Bear Market Rally Part 2 The bear market rally has extended further with a strong showing, following the Fed meeting and even more gains in the after-hours sessions due to strong reports from Apple and...
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The bear market rally has extended further with a strong showing, following the Fed meeting and even more gains in the after-hours sessions due to strong reports from Apple and Amazon. Fortunately, we had been anticipating this and modestly increased our exposure and enjoyed some outperformance. In today's commentary, I want to map out the endgame for this bear market rally. Specifically, I want to talk about why I think the S&P 500 (SPY) could squeeze higher but also my reasons for believing that this is a mirage rather than a resumption of the bull market. Read on below to find out more….
(Please enjoy this updated version of my weekly commentary published July 28th, 2022 from the POWR Stocks Under $10 newsletter).
Over the last week, the S&P 500 (SPY) is up just under 2%. The bulk of strength has been concentrated in the Nasdaq due to better-than-expected earnings reports from the mega-cap, tech companies. Overall, the earnings were good, not great.
Then, why did stocks rally?
Simple. Market sentiment was at rock bottom, and expectations were quite low, setting up a low bar to beat. Additionally, we discussed last week that bearish sentiment was at extremely bearish levels, and these types of explosive moves are exactly what happens in such circumstances.
In fact with Q2 earnings season now about 40% over, 70% of companies are beating bottom-line estimates.
Going into earnings season, expectations were for 4% earnings growth in Q2. Currently, it's at 4.8%. Although, we should note that ex-energy, earnings are set to decline by 1%.
Again, this is not great but not a disaster… and the market was clearly expecting a disaster.
The other catalyst was the FOMC. Fair to say it was a "dovish hike'. This is because the Fed did raise 75 basis points but signaled that it was going to wait to assess the impact of its hikes and acknowledged growth slowing.
If we are correct that inflation is going to bend lower (and at a much faster pace than the market currently believes), then it makes sense that the Fed is "pivoting' for all intents and purposes.
In fact, the Fed got so hawkish that a "pivot' doesn't necessarily mean that it will start cutting. Instead, it could just be a pause or even a slower pace of hikes.
Bear Market Rally Thoughts, part 2
We are now off the mid-June lows by 12.2%. To me, it's clear from the price action that this rally is driven by short-covering. I think this squeeze could continue in the near-term as these types of momentum-driven moves often go farther than logic suggests.
We still haven't had the chorus of bottom-callers and late-comers to the party join in the buying frenzy.
And, just like fear-driven moves go lower than what seemed fathomable at the beginning of the down move, this squeeze could go sharper and higher than people think.
Let's inject a note of caution into this discussion…
But to be clear, while I'm feeling pretty bullish in the near-term, we remain in a bear market. Just like I'm confident that inflation is going to decline due to the Fed slamming the brakes on the economy.
This is going to have major impacts on earnings and employment and this process hasn't even begun. Additionally, the higher we go, the more risk there is on the long-side.
Compare this to when we ramped up our exposure in late-June and early-July, when there was a low-risk setup as we were willing to cut positions if we broke below these levels.
Further, I talked about spidey-senses going off when we failed to move lower despite an abundance of bad news in June and July. China Caution…
I have nothing of substance to offer regards to China, just my vibes and intuition. We took 2 positions thinking that a bottom could be in. Price action has been middling. But, I'm not liking the news.
Zero-COVID is clearly here to stay with any relaxation that results in a surge of cases and a re-implementation of lockdowns. There is ominous chatter about Taiwan. Jack Ma is giving up control of Alibaba.
People are refusing to pay their mortgages. Builders are unable to complete properties. This is not what we want to see.
I think that China could pose a risk to the stock market (SPY). And, it's appropriate to cut our positions. Take the L. And focus on the stocks and opportunities that are working so well.
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All the Best!
Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares rose $1.19 (+0.29%) in premarket trading Friday. Year-to-date, SPY has declined -13.59%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini's background, along with links to his most recent articles.
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