Is This the Beginning of a Potential Recovery?: Market Commentary from Cabana’s CEO – June 1, 2022

4 weeks ago

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Last week we talked about the equity market trying to find a bottom after the brutal last five months. After a whipsaw that began in the middle of March with a more than 10% move up, the S&P 500 reversed and dropped for eight straight weeks, culminating in a bear-market-defining low of 20% down from January highs. We are now seeing the beginning of a potential recovery, as stocks bounced 6% over five trading days last week. Investors stepped in and bought when we hit the first real long-term support for the S&P 500 at 3850 (SPX). This level also coincides with a 38.2% retracement of the gains seen since the March 2020 low. As such, this seems to me to be a logical spot for a relief rally to begin. Short sellers covering their positions likely accounted for a good portion of the big move up through the end of the week.  

Way back in January, I suggested that the bond market started this precipitous fall in asset prices, and it will finish it. What I mean by that is the 2022 historic relative rise in interest rates was a major factor in the simultaneous equity and fixed income sell off. When the bond market finally finishes its business of moving rates higher, stocks will have the opportunity to rise again, albeit at lower prices. We have seen a subtle shift in bond prices over the past three weeks. They finally began rising as rates started to pullback. Instead of bond prices falling when stock prices fell, they began to rise on those days. This suggests that investors are starting to believe we may have all this rising interest rate worry “priced in” and that the Federal Reserve will back off its stated claim to stamp out inflation at all costs (including sending the economy into a recession). We will have to wait and see whether that line of thinking has any long-term merit. I will point out that the first two days of this week have seen a shift back to the previous positive correlation between stock and bond prices.  

For now, we have a bear market rally within a much larger downtrend. The major indices are facing a ton of overhead resistance and will need to reclaim their important 50- and 200-day moving averages before serious discussion of “the bottom being in” is appropriate.  

Disclaimers

June 22, 2022

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