December 18, 2022
Weekly Market Outlook
By Keith Schneider and Donn Goodman
Gaugers, we hope you are getting ready for a great Christmas (or Hanukkah) holiday. Lots to cheer about, and we are certainly blessed to have you all in our lives. We wish you and your families a joyful holiday season.
This week started off in a positive fashion. On Tuesday, before the open, the CPI (Consumer Price Index) came in less than expected at 0.1% for the month of November and year-over-year of 7.1%. The tape (market) became frantic in celebration. This sent the Dow up over 700 points right out of the gate. The shorts were covering in a fury… and then…
The fade kicked in. The opening gap up was filled by midday.
However, when the market closed on Tuesday, the positive bias remained. While the gains were diminished, they were positive nonetheless, and this led writers to say, "The Fed can now pivot."
These past few weeks, we have been sharing charts, graphs, and commentary from numerous sources showing the positive seasonality that exists. Especially compelling have been the historical studies showing that after a midterm election of a first-term President, the stock market has an upward bias. We have also shared tables showing that when the market is down more than 15% at this point in the year, the next 12 months are typically favorable. In case you want to reread or review these recent Market Outlooks, here is the link to the archives.
We want to believe these seasonality charts and positive market prognosticators. We are waiting patiently for the Santa Claus Rally that is supposed to arrive.
But that was not the case on Wednesday when Chairman Powell announced that the Federal Reserve was ONLY raising rates by 0.50% (50 basis points). The market remained strong, up over 1%, as investors believed this meant the Fed was almost done with its hawkish activities. Then…
The Chairman spoke at his Press Conference. Here are his exact words:
"We're into restrictive territory," Fed Chairman Jerome Powell told reporters in Washington. "It's now not so important how fast we go. It's far more important to think what the ultimate level (and) is how long do we remain restrictive."
"There is a strong view on the committee that we'll need to stay there until we're really confident that inflation is coming down in a sustained way and we think that will be some time," Powell cautioned.
The stock market sold off hard. The bond market remained steady, especially the long end of the curve.
The Fed is Raising Rates at a Furious Rate (this will always have a negative effect on stocks)
The Fed is very aware that its hawkish plan will likely cause pain to consumers. However, it is tasked with getting inflation back down to 2%, and now everyone is acutely aware that it will do what it takes to get it there. We have often commented during late 2021 and most of 2022 that inflation is an insidious and punishing cost on 90% of society. It was reported this past week that a majority of Americans are living paycheck to paycheck and many folks have begun to reduce their consumption habits, including spending at restaurants, retail purchases (apparel), and travel.
Hawkish Rhetoric Followed by Bad News (the full reports can be accessed in blue)
On Thursday, the November retail sales report was unexpectedly weak, prompting concern over the health of the U.S. consumer, which has been the driver of a better-than-expected economy this year.
Friday stocks sank on the report of more downbeat news on the U.S. economy. The latest leg lower for stocks followed preliminary readings on economic activity from S&P Global, which showed a further deterioration in business activity in December. S&P Global services PMI fell to a four-month low, while its manufacturing index hit a 31-month low in December.
Here is the essence of what it said (click on the links in blue type above if you wish to read the whole report):
"Business conditions are worsening as 2022 draws to a close, with a steep fall in the PMI indicative of GDP contracting in the fourth quarter at an annualized rate of around 1.5%," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "Jobs growth has meanwhile slowed to a crawl as firms across both manufacturing and services take a much more cautious approach to hiring amid the slump in customer demand."
The Dot Plot
Basically, the Fed drew up a new dot plot. For those that may not be familiar, the dot plot is a Federal Reserve forecast of where they see the overnight lending rates headed.
Prior to Wednesday's Fed meeting, most investors had believed that the upper level for the Fed overnight level was 4.8%. With these 7 rate hikes in 2022, (25, 50, 75, 75, 75, 75 and now 50 bp) we are 4.25%, and most people figured that was more than enough and that the Fed might even take a pause. With the new language, the Fed is likely to raise a few more times in 2023 and get close to the 5.1% mark they have now forecasted in their revised dot plot.
Of course, the market would not take kindly to this language. Here is what Yahoo Finance had to say about the Fed's revised and more hawkish sentiment:
As Yahoo Finance's Myles Udand laid out in Thursday's Morning Brief, Fed Chair Powell strained credulity at his latest press conference while attempting to make the case for a potential soft landing next year that sees inflation come down without the economy contracting.
