What happened last week.
What we're watching for
next week.
Fun with numbers
I keep reading bloggers and pundits and strategists saying that the correction is over because the market is up 13.3% from its recent low on December 24th. The rationale seems to be "you can't dismiss a 13.3% rally as just a dead cat bounce." Well, I beg to differ, and here's why.
The S&P 500 peaked on September 20 at 2930. It then dropped 19.8% and closed at 2351 on December 24th, Christmas Eve. Some of these same pundits labelled this decline as a bear market because the market did trade lower on an intra-day basis. But most honest and rational folks only look at closing prices.
Be that as it may, the rally from the bottom on Christmas Eve has produced, so far, a 13.3% gain. That's impressive. But the market is still 9.1% below the high water mark in September. It will take a further rally of 266 S&P 500 points to reclaim the old high. Can it happen? Sure.
How likely is it to happen? Not very, unfortunately. So, that leaves investors in a quandary. Should they go ahead and get back into this market, knowing that the upside will probably be limited to 9% or so, just to get back to the previous high? Or should they stay on the sidelines and wait for the storm that is coming in 6 months, 8 months, 12 months? It's a tough spot to be in, for sure.
Subscribers to my Monthly Intelligence Report know the solution to this quandary. For the rest of you, it's a coin flip. Should you sell into this rally, or wait for another leg down to buy at cheaper prices? If you have a plan, you know what to do next. If you don't have a plan, you should get one. Seriously, dude, you should get one.
Chart 1. S&P periodic returns.
Improvement all around. Things are looking up. Are you willing to bet your nest egg on the chance that this rally will continue? Food for thought.
Chart 2. Distance from Key Markers
The next chart reinforces what we saw previously - a market that is rallying on a short-term basis but is still under water.
Chart 3 - chart of the week
This chart comes from Jill Mislinski and Doug Short from AdvisorPerspectives. I chose this chart because it's a reminder that inflation is not dead. We've enjoyed many years of low inflation recently, but we shouldn't become complacent about it. The Fed is tasked with the responsibility to manage inflation, and when (not if) inflation comes back with a vengeance the Fed will have no choice but to jack up short-term rates to combat it.
That day may be years away, but it will get here eventually. Inflation is like Communism. Everybody feels just a little uncomfortable about it, but as long as it doesn't affect them today they don't spend much time worrying about it.
Final Thoughts
We've had a nice rally in the market. But I'm not yet convinced that we will make a new high before we finally succumb to the next bear market.
I could be wrong, of course, but I follow my models and they are showing increasing risk and diminishing prospects for a new high.
For a full analysis of the probability of a bear market or a new recession, see my Monthly Intelligence Report.
As always, if you like what you see, or have suggestions for improving this recap, leave a comment below, or email me at info@zeninvestor.org
Something just does not seem right. Huge government debt everywhere supporting economies and markets. Huge corporate debt everywhere supporting economies and markets. Profits ok but profit growth rate seems to be falling.
Problem is how long and how much can debt keep increasing everywhere before something happens. What that is I do not know. Only cannot keep printing more and more money forever. Must be law of physics that prevents this. If not will have to create new law of physics.
Inflation, currency collapse somewhere, resource shortage, global warming ??? Something is lurking out there as result of this massive debt and money creation
Don’t know what it is or when will happen so just being very cautious now. Things just do not feel right.
Howard Randall