Two Weeks Later...and Another Inflection Point

Table of Contents:

1)  No matter what happens in the short-term, the stock market still has a lot more “normalizing” to do.

2)  The chip stocks are breaking out.  Any further upside follow-through will give us confirmation.

3)  Who has noticed that the XLK tech ETF is within a whisker of its all-time highs???

4)  The trend for bond yields is still up (and the 2yr note yield is testing its 2023 highs!)

5)  Updating the charts on the major averages.  Very close to confirmed upside breakouts for the SPX & NDX.

6)  The action in the XLY consumer discretionary ETF should be important going forward.

7)  What are the stock markets in South Korea and Europe telling us right now?

8)  Crude oil should see a short-term bounce, but it may not last very long.

9)  Potpourri….….Economy, markets, politics, geopolitics, Veterans…and football!

10)  Summary of our current stance.

1)  Although the action over the past two weeks doesn’t guarantee a further rally, it certainly bodes well for one.  However, the era of “free money” is over…and a big divergence still exists between the bond market and the stock market.  Therefore, the “normalization” process for the stock market still has a long way to go before it’s over.

 No matter what happens over the near-term (over the rest of this year), our stance has not changed on the intermediate-term potential for the economy and the stock market.  We still strongly believe that the significant change in Fed policy…which has already produced a substantial “normalization” in the Treasury market…will cause a lot more “normalization” in the stock market and other risk assets.  The divergence between the bond market and the stock market is still extremely wide, so now that the era of “free money” has been pushed behind us, these other asset classes are going to have to adjust to this fact…even if they do so begrudgingly.

 None of this means that the stock market cannot rally further before it resumes its “normalization” process.  It also does not mean that something resembling the era of free money cannot make a comeback at some point in the future.  It’s just that it is our opinion that this won’t happen until the after the economy slows dramatically…or something else “breaks.”  Thus, it is very likely that any return of that free money era will not come until the stock market has fallen in a substantial manner. 

 We acknowledge that the employment picture remains strong…and that this will help buoy the consumer for the time being.  However, it’s going to be very difficult to keep employment chugging along.  It’s not like the end of “free money” has just made high valuation levels much harder to justify.  It also leaves a lot less money in the economy for innovation and new business development.  Just look at the private equity industry.  The value of PE deals has fallen by more than 50% this year…and the average value of those deals is at its smallest level since the Great Financial Crisis!

 Remember when SVB went under?  The reason for their failure really had to do with the fact that a huge number of start-ups couldn’t get more money from their PE firm to pay their staff and keep the doors open.  The end of the free money era meant that these PE firms no longer had the piles of cash to handout any longer…every time one of the start-ups needed a new influx of money.  Therefore, many these startup companies had to go to SVB (and a small number of other banks) and withdrew money from their bank accounts to meet their payrolls, etc.  Since so many of them had their money at a very small number of banks (especially SVB), it turned into a “run.”  In other words, the “run” did not start because people were worried about being able to get their money out.  (Yes, that IS DEFINITELY what happened before long, but the initial “run” took place because the money from PE’s that start ups had become so dependent on…had dried up.)

 This example is a great one in terms of showing people that the end of the free money era is having a much bigger impact than just making it tougher to justify very high valuation levels.  It’s having an impact on the economy…and will continue to do so in the future.  There just isn’t going to be as much innovation as there has in the past…because there won’t be as much money to fund it. 

 Of course, another issue we’ll have to worry about in the future is the amount of debt is coming due.  It’s great that households have really low mortgages that they can hold onto for years (even decades).  However, that’s not the case for many companies.  As we’ve all heard and read for months now, $1.8 trillion of U.S. corporate debt will mature in 2024 and 2025.  With long-term yields having skyrocketed in the last 2-3 years, costs are going to rise in a big way over the next 24 months.  Sure yields are down from their 5% highs of a couple of weeks ago, but the drop to 4.6%...or even 4.3%...is not going to be anywhere near close enough to change this situation very much at all.

