The NASDAQ closed above its 200-day moving average last Friday with heavy volume (29% above 50-day average volume), first time since the Fed induced correction! Now all major indices are above their 200-day moving average and that’s a definite bullish statement if the 200-day moving average is not violated on the downside. The Fed desperately wanted tight financial conditions, i.e. a poorly valued stock market in addition to quantitative tightening to aid the fight against inflation.
But the market doesn’t give a damn to the Fed. There were two major rallies in 2022, once from the June low and once from the mid October low to provoke the Fed. The June low rally was put down forcefully via terse statements from Jackson Hole conference in August. Since the mid October low, numerous Fed officials have tried to shock the market with ultra hawkish statements numerous times. Each time the market showed some respect and sold off a little. But the trend remained bullish in the DOW and S&P 500 while the NASDAQ tried to find a bottom.
The 10-year treasury yield topped on 10/21/2022, a few days after the stock market bottomed on 10/13/2022. The falling 10-year treasury yield since 10/21/2022 confirmed that inflation has peaked and therefore it gave room for the equities to rise. The bond market gave the middle finger to the Fed for the reasons below:
- Inflation is already falling and the Fed doesn’t need to raise rates much higher
- The economy is already slowing down and further tightening will crash the entire financial system which will lead to hard landing. Will the White House allow the Fed to be unhinged as we are getting closer to the election season again in summer 2023? Of course, NO.
- The government fudges inflation data all the time. The formula for the CPI has been routinely altered. Real Estate used to be included but when that was rising too much, they replaced that with rents. When rents started rising, they replaced them with controlled rents.
With the bond market giving consistent lower interest rates signal, the NASDAQ finally got it. The triple bottom in the NASDAQ we blogged last week paved the way for it to reach its 200-day moving average last week.
The market is quite comfortable with lots of liquidity. In any other time when the Fed raised Fed Funds rate from zero to 4.25%-4.50% in less than 12 months, the market would crash 50% minimum. The S&P 500 crashed 57% in 17 months during the financial crisis in 2009. This time the S&P 500 corrected 27% in 10 months. We can’t emphasize enough that the market doesn’t have a structural problem like any other time. The structural problems existed in Cryptocurrency market, not in the traditional stock market.
The king of growth stock Tesla reported earnings last week and it was not as bad as feared. TSLA had a great week and our calls paid off handsomely. The bullish trend in TSLA was established prior to the earnings report. We bet the market would react to the earnings in the direction of the established trend, regardless what the earnings would actually be.
Microsoft reported earnings and the initial reaction was negative. But soon the market harped on the AI story with Microsoft and all the losses were wiped off.
Next week we will have the much anticipated Fed meeting and a Tech-Heavy earnings week. Will the market sustain the rally?
We believe the upward momentum will last to at least April/May time frame. There will be volatility surrounding the Fed meeting and earnings. But the bullish trend will be intact. Why?
- The majority people have been anticipating an immediate recession (or at least an earnings recession–meaning very bad Q4 earnings) and a very bad stock market in the first half of 2023 to continue the bad 2022. You know the market makes up its own mind and it is determined to hurt the most of the people at all times by design. The strong open in 2023 is indicating a very good stock market in the first half of 2023.
- The Fed is closer to the end of the rate hiking cycle and inflation data continue to get better. The economic data continue to be strong. A recession is not in the immediate horizon.
- The incessant talk of recession made this recession most anticipated one, if this one ever arrives. We believe a recession will come upon us unannounced sometime in Q12024 and the Fed will pivot then. Yes, the Fed will keep the rates high in most of 2023, but at least we know what the Fed funds rate is and we can price thing accordingly.
Why April/May time frame? The mid October low is a seasonal low. Normally when a market comes out of a seasonal low, we can expect it to run at least seven months, which will be around late April to May time frame. April/May is a seasonal high location. The rally could run further than April/May because the hated persistent rally will confuse a lot of people and a FOMO will kick in at the end of the rally.
Below is the NASDAQ weekly chart. You can see that the NASDAQ clearly closed above a 3-point trend line on the weekly chart. A 3-point trend line is significant. The most oversold growth stocks will come back to life following the NASDAQ. But don’t expect them to make new highs yet. A true bull market will start in 2024 when the Fed is our friend again.