Momentum Monday – Another Bear Market Rally?

MarketSmith powers the charts in this video

Financial markets strive to live in the future and anticipate events that haven’t happened yet. Last Thursday, the consumer inflation data came at the still-high 7.7% level but it was a little bit below mainstream estimates. This was enough to spark a rally of epic proportions, just like the one we saw in early summer. The rally that started in late June lasted until mid-August and brought some significant opportunities, especially among the most shorted names at the time. Are we currently experiencing something similar? After all, stocks tend to do well post-midterm elections. The market is betting again that the Fed will slow its rate increases. It is currently pricing a 50bps rate increase in December, not a 75bps. Will the market end up being wrong again in mid-December? Maybe, but there’s a long time until then and we can enjoy a rising market. 

Let me make one thing crystal clear. I don’t have the illusion that the latest lift in stocks is anything more than just another bear market rally but that doesn’t mean that it can’t continue much longer than most expect and that you can’t make money in it. Bear market rallies are powerful and can lift all boats, not equally. The first stage is led by the most shorted and the worst-hit stocks. If there’s a second stage, the new leaders step up and outperform. The one drawback of the current push higher is that metals and other commodities are leading which means that inflation expectations will remain elevated and the Fed hawkish. The last FOMC meeting for the year is on Dec 14th. I suspect, most stocks will rally until then. Maybe, there could be a selloff in a week or so before it as some market participants will expect the Fed to remain on its current tightening warpath and take profits preemptively.

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