Powell struggled to fit the FOMC's own predictions about the economy next year into a narrative that avoids a hard landing — or recession.
Powell hammered home the strong job market and didn't mince words when he said, "There's an imbalance in the labor market between supply and demand," noting that it will take a "substantial period" to get the labor market back in equilibrium.
Why You Should Not Be Surprised
We realize that you read, watch, and hear a lot of differing commentary throughout your day, week, and month. Understandable. We would like to encourage you to pay more attention to MarketGauge's Risk Gauges and our weekly narrative, especially the Big View commentary and the video, both produced by Keith. They are insightful and provide actionable ideas. More importantly, if you followed our guidance, you would know that we have been right on this year (not bragging, just being accountable and honest). This is our job, our daily motivation, and our passion. We want to help you protect and grow your $.
How Did We Know?
We realize that daily access to these gauges is restricted to Big View Premium members, but every weekend in the Big View section of this commentary we state their reading.
They are extremely accurate and very prescient. In 2021 they kept forecasting that market difficulties lay ahead. We were often troubled that the markets were going up and the Gauges (and our indicators) had turned negative.
Then came 2022. We have been "out of the market" more than in it during this year with our Alpha Rotation strategy. Recently, our indicators moved us into bonds (TLT). Again, this has been a prescient move to take advantage of lower long-term interest rates. (Long-term rates are now forecasting that we are headed for a major slowdown/recession and then possible rate cuts in the 2nd half of 2023).
Here is a recent picture (this week) of the Risk Gauges:
All of us have been around a long time in the investment industry, and I can attest to you that our Risk Gauges are about as good as they come in determining Risk On or Risk Off. Use them. Trust them.
Other Indications that We Could See Stock Prices Fall
Like you, we are constantly watching and evaluating the ongoing fiscal, monetary, and momentum indicators. We certainly benefit from the number of tools we have at our disposal. Moreover, we have quant models and proprietary indicators that give us a good roadmap. We also look at other inputs. We thought we might share just a few of the other important tools we look at daily:
PMO (Price Momentum Oscillator)
Our friends at Decision Point have done a great job of identifying turning points in many of the major market indices, ETFs, and individual stocks.
Here is the recent chart on the S&P 500. Notice the PMO's cross indicated that the top was in place just a few days after the high day. It also remained bearish during the SPY's subsequent attempt to rally.
The PMO indicates a slowing momentum when the black line moves below the red line (see chart below):
Bearish Investor Sentiment
Another valuable perspective comes from Bespoke.
They publish the AAII (American Association of Individual Investors) Investment Sentiment charts showing the Bullish, Bearish and Bull-Bear Spread. Clearly, right now, individual investors share in an expectation that the market is due for more volatility and potential chop. Check out the charts below with their most recent readings:
Bullish Sentiment: (reading of 24.30 is historically low)
Bearish Sentiment: (reading of 44.6 is historical on the high side)
Bull-Bear Differential: (reading of -20.30 is very bearish sentiment)
Why Bearish Sentiment May Not Be Good News
According to some sources, we have been so persistently bearish that this may signal a bottoming process. One MarketGauge takeaway about this: we have not been in a rapidly rising interest rate environment for 40+ years. Therefore, we may be in uncharted territory right now. However, see one perspective in a chart below:
Households still hold too much of their assets in stocks. This is according to analysts who track individual investors. They monitor not only the individual investor sentiment towards stocks but also the number of stocks currently owned by the individual "household" and not institutions (pension and sovereign wealth funds). One such indication is below. When households begin to liquidate their holdings and "throw in the towel," this tends to indicate we are at or near the bottom. We are not there yet. (We suspect the past few years had been so good that people are afraid to sell their long-term holdings with large capital gains... this may be a mistake):
One of Our Favorite Indicators
As noted above, there are many tools and indicators we use at MarketGauge (hence the word Gauge in our name), and one of the best is to watch a sophisticated rolling average of the number of stocks above their 50-day moving average for each of the indices (Dow, QQQ, NYA and S&P). As a validation, we like to be invested when the number of stocks above the 50-day has bottomed and begun to turn up. Also, investing when the bars are blue is the "safe zone," but as they turn (as they did this past week) we want to be in cash or bonds seeking safety. These charts are very predictable and will soon be available in our Big View section.
Here is one example of these valuable charts. (We also watch stocks above their 20-day and 200-day moving averages for additional inputs and confirmations).
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