It was just a short-covering rally?…..That is what the skeptics ask whenever the stock market rallies on one day during an extended correction or bear market. The problem is that pretty much all rallies that take place during a correction/bear market START with short covering rallies. The ones that fail quickly…the ones that last several weeks…AND the one that signals the end of the entire decline all start with short-covering. Therefore, it is impossible to know which one of those three it is until at least some time has passed. In other words, trying to decipher which one the bounce that began late Thursday is impossible at this point in time.
Of course, that won’t keep us from trying to guess which one it is…but we readily admit that we won’t know for at least a few days…..We believe that it is likely the middle of the three choices just highlighted. We think it’s probably the beginning of a short-term rally. The reason we think this is that will last for more than 1 or 2 days is that it is quite evident to us that we have seen a serious bout of “forced selling” (that took place last week that derived from the crypto market). Markets tend to see bounces that last for while after a case of “forced selling” subsides, so we think we could/should see some upside follow-through this week.
However, not everything points to a further rally. For one thing, Friday’s rally came on much lower volume that we saw when the market was falling last week. Also, we got some very negative economic news out of China last night…which lowered the outlook for global growth. (Industrial production was -2.9% vs the consensus estimate of +0.5%...Retail sales were -11.1% vs. a -6.6% estimate…and the unemployment rate rose to a record high of 6.1%.)
Having said this, the breadth on Friday was quite good. It was 13 to 1 positive on the 500 and 33 to 1 for the NDX Nasdaq 100! Also, the futures are trading slightly higher as we write this morning, so it looks like we’ll be able to shake-off those disappointing numbers out of China.
From what we can gather, there is a decent sized group of people who are looking for the kind of significant rally that will take the S&P up by as much as 10% or more…much like the two-week rally in March accomplished. We, however, think it will be tough for the SPX to rally quite that much. First of all, we do not believe we have seen the ultimate bottom for this decline. There are just too many headwinds that are associated with this period of inflation (which is morphing into stagflation) for the market to rally strongly for a long period of time right now in our opinion…..Since successive bear market rallies tend to be smaller as the decline progresses, we expect this upcoming bounce will be smaller than the last one (assuming it continues at all).
There is no guarantee that this bounce will be a small one. The impact of “positive gamma” in the options market can be a very powerful. This issue helped the market rally very strongly back in March…and it could do the same thing this time around as well. We just think that it is going to become more and more evident that the cuts in economic growth estimates which continue to be made around Wall Steet (Goldman cut their U.S. GDP forecast yet again this weekend), it is only a matter of time before earnings estimates will have to fall as well. This, we believe, will probably cut the rally short of reaching the 10%-11% gain it saw in March.
As investors continue to keep a close eye on inflation, the situation in Ukraine and the situation in China…there will also be a lot of focus this week on the earnings reports from the retail sector. Companies like WMT, HD, LOW, TJX, TGT, & ROST report this week…and we also get the report on April Retail Sales tomorrow morning……Probably the number one item that the bulls are hanging their hats on right now is the strength of the consumer…who remains strong. However, when you look at the stocks of the airlines, the cruise ships, the retail stock ETF and the consumer discretionary ETF, it shows that the strength of the consumer might not be very strong in the last 6-7 months of the year. (Stocks tend to be good leading indicators…and thus the severe declines in these groups in the last six weeks does not bode well for continued strength by the consumer. Nor does the recent lower-than-expected consumer confidence data from the U of Michigan on Friday.)
Needless to say, however, if the numbers are good and (especially) if the guidance is strong…it should give these stock group a nice boost…and it will strengthen the positive argument for the bulls. That said, if the numbers and guidance are poor, it’s going to take an incredibly important leg of the bullish stool out from under their argument. That would not be good for the broad market at all……As we all know, the consumer is 70% of the U.S. economy. If (repeat, IF) it becomes evident that the consumer is going to pull-in their horns because they have used up their pent-up demand or because they’re worried about inflation (or both), it’s going to throw a major wrench into the bullish argument for the second half of the year (in terms of both the economy and the stock market).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.