MarketSmith powers the charts in this video
There was a whole lot of buying in the market in the past week or so. The bulls have been on fire ever since January 6th, when the employment report showed a slowdown in wage growth. It’s an important metric for the Fed and it might signal a potential pivot down the road.
The price action is bullish so I’ve been trading mostly on the long side. I am skeptical that this is anything more than a bear market rally but I am not going to argue with the market. I’ll dance until the music is playing. You might be wondering why is the stock market rallying. Aren’t people still talking about the possibility of a recession later in the year? A big reason behind the equities rally is the weakness in the US Dollar. The bullish scenario is that China is reopening and stimulating its economy, Europe didn’t fall apart due to high energy prices, the Fed is likely to significantly slow down its rate increase and likely stop the raises soon, and the economy might get a soft landing – meaning very low growth instead of a recession.
So what’s the bearish scenario, you might be wondering? China’s reopening, Europe still keeping interest rates low, still low unemployment in the US despite massive layoffs, and the stock rally that we are currently experiencing can lead to sustained inflation or at least the perception of one. If nothing is broken in the economy and inflation is not back under 2%, the Fed has no reason to pivot. It is likely to remain hawkish longer which historically hasn’t been favorable to stock prices. We will worry about that when it matters which is when prices start to fall again.
In the meantime, the earnings season has just begun. Banks like JPMorgan, Bofa, and Citi beat estimates on Friday. Initially, they gapped down 3-4% on comments about a potential slowdown in the economy, but the dip was quickly bought. The market reaction is an indication of the current sentiment. Let’s see what Netflix and Goldman Sachs bring this week.
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