Signs Point to a Year-End Rally: Market Commentary from Cabana’s CEO – December 1, 2022

2 months ago

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The major stock indices managed to grind out a gain in the holiday-shortened week. This followed two weeks of digesting gains and testing prior support after the major move up on November 10. I previously suggested that this process was necessary, and we needed to see 3900 hold on the S&P 500 for a year-end rally to occur. We also got a weekly close above the 4000 level, which to me was an important psychological threshold. The last remaining hurdle in my view is a confirmed break above the all-important 200-day moving average. This technical level has held prior attempts to clear it this year and up to this point has initiated another leg down. This most recently occurred in August and the close last week was right at this level.  

Monday and Tuesday of this week we saw markets pull back once again, setting up a really make-or-break time for the current rally (in my opinion). The good news today is we recovered all of Monday and Tuesday’s losses and then some on the back of yesterday’s comments by Fed Chairman Powell. Investors seem to have interpreted his prepared remarks as reasonable and evidence that the Fed is not going to intentionally crash the stock market. All major indices were up more than 3% yesterday. The Nasdaq was up almost 5%. Volume was huge as well. Yesterday’s market action, coupled with the jump on November 10 (also on big volume) is strong evidence, as I see it, that a corner has been turned at least over the short to medium term – in a good way. I think that one big up day during a bear market can be dismissed, but two up days spread out over several weeks at critical junctures should be taken seriously. And best of all, yesterday the S&P 500 cleared its 200-day moving average. Let’s see if we can hold it through the week.  

As I have previously stated, we have seasonality in our favor in December and given the recent technical progress, my hope for a continued rally remains viable. We have the November inflation number coming up and one more Federal Reserve meeting. If those data points show cooling inflation and a slowdown in rising rates, the table may be set for a test of the August highs by year end.  

Lastly, I want to point out that bond yields have pulled back consistent with the market rally. This suggests to me that the bond market believes a peak in rates has already occurred and is consistent with the positive moves we are seeing in stocks. The yield curve, however, remains significantly inverted and foreshadows a slowing economy in 2023. The extent of that “slowdown” is up for debate and will ultimately determine when we exit this bear market. Let’s save that struggle for January and enjoy the bit of good news going on right now. It has been a tough year to say the least for all investors and any relief is welcome. 

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June 22, 2022

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