It seems Santa is not coming to town this year. We received economic data that were better than expected, and the market sold off on fear that FED may tighten more because the economy is good. It is silly. On the one hand, the investors are panicking on fear of the US economy going into recession, and on the other hand, they are panicking when the economy is good and the FED may tighten and spark a recession. That’s how fickle the market is. So we sold off because the economy was too good. We would probably sell off if the economy weren’t too good, either.

 

 

However, the market acted as expected. We sold off in the morning, true a bit more than I expected, but then rallied towards the end of the trading session erasing half of the losses. I expected to erase all losses, but I do not have a crystal ball, and the predictions are not the exact chart of what will happen.

 

 

Tomorrow, I expect the market to be muted or even trying to recover today’s losses but eventually lose it by the end of the day and sell off before the weekend. So, expect a down day again.

The market managed to get above the support that it undercut this morning. That could be perceived as a good sign, but I am skeptical and do not think it will hold tomorrow. I would be surprised if it did, but it may happen. Anything can happen.

 

 

Overall, I think we are undergoing an exhaustion process. The level of bearishness out there is so high that it justifies becoming bullish. For example, Tesla (TSLA) is so beaten up that I think the stock will soon see some bounce. And the market may see the same thing.

I anticipate markets will go up and through the big downtrend line. There are multiple reasons why and I won’t go into full details, but here are some key points:

#1- Market Sentiment. Almost every human I know is bearish on markets for the first quarter of 2023. The equity put/call ratio hit extremes not seen since 2008. That suggests massive put buying, which is counterintuitively bullish (institutions own hedges, so they are less inclined to sell).

#2- Fundamentals. The drop in earnings estimates has been in place for all of 2022. The most vulnerable groups based on valuation (e.g., high-flying tech stocks) have already come down 70%+ in most names. So, I think the slowdown is priced in and actually set up for some + surprises.

#3- Technicals. The downtrend line (see chart above) is so obvious to everyone. It becomes an obvious place for bearish (short sellers) to trade against. The stop-losses above that downtrend line are begging to be triggered on the move upward.

#4- U.S. Dollar has been moving sharply lower. Just as it was a major headwind for stocks previously, it should act as a tailwind for a trade higher in stocks. Also, Bonds have reversed sharply on the massive Yen drop. Stocks being up on that news is actually very impressive.

#5- My proprietary Bollinger band system has many buys and zero short setups. Suggesting that the market as a whole is on a big buy signal (in fact, the Dow Jones Industrials are on a b-band buy signal, use the symbol DIA if trading it).

Long story short, I have a lot of reasons to be a buyer. It feels very uncomfortable to be a buyer, which makes it probably the right thing to do.

Happy Holidays friends!
 

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