. If the market is going to ease back a bit before trying another leg higher, then we’ll want to see SPX avoid falling too much below the 4075 level. Falling to just below 4000 would be about a 50% retracement of the recent rally, which, under bull market conditions would be acceptable, but which, in the current environment would be the make-it-or-break-it level for the rebound rally.

Three weeks ago I wrote, “While it might still be too soon to go aggressively shopping for bargains, it’s probably not too soon to begin browsing.” Now that the averages have had a sizeable rebound, it seems to be a good time to hit “Pause” on any bargain-hunting buying and hit “Fast Forward” any cash-raising liquidations that you were regretting not doing sooner a few weeks ago. Many attractive alternatives to the U.S. stock market are now available. We’re being repeatedly reminded that “T.A.R.A.” has replaced “T.I.N.A.” The free-money, zero interest rate environment that created the “There Is No Alternative” to U.S. equities binge is gone. Now, for the first time in years, “There Are Reasonable Alternatives” to the U.S. stock market. One example: municipal bond funds now offer their most attractive taxable equivalent yields in more than a decade.

Date Report Previous Consensus
Monday 6/6/2022 No Reports Scheduled
Tuesday 6/7/2022 International Trade, Trade Deficit, April $109.8B $90.2B
Consumer Credit, April, M/M $52.4B $31.7B
Wednesday 6/8/2022 Wholesale Inventories, April, M/M +2.3% +2.1%
Thursday 6/9/2022 Initial Jobless Claims 200K 210K
ECB Policy Announcement
Friday    6/10/2022 Consumer Price Index, May, M/M +0.3% +0.7%
CPI ex-Food & Energy, May, M/M +0.6% +0.5%
CPI ex-Food & Energy, May, Y/Y +6.2% +5.9%
Consumer Sentiment, June 58.4 58.5

 

Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market.