On Wednesday November 30, 2022 the Fed chair positively confirmed that a smaller rate hike is coming as soon as in the December Fed meeting. The market welcomed the positive confirmation and promptly rallied to close above its 200-day moving average. This literally changed the S&P 500 from a bear market to a bull market if it can stay above the 200-day moving average consistently. It’s a very good sign that the market closed above its 200-day moving average last Friday. The bears would discount the significance of the strong close above 200-day moving average and argue that this is just a bear market rally and it will soon fizzle out. We agree with the bears’ fundamental point of view that the Fed funds rates will remain high and the economy is weakening. We may or may not get a recession, but the macro environment will be difficult for earnings. However, we do see that the market has discounted the bearish fundamental views and therefore the rally has ways to go.
We blogged a few times before that we have been anticipating a seasonal low in mid October to conclude this correction wave that started in January 2022. On October 13, 2022, the September CPI was released at 8:30 am before the market open. The September CPI was the worst since early 1980s. The market sold off before open and had 1.58% gap down open at 9:30 am. Within the first 15 minutes, the buyers showed up and the market rallied non-stop from the first 15-minute open low. By 11:30 am, the S&P 500 cash index was able to climb above its June 2022 low. At that point, there is a valid two-way swing trade. A long trade should be placed at the June low level. In the face of the worst possible CPI data, the market was not able to trade below its June low. The market was telling us that all is priced in. Bad news, good reaction. On October 13, 2022, the S&P 500 traded with very heavy volume and it rallied 5.1% from the intraday low to high.
There have been only less than 10 of those trading days that had greater than 5% intraday rally since 1968. On March 10, 2009 the S&P 500 had an intraday rally of 5.9%. We all know what happened after the March 2009 low. We haven’t visited that March 2009 low for the last 13 years and very likely will never visit that low again in the future.
After the October 13 low, the market pundits continued to be very bearish, but the October 13 low was never violated. Then on November 10, 2022, the October CPI was much better than expected and it proved that the worst September CPI was the peak. The market rallied on November 10 to produce a follow thru day to confirmed the validity of the rally since mid October. Subsequently the Fed chair spoke on November 30, 2022 and positively confirmed that a smaller rate hike is coming in December meeting. The market promptly rallied to closed above its 200-day moving average.
At the mid October low, the S&P 500 corrected 27% off the January 2022 high. As you can see in the chart below, the current correction fits the definition of an event driven correction. The 2007-2009 correction is a structural problem that we don’t have presently. The current structural problem is in crypto, which we are not part of.
It is now seven weeks into the current weekly cycle. It is very likely the rally can go for another 5-6 weeks which will put us in mid January 2023. This will be the most hated rally in history. The bears will have a hard time to flip their bearish views.
The 10-year treasury yield has been crashing, probably will not stop until it hits the 200-day moving average around 3%. The bond market is saying recession is coming, but the good employment numbers probably are saying that we could have a soft landing, meaning that the Fed is able to fight inflation and not cause a recession. That’s too far for us to worry about now. We have reasonable confidence that the rally could go for another 5-6 weeks. It is possible that the S&P 500 could reach 4300 by April 2023.
Next week probably is going to be a dull trading week because the Fed will not make any statements before the December meeting on the 14th. The November CPI will be released on December 13th. So the market will most likely meander until the big catalysts in the following week.