 On top of this, there is a tidal wave of debt coming due in commercial real estate.  We won’t bore you by reviewing the details of this situation…which has been covered ad nauseam all year.   However, just because it hasn’t had a big impact on the markets yet…does not mean it won’t in the future.  So, there’s little question in our minds that this is another issue that will create big headwinds for growth next year.  Finally, as a lot of well known and extremely successful Wall Street titans have been saying recently, there are a lot of reasons to worry that the U.S. national debt…and how we’re going to fund it.  Last week’s horrendous 30-year auction results were a good advertisement for these concerns…as was the fact that Moody’s downgraded the outlook for U.S. debt. 

 We’ll finish this first point by highlighting some very similar to what we highlighted last week.  Last weekend we mentioned how we loved the fact that Stan Drunkenmiller talked about the idea that the bond market was pricing in the end of the QE era, but the stock market had not yet…which is something we had been harping on for many months.  This past week, we heard from money manager (and member of the Berkshire Hathaway Board), Chris Davis…who espoused many of the same thoughts we have been saying along those same lines as Mr. Drunkenmiller’s comments. 

 Mr. Davis said that we’re in the early innings of the unwinding of the excesses in asset prices that have evolved while the price of money has been kept artificially low for over a decade.  The reversal of the misallocation of capital that has taken place for many years is going to cause some “strange things to happen.”  He repeated our oft-mentioned call that we’re not going back to what we’ve seen over the last decade....and that there is an “enormous amount of risk that needs to be re-priced with the change in the cost of capital to a higher level.”

 Regular readers of our work know this is something we’ve been saying for a very long time.  Therefore, we believe that if (repeat, IF) we get a further year-end rally over of the coming weeks, it will be a good opportunity to raise some cash...and get more defensive.  That won’t be easy for institutional players in a year that has been such a good one in the stock market.  However, it’s something that individual investors should seriously consider…and it’s something that institutional investors should have a game-plan for…when we move into the new year.   

 2)  As much as we are concerned about the intermediate-term picture for the stock market, we must admit  that the action over the last two weeks is the kind that is usually followed by some upside follow-through (even if it doesn’t come immediately).  On of the best examples of this performance is the action in the SMH semiconductor ETF.

 Maybe the most bullish development from the past week came from the chip stocks.  The SMH semiconductor ETF broke above both its trend-line from the summer highs (and thus above the top of a “flag” pattern).  It also moved slightly above its October highs…thus changing the tend of “lower-highs/lower-lows” that has existed for over four months.  The “higher-high” is only a slight one so far, so it’s still going to have to see a bit more upside follow-through next week, but this is definitely a bullish development on the technical side of things for the chip stocks. 

 On the fundamental side of the ledger, Taiwan Semiconductor (TSM) posted their first monthly sales gains since February, so we’re finally seeing some positive signs from this company.  Until recently, TSM has been talking about continued low demand for chips.  Since they’re the biggest chip company in the worlds, this was acting like a wet blanket for the group.  So, the fact that their outlook seems to be improving, it’s certainly a positive development for this important leadership group.

 Of course, saying that it “just needs a bit more upside follow-through” is just the opposite of what we said two weekends ago.  Back then, we highlighted how the SMH was testing its 200-DMA and the bottom of its downward sloping trend-channel.  Thus, we said, any further downside follow-through would be very, very bearish for the chip stocks.  HOWEVER, instead of getting any downside follow-through the group bounced strongly…and now stands 14% above its late-October lows. 

 Therefore, we don’t want to get ahead of ourselves.  Since it’s not out of the question that this group could reverse lower…as quickly as it reversed higher two weeks ago…we have to wait to see if the upside follow-through actually takes place.  Since the SMH has become overbought after this huge rally, so it would make a lot of sense if the group took a short-term breather of some sort.  However, if it can resume its rally…either immediately, or after a short-term pullback/breather…it will give the bulls more reasons to think that the recent two-week bounce will soon become a full-fledged year-end rally.

