Last week we experienced an incredible market rally. The S&P 500 rallied from a several weeks long bearish craziness to a bullish madness by 5.86%. What is crazier is that this, almost, 6% rally took just 5 days to happen. On average, this rally consisted of a 1% a day move. And now, the question is, is this market rally sustainable?

This crazy move could be just a relief rally before we resume bearishness, but we need to wait to see what happens next. Why? So far, we only reached the previous support which now acts as a resistance, and we may bounce from there down.

I was thinking what has changed in the market? Well, the answer is simple: nothing. Let’s review:

The bearishness was based on silly behavior from investors who were scared of a known event – interest rates. But that fear was irrational. Everyone knows that the economy is still strong, that the labor market is still strong, consumer spending is strong, and inflation is easing. Yes, in September and October we saw an uptick in inflation but that was a very small uptick. It didn’t change the trend. Yet, the investors freaked out and kept selling. And the selling lasted for two months!

But last week, the GDP came in lower than expected, Jerome hinted longer pause in hikes, and these same investors who were panicking for the last two months started buying like crazy.

Interestingly, last week’s rally caught a few big hedge funds with pants down causing them losing a lot of money.

So, are we out of the woods? I think not. This type of violent rallies are usually overblown and attract sellers. But we need to put this into perspective. People fail to do it. They look at today’s or yesterday’s price action and make conclusions.

A good way to determine if the market rally is over and we are in a bear market again, is to zoom out:

Are we in a bear market? No. Was last week rally just a bear market bounce? No (twist it anyway you want, it was not a game changer). The longer-term market still shows very clearly that we are in a secular bull market.

Will it last?

Yes, the market will go up. But maybe not next week. This rally was not sustainable, and I expect some type of a correction. I think, we will bounce down on Monday or early next week. But eventually, earnings will win this over and we will resume uptrend.

The market lost 9.94% since the end of July this year. It was a brutal decline. Selling had only a few bounces but new sellers came in and pushed the markets lower pushing it into a correction territory.

It is perfectly normal and to be expected correction. Too soon after a recovery from the not so distant bear market, but still normal. The question is, will we stop here? This may turn into deeper declines and turn the recent rally into a bear market bounce erasing all bulls hopes.

Economically, this makes no sense. The US economy shows strength and growth. GDP growths, retails sales grow, consumer confidence grow, the labor market is strong (not a recession when everyone loses jobs, not gains them)… so the only reason for this selling is the fear of “higher for longer” interest rates. That is not sustainable and at some point this fear will go away. In the meantime, we have to wait this out.

How frustrating this is compared to easy market in 2021, right?

Tomorrow, we will see a report on the current inflation, so be prepared for another market’s haphazard reaction in any direction. If the repost shows easing inflation, the markets will rally. If not, more selling will come.

The market was declining last week but none of the selling was aligned with economic data. Economy is clearly strong. Labor market is strong. And the consumer’s sentiment is improving. Unfortunately, in today’s market, this is negative. Good news is bad news. Investors simply ignore that the inflation as transitory after all and it will go lower. Some perceive it as not going lower fast enough, others even believe, it is actually going up. But that is not the case, well, it depends, how far you are willing to look. If just around the corner, you may be right, this is all bad, if your horizon is more than 5 years, you should rejoice.

Weekly initial unemployment claims report has been pushing bond yields higher lately because the 4-week average of the series has been declining, suggesting that the unemployment rate remained low in October. Jobless claims likely remained low too during the October 20 week. And short-sighted investors do not like it.

The market is deeply oversold, and I expect a bounce. Futures are up right now, but will this hold throughout the day or even a week? We must wait and see, but the market is clearly driven by the bond yields now and nothing can stop it. If the yields keep rising the markets will sell. And any bounce will find sellers.

In this environment, it is hard to say what is going to happen. The rates were going up and there is no sign of a change:

Over the weekend, the yields eased (which explains the futures rising). If this continues, the markets will see a relief rally next week:

 
Oh, and if you still believe in hard landing, the economic data indicate that your beliefs in doom and gloom will hard land. Not the economy…

Powel is speaking and as he does, he provides “hints to the FED’s rate hikes pause” then says the economy is still too strong and so he may raise the rates up and seesaw continues. And the stock market is on the FED’s swing.

As long as the market stays flat overall (we do not care about the daily choppiness), our trades are all safe.

The market is experiencing more weakness on Thursday, October 19th, 2023. Futures were down significantly overnight but surprisingly recovered all losses prior to opening. Unfortunately, after opening the markets slipped lower ahead of J. P. speech today at noon ET. We can only speculate about how Wall Street will react to his speech. The market may not like it and we will move lower, or they will cheer it and we will see a sharp rally.

All indicators are weak today and point to lower trading. We are bearish again.

This didn’t impact our yesterday’s trade. We had a “crumbs” Iron Condor, and it was in the safe territory, so it expired worthless despite the selling. We also opened a new Iron Condor with tomorrow’s morning expiration. If the trade stays inside the green box in the chart above, it will expire worthless for a full profit too.

If you go to social media like Twitter or Reddit, you will find many people posting about high inflation and how we are being lied to by the government. The narrative is that inflation is a lot higher than we are being told. Not 2%, 3% or 4% but 75% (let’s ignore for now that these people are comparing two different items. What is however interesting, is that the same people who are complaining about inflation are buying stuff like crazy.

Today, we received a report about retail sales growth. It was stronger than expected. The Atlanta Fed’s GDPNow tracking model shows real GDP grew 5.4% (saar) during Q3, up from 5.1% on October 10. Leading the estimate higher is real consumer spending with a 4.1% increase. I have seen people on Investing.com saying that the earnings from companies are fake because the reported EPS comes from increased prices of goods and not from increased sales. Today’s report proves this view wrong as well.

The chart clearly illustrates that sales are there supporting good EPS reports. These are coming from sales and not necessarily high prices (though they contribute to it too, but are offset by higher input prices).

But what is more striking is that people are complaining about inflation but spend like crazy. They buy everything no matter how expensive it is. Why are they buying stuff and then complain how expensive it is? And do not tell me that they are buying only essential things. They are not. The best way to measure this is to look at Amazon sales. During this fall Prime sales event, people ordered 150 million items (50 million more than prior Prime Day), and the holiday spending growth is expected to be 4.4% higher. And in July’s Prime Day, people spent 12.7 billion on stuff.

According to Amazon: “Shoppers snapped up Apple AirPods Pro, Bissell carpet cleaners and Crest 3D Whitestrips, as well as Amazon-branded devices such as Fire TVs and Echo smart speakers, the company said.” How essential is the “snapped stuff?”

So, if you want inflation down, stop buying crap.

Morning started lower and I expect choppy market today. Media (this time Reuters) are again telling us:

“Wall Street’s main indexes opened lower on Tuesday as hotter-than-expected retail sales data stoked worries U