The S&P 500 launches its fifth 5% rally since the Jan. 3 peak. Could this one stick?
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Here is Mike Santoli’s daily note, CNBC senior markets commentator. This notebook contains thoughts about market trends, stocks, and statistics. The fifth S & P 500 rally of more than 5% since the Jan. 3 market peak is underway. More than 8% is a difference from the intraday bottom for this decline set last week. After the previous four failed, there was a slide to new lows. Do you think the current rebound is more likely? Although we have not yet closed below the threshold of 20%, the latest rebound came at the level of 20%. This retreat has a chance to be the fifth that’s stopped short in closing a decline by 20% since 1990 (the others are 90, 1998 and 2011, 2018, respectively). The tactical algorithms know this history and are well aware of it. This is not clear whether this is an actual input or a game of parlor, but it has been working. The bulls were aided by mean-reversion, which was a relief after a seven-week losing streak. Also, positive are month-end factors and expiration of post-options. Although volumes aren’t huge (they rarely are during rallies), the three-day rise is due to very large participation. There has been an additional 80%+ in upside volume since Wednesday. Pushing above last week’s high (roughly 4,090 on the S & P 500) is a modest plus. This move comes off of the lowest valuations ever since the Covid collapse. The market has absorbed some unclear retail and technology results, and investors have made at least temporary peace about the Federal Reserve’s tightening outlook. The market is still not free from the negative echoes of post-2000 Nasdaq Composite slow motion demolition and the feeling that the Fed will continue to tighten financial conditions, if markets change too quickly. If the S & P 500’s current level near 4,120 rings a bell, it could be because it was for a time the intraday low held in mind by traders for two full months, set the day Russia invaded Ukraine: Feb. 24. It is important to remember that although the S&P 500 has been trading at close to 4,120 for the last five months, it was previously at the large-cap index level for 15 months. Speculative growth stocks have seen the market only slowly return back down to levels once considered “must keep” for the downside. This bear-market rally seems unlikely to continue much higher, according to consensus. It is prudent as well as plausible for stock to keep their reservoir of skepticism full. Yet – as asked here Thursday — after months when dip-buyers were run over and demoralized, might the “rally sellers” be due for a stiffer test of their conviction? It is more important than whether it is a sell-off or chase, to know if the correction has restored value in a way which has increased the reward/risk ratio for long-term investors. Fair to call valuations – both absolute and relative to bond yields – as neutral rather than genuinely cheap, not back above 17-times year-ahead earnings after bottoming at 16.5. Although the pendulum is often not able to swing through “fair values” under pressured markets it may occasionally swing very quickly at “cheap”. In the early 2016, late 2018 and early 2020 sell-offs, the S & P 500 spent mere weeks below 16-times forward earnings before bobbing higher. Although stocks may chase earnings lower in the event of an indefinite recession and profit forecasts being cut lower, there aren’t any guarantees that we will reach a certain valuation level. Is sentiment/positioning still depressed enough to provide fuel for a re-risking rally? Most likely, according both to surveys and Bank of America’s Bull and Bear Gauge, which uses various market-based credit and flow indicators. Although this gauge was low in crisis periods, it has been stable for long periods of time as the market struggled. However, low readings in other times have helped to shield markets from further falls. This morning’s personal consumption expenditures inflation figures were in line with expectations. This provides support for anyone willing to believe that the “peak inflation story” has legs, with a 0.3% month-over-month Core PCE and an annualized core figure of under 5%. Although energy prices do not support this view, the shift towards services spending over goods will help in the short term as the labor market slows and there are slower hiring at large and small businesses. This is the end of a difficult earnings season. Month-end forces are expected to dissipate by now. The Fed will meet in two weeks. It is not clear if the forthcoming jobs numbers will make a difference. Air pockets have been found above and below the tape, making it quite thin and inliquid. The tape will remain that way until official summertime trading begins. The market is still strong as it has a 80% upside in NYSE volume. There are also more highs and lowers. The credit market continues its rally and risk spreads are starting to recover from their previous levels. VIX is soft, both with higher index levels, more muted intraday moves and the coming three-day weekend suppressing expected volatility – making the case that it’s safer to relax. Next week will tell if it really is.
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