 3)  As good as the SMH has performed, the broader XLK technology ETF has been even better!  It’s now within a whisker of its all-time highs…..It is getting overbought near-term, but if it can break above its all-time highs from July…whether it happens now, or after a breather…it’s going to be very bullish.  (The fact that this shows that it’s a narrow rally once more is not good for the longer-term…but that doesn’t mean it cannot go higher over the shorter-term.)

On top of this positive actin from the chip stocks, we also need to highlight that the XLK technology ETF has already broken well above its trend-line from the July highs…above its October high…AND above its early-September high!  In fact, it’s now testing its all-time high from July!!!  That’s right.  Even though the major averages are still well below their all-time highs from a few years ago, the XLK DID break above those highs earlier this year!  NOW, it’s testing those highs once again.

 Since Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA) make up 52% of the XLK, this really shouldn’t surprise anybody.  We’ve known for a long time that this year’s rally has been an extremely narrow one, so the fact that the top-heavy XLK is hitting new record highs makes sense.  The problem is that narrow rallies are always unhealthy ones (no matter what some pundits try to say).  In this case, we think it shows that investors are not overly confident in the economy’s ability to push the entire stock market higher. 

 With MSFT hitting record highs as well last week…and AAPL & (especially) NVDA within shouting distance of their own record highs…it sure looks like the issue of FOMO is playing a much bigger role in the recent advance…than anything having to do with a brighter economic outlook.  This is especially since most of the Magnificent & is quite expensive on a valuation basis.  That means that this narrow rally is likely going to end in tears eventually.

 Having said this, none of it means that the group cannot rally further over the near-term.  If the XLK can break to new highs in any significant way, it’s going to be very bullish for the big-cap tech sector…and it’s probably going go cause the FOMO crowd to chase these stocks for quite a while longer! 

 We do have to point out, however, that the XLK is getting overbought on a technical basis. Yes, it has become even more overbought on its RSI chart before it topped out on several occasions this year, but not much more overbought.  Therefore, the group could/should see a pullback soon…before it takes a more compelling shot of breaking out to a new record high.  However, given the recent momentum in the group, anything is possible.

4)  Given the further rally in the stock market, you’d think that yields declined last week.  They actually rose last week (even a little bit on Friday).  In fact, the yield on the 2yr note is back within a whisker of its 2023 highs!....If yields roll back over, the 4.5% level will be first support, but the 4.3% level will be the more important one.  (For stock investors, be careful what you wish for.)

 It is quite remarkable to think that the Treasury market actually sold off last week…which obviously means that yields moved higher!  Given how much people were talking about how the big drop in yields has been fueling the rally of the past two weeks, you would have thought that these yields have fallen once again last week.  In fact, not only did the yield on the 10yr note and the 2yr note rise last week, they both rose on Friday as well!  Yes, the rise in the 10yr note was negligible…and the advance in the 2yr note was not big (albeit bigger than the 10yr move).  However, with the 1.5% rally in the SPX and the 2.2% jump in the NDX, you would have thought that yields had declined that day. 

 Then again, the fact that the 10yr note is still 7% below its October highs might explain some of this movement in the stock market on Friday.  However, as we mentioned earlier, it’s still 40% above where was trading last spring.  Besides, the yield on the 2yr not is now within a whisker of its 2023 highs…which is it high of the last 15 years!  (Second chart below.)  It’s great that bond yields have moved somewhat lower, but they are at levels that are still at levels that are a LONG WAY from anything we saw in 2020 and 2021…and higher than anything we’ve seen since before the Great Financial Crisis.  Therefore, we wonder why the move we’ve seen over the past two weeks would generate such a rally…if it was a fundamentally based one.  (Putting it in another way…and a much blunter way…it has not been a fundamentally based rally in stocks.)

 On the technical side of things, 4.5% is the first support level to be looking at right now.  A break below that level would take it below its multi-month trend-line from last spring.  (That level could also be seen as the “neckline” of a “head & shoulders” pattern…especially if we see a slight move higher in the first half of next week.)  However, the much more important support level comes in at 4.3%.  If you’ll remember, that was the high in 2022…so it was the breakout level earlier this year.  Therefore, that “old resistance” level is now “new support”…and any significant break below that level will be bullish for the bond market……As for resistance, the October highs of 5% is the key level to keep an eye on.  Needless to say, another “higher-high” in bond yields would not be good for the bond market whatsoever. 

 We would like to reiterate our long-held theme that says investors need to be careful what we wish for. If the 10yr yield falls below that 4.3% level…after such a big rise…it could be signaling that we’re heading into a recession, or that something has broken…or both.  If that is the case, it won’t’ be good for the stocks market.  (It’s great to hear that this them is finally becoming a common one around the Street.)…..No matter what it means for the stock market, a significant drop below 4.3% on the 10yr note will be very bullish for the Treasury market on a technical basis. 

5)  Let’s update the charts on the S&P 500, the NDX Nasdaq 100, and the Russell 2000.  The SPX and the NDX had good weeks once again.  Therefore, it won’t take much more upside follow-through (even if that comes after a short-term breather) to confirm a breakout.  However, we HAVE to wait for that breakout to be confirmed…..The Russell 2000, has a rough week, so it’s technical outlook is more hazy.

 Two weeks ago, we said that unless the stock market saw an immediate, sharp, and sustainable bounce from its current level (at the time), the market was going to be in a heap of trouble over the rest of the year.  Well, we did indeed get an immediate and a very sharp rally from that point.  Now, we just have to see if it’s going to be sustainable.  After a two-week rally, it’s not going to take much longer for us to declare that it IS a sustainable rally…and not just a head fake like we’ve seen twice before since the market topped out over the summer. 

 The odds are in the favor of the bulls, BUT we still HAVE to wait for a bit more confirmation.  Let’s face it, it didn’t look like it was going to be able to rise out of its tailspin two weeks ago, so it’s certainly possible that its upside momentum could reverse just as quickly.  For instance, the situation in the Middle East could spread in an instant.  Bond yields could jump at any time.  With the downgraded outlook of U.S. debt by Moody’s late on Friday…and the CPI data out on Tuesday morning…there are plenty of potential hiccups that could turn the bond market on a dime. 

 Having said this, we do acknowledge that the action in the stock market over the past two weeks is the kind that is usually followed by a further advance before long.  Besides, even though the market is getting overbought, it’s not as extreme of a condition as it was when it was very oversold two weeks ago.  Also, even though sentiment has become MUCH less bearish, it has not reached the kinds of extremes on the bullish side…that it saw on the bearish side two weeks ago.  Finally, even though a lot of the extreme positioning that had built up in late October has been worked-off, it’s not like people are suddenly “long” up the wazoo.  Therefore, it will likely take some sort of catalyst…some surprising development…to reverse the markets so quickly once again.  (However, since that’s not out of the question, so we cannot get ahead of ourselves.)

 On the S&P 500 Index, after breaking above its trend-line from October the previous week, this all-important index broke slightly above the key resistance level we talked about last week…its October highs of 4,400.  However, since it is only a slight break so far, it does need to see some more upside follow-through to confirm the breakout.  No, it doesn’t need a lot of upside follow-through, but it does still need a bit more of an advance to give us confirmation…….This kind of breakout move does not have to take place immediately.  It could see a mild short-term decline…in order to digest its big recent gains…and then breakout in a more significant way later on.  However, if it can move much higher than where it closed the week this past week (either now, or after a mild breather), it’s going to confirm a change in trend…back to the upside.

 Of course, it’s not out of the question that we could see an immediate/sharp and sustainable reversal to the downside…just like we did in the other direction two weeks ago.  If that does indeed take place, the first support level we’ll be watching is the 1-year trend-line from last fall (at about 4,350).  That would be followed by the 200-DMA of 4,255 (which is also a 50% retracement of the two-week rally we’ve just seen).  As we just said above, it’s not out of the question that this kind of reversal could take place, so we DO need to see a bit more upside follow-through before the bulls can celebrate in a serious manner. 

 The NDX Nasdaq 100 index has broken above its October highs…and is now testing its early September highs AND its trend-line from its January lows.  Therefore, it won’t take much more upside follow-through for the index to regain that trend-line…and thus return it to the positive trend it has seen for much of this year…….HOWEVER, it is starting to reach an overbought condition.  No, it’s not as overbought as it was at the summer highs, but it is more overbought than it was at the highs following the “head fake” bounces of late-August and early-October.  Therefore, this tech laden index is getting ripe for at least a short-term pullback. Unless that pullback is a sharp one, the outlook will be quite positive.  And as we just mentioned, any significant break above Friday’s close would clear the way for a further year-end rally…….First resistance for the NDX is 15,530 (the trend-line/Sept high)…followed by 15,842 (the summer highs).  First support is 15,190 (Fibonacci 23.6% retracement of the recent rally and the low from Thursday)…followed by 14,900 (Fibonacci 38.2% retracement.) 

 As for the Russell 2000, unlike the other two indices, this small-cap index had a rough week.  Yes, it was able to bounce a bit on Friday, but it still lost more than 3% on the week.  (It is interesting to note that its longer-term trend-line from September 2022 stopped the rally in the Russell dead in its tracks.  Therefore, it’s not out of the question that the longer-term trend-line for the NDX that we just mentioned above could provide some very tough resistance as well.) 

 Anyway, last week’s decline retraced about 50% of its recent bounce, so we’re going to have to see how thing playout next week.  However, the battle lines are VERY well drawn for the Russell…and thus there is really only one resistance level and one support level to watch over the near-term.  If this small-cap index can bounce back and takeout its trend-line from last year’s lows, it’s going to be quite bullish.  If, however, last week’s drop continues…and the Russell falls below its late-October lows…it’s going to be EXTREMELY bearish………..There WILL be a key level to watch if it can break to the upside.  (The 200-DMA is also the old “neckline” of an “H&S” pattern.) However, we won’t think about that one unless or until it can regain its 26-month trend-line. 

6)  We continue to see more and more cracks forming in the consumer space.  Consumer confidence is falling again…and stands at very low level overall.  We’ll be watching the XLY consumer staples ETF to see if this lack of confidence…and the problems we’re seeing in the credit card arena…are finally going to have an impact on the consumer during the all-important holiday selling season.

 There are more and more cracks forming in the consumer…and we hear about new ones every day.  The most oft sighted issue surrounds the enormous rise in credit card debt to all-time highs above $1 trillion…and now the big rise in credit card delinquencies.  However, the examples of the buildup of consumer stress keep growing.  Last week, we heard EBAY give negative forward guidance…and gave the weakness from the consumer as their reason (much like Walmart and others did earlier this earnings season).  FedEx and UPS are not hiring as many people this holiday season and their encouraging their pilots to take other jobs.  Friday’s U of Michigan consumer confidence number was dreadful.  Even though it remains above last year’s levels, it’s still WAY below the average of the 15 years since the Great Financial crisis. 

 It's interesting to note that the XLY consumer discretionary ETF remains well below its trend-line from its lows of the beginning of this year.  It has retraced 50% of its decline from the July highs and is now close to testing its October highs.  It has also been testing its 50-DMA over the past four trading days.  Therefore, if it can rally further from its current level, it’s going to help this key indicator for the consumer rally further into the end of the year.  However, if it rolls back over, it’s going to raise a warning flag. 

 Black Friday is still two weeks away…and it’s not as important as it used to be.  That said, the holiday selling season is still VERY important for the U.S. economy.  Thus, we could/should get some valuable information about the consumer in the weeks ahead…..What we’re saying is that we’re going to be watching the XLY very closely.  However, we won’t be doing this to figure out how the stock market is going to do over the rest of this year.  Instead, we’ll be looking at it as something that will tell us about economic growth in 2024. 

 The main thing holding up this economy is the consumer.  Sure, it will take a change in the employment outlook to signal that we’re finally going to fall into a recession.  However, if the stress we’re seeing in the credit card arena and in the auto loan market is something that is going to have a negative impact on the consumer during this holiday…even if the employment situation remains stable…it’s going to tell us that growth next year is going to be hard to come by.  That won’t be good for an expensive stock market.

 7)  What is South Korea so worried about that they felt the need to ban short selling???....Anyway, a divergence has developed between South Korea’s KOSPI index and the S&P 500.  It’s not a big deal yet, but it could signal some problems for the global economy if it continues…..Also, Europe’s stock market continues to underperform.  Is it a negative omen…or an opportunity?

 One of the strangest developments of the past few weeks was the decision by South Korea to ban short selling for six months.  This is something that we usually don’t see unless a market has been absolutely clobbered…and is down by well over 20%.  Yes, South Korea’s KOSPI index has declined 9% from its summer highs, but that is not the kind of drop that will lead to this kind of action by authorities.  Even at its lowest level of the fall, it was only down 14%...which should not be considered anything more than a normal correction. 

 We don’t know if they “know something we don’t know”…or they’re merely worried about a bigger global slowdown in global growth.  South Korea’s economy relies heavily on exports…especially to China…so maybe they’re seeing something that leads them to think that a much more significant sell off in their stock market is coming in the not-too-distant future.  Either way, it’s a very strange development….This might sound like we’re being overly paranoid, but we don’t think so.  We think it is makes perfect sense to question such a move.  It just doesn’t make much sense for them to ban short selling unless they have some sort of meaningful concerns about their stock market right now. 

 Anyway, if you look at the first chart below, you can see how strong the correlation is between the KOSPI and the S&P 500 has been over the past two years.  (The directional correlation has been very strong for decades.  It’s just that the S&P tends to see bigger moves in both directions.)…..You can also see that a divergence has developed over the past few months.  To be honest, most of the divergence came when the S&P rallied more strongly than the KOSPI during the AI craze during the spring and summer.

 However, another divergence has developed more recently…as the KOSPI’s rally has reversed quite badly over the past four trading days…falling almost 4%.  We don’t want to make too much of this divergence yet, but the fact that is has reversed so much of its big jump after the short sale ban was announced is a bit concerning.  Thus, we’ll be keeping a close eye on this market over the next few weeks.

 What we’re really trying to say is that there could be a few reasons why South Korea’s stock market moved in the opposite direction of the U.S. stock market last week…that should raise concerns about the U.S. market yet.  However, given how sensitive the South Korean economy is to the global economy…and how strongly correlated the KOSPI and the SPX are (especially on a directional basis)…this index could be very important for all investors if (repeat, IF) it continues to decline. 

 We also want to make a quick comment about another overseas market.  We’re talking about Europe.  The STOXX Europe 600 Index has lagged the U.S. market during the recent bounce…much like it has most of this year.  It stands only 3.2% above its October lows…and has retraced only about 1/3 of its decline from the summer highs (vs. a 2/3 retracement by the S&P 500). 

 This underperformance is a bit concerning.  HOWEVER, this might not be all bad.  Given that the European stock market is much cheaper than the U.S. market, it’s not out of the question that it start to play catchup at some point soon.  In other words, we’ll be watching the STOXX 600 for two reasons.  If it continues to underperform, it could be sending a warning signal for global growth.  However, if it shows any sign of life, it could finally do some catching up…and might be a way for institutional investors to gain some performance at the end of the year.

8)  The further pullback in crude oil and the energy stocks did indeed come to fruition.  They’re both getting oversold on a short-term basis, but not on an intermediate-term one.  Therefore, even though we expect a near-term bounce, we’re going to hold-off for a while longer…to see if crude oil tests its all-important support level after any bounce.

 Our cautious short-term call on crude oil and the energy sector has worked out quite well.  WTI is becoming somewhat oversold on its weekly RSI chart, so it could be due for a bounce next week.  That said, it’s not oversold on its weekly RSI chart.  Therefore, it is not out of the question that we could see some more weakness in this commodity over the near-term.  One level that we’ll be watching closely if we do see some more weakness is the 200-week moving average that comes in at about $70.  That line provided excellent support for WTI back in March…and then again several times in May, June, and July.  Therefore, that should be a good level to think about adding to positions in the energy sector between now and the end of the year.  (Remember, we have been saying that investors should hold off adding to positions recently.)

 One of the reasons we highlight this situation is that the XOP oil and gas/E&P ETF is getting oversold and testing its 200-DMA.  That 200-DMA provided solid support back in October, so we’re likely going to see it bounce off that line once again on a short-term basis.  However, we’re thinking that any bounce might turn out to be a short-lived one…and that we’ll have to see one more decline before a really good buying opportunity presents itself. 

 Yes, there is a risk that we’re being too cautious right now.  However, since we turned bullish on the energy group three years ago…when it was trading MUCH lower than it is today, we can afford to be a bit more careful when deciding when to add to positions once again.  If the situation changes…and we get some signals that tells us that the worst is already behind us…we can change our minds.  Yes, that will involve buying these names at higher prices than where they are right now, but since we turned positive on them at much lower prices, it gives us some room to be a more discriminating.

9)  Potpourri……We just wanted to make some comments about some issues that have been on our minds recently.  Some of them have to do with the economy and the markets…and some of them have absolutely nothing to do with them.

 We don’t need a recession to cause the stock market to see a deep correction.  Deep corrections are far more common than recessions.  Sometimes the stock market just gets too far ahead of its fundamentals and needs to decline in a serious manner.  (To say that the stock market has predicted nine out of the last 5 recessions is true, but it’s not a reason to be bullish.)………The S&P Equal Weight Index is still in negative territory for the year.  Also, the NYSE A/D line has retraced just 20% of its Aug-Oct decline...while the S&P 500 has retraced over 60% of its decline.  (Chart below.)  Narrow rallies are not healthy ones…even when the companies involved are great ones.  They eventually end in tears……..Funny how little attention the most recent Senior Loan Officer Survey had this past week……..M2 has turned negative for the first time since the Great Depression.

 We still cannot believe the level of complacency surrounding the situation in the Middle East.  Israel’s allies are putting more pressure on them to back off.  (Sec Blinken’s comments were very telling last this past week.)  However, how is Israel going to step back from doing what they need to do to make themselves safe from Hamas?  We’re not saying that the conflict is definitely going to spread, but the odds are still higher than the markets are pricing-in right now…because they’re not pricing-in this potential at all!!!...........Many of my closest friends are Jewish and so is my roommate and best friend from college.  It completely boggles my mind to think about what happened in Germany in the 1930s (and what took place in the U.S. during the 1950s with McCarthyism).  I’d rather die than turn against my friends. 

 Safeties in football need to be more penal.  Kickers can kick the ball too far now-a-days.  In the old days, a team who tackled an opponent in their own end zone would get two points…and then usually get the ball back with good field position after the ensuing free kick.  (They’d usually get it somewhere near mid-field.)  Now, these guys can kick the ball SO far that the team that made the great defensive play don’t get as much of a benefit for their efforts……….They should change the rule in college & the NFL…so that the free kick is taken from the 10-yard line instead of the 20-yard line. 

 Well, our prediction that Glen Youngkin would be the GOP nominee in 2024 fell flat on its face.  (We knew it was a long shot, but he had raised SO MUCH money that we thought there was still a chance.)  The only way the GOP can with without former President Trump now…is to have somebody replace him who is also anointed by Mr. Trump.  (Talk about a long shot!).........We still think there is a good chance that the Democrats will find a way to replace Biden as the nominee.  However, they’re going to have to do it in a way where somebody quickly becomes the frontrunner…just like they did when they maneuvered to make sure Biden would suddenly and quickly become the front runner aft er Super Tuesday four years ago…just before the pandemic shutdowns we put in place.  They can’t afford to have an open-ended situation going past the springtime next year……..……As usual, we’re not saying who SHOULD be the nominees…or what SHOULD take place.  We’re just describing what we think COULD take place.

 We’ll finish by repeating what we said in our daily piece on Friday:  Thank you to all of our Veterans on this Veteran’s Day.  We owe you a debt we can never repay.  You are all true heroes. 

 10)  Summary of our current stance…….There is no question that that the rally over the past two weeks has been a great one.  It has retraced 2/3 of the decline that we experienced over three months leading into the end of October.  (It’s funny.  Usually, the stock market rallies gradually…and falls all at once.  This time the opposite has been true.)  Having said this, strong/sharp rallies ARE the kind we do see when an important bottom is put in place.  It’s just that it usually comes after a bigger decline than we was this summer/fall…and usually follows a big washout/capitulation move…and after the stock market has become quite cheap.  This time around, it came after a routine correction…and at a time when the market was still expensive.  Therefore, there are some reasons to think that this is not the beginning of a big year-end rally.

 Still, if the stock market can rally much more from current levels…whether it happens immediately, or after a mild pullback…it’s going to confirm a change in trend.  Any push above Friday’s close will take the stock market far enough above its trend-line from the summer highs…and far enough above its October highs…to give the confirmation the bulls are looking for right now.  However, we do have to see a bit more upside follow-through.  Remember, it was just two weeks ago when the exact opposite was true.  It would have taken just a bit more DOWNSIDE follow-through to confirm an important breakdown in the stock market…and we got just the opposite.  Therefore, it’s not out of the question that we could get exactly the same kind of opposite move this time around as well. 

 No, the stock market is not overbought and over-loved…to the degree it was oversold and over-hated two weeks ago…but that doesn’t mean it cannot roll-over in a meaningful way next week.  As we said two weeks ago, “unless we see an immediate/sharp and sustainable rally, we’ll have confirmation of an important breakdown in the stock market.”  Well, unless we get an immediate/sharp decline very soon, we’ll very likely get confirmation that the worst of the recent correction is behind us…and that a bigger year-end rally is in the offing.

 If we get that kind of upside follow-through, however, it won’t be fundamentally based.  After a massive rise in bond yields, those yields have only fallen in a very mild way on a relative basis, so it will not be enough to justify a push to much higher levels in the stock market.  Earnings growth cannot justify a further rally either.  Since early September, earnings for Q4 of this year…for the next 12 months…and for all of 2024…have actually fallen.  No, it has not been a significant decline, but it HAS been a drop…and so the S&P 500 is now trading at 18.6x the earnings estimates of the next 12 months…and 2.4x sales.  THAT is not a cheap stock market…and it’s not even a fairly valued one…especially with bond yields still at/near 16 year highs. 

 Finally, the economic outlook is not brightening at all.  If anything, it’s getting darker.  This past week, we heard from EBAY that the holiday season will be a soft one…FDX and UPS are telling their pilots to take other jobs and they’re hiring fewer people in their distribution centers…credit card debt & delinquencies are hitting new highs…Trade Desk warned about the slowing ad market…the Senior Loan Officer Survey was abysmal…and consumer confidence fell in a significant way once again. 

 More than anything else, however, we are still concerned about the intermediate-term prospects for the stock market.  Even if we see more upside follow-through in the weeks ahead, the stock market has not gone through the kind of “normalization” process that the Treasury market has already gone through.  History tells us that every time that bond yields spike in a serious manner, it always causes a deep correction in the stock market eventually.  This year’s huge rise in yields should have the same effect…even if it takes a while longer.  Finally, we’d just add that Chicago Fed President Goolsbee said recently that every time the Fed tightens policy in a serious many, it always causes a recession.  Of course, he followed that by saying the thinks it will be different this time, but we thought it was very telling that he made that comment out loud. 

 With all of this in mind, investors will have to stay very nimble in the days and weeks ahead.  More importantly, we believe they should all have a plan in place…in advance…for what they will do once it becomes evident that the “normalization” process that began this summer in the stock market reasserts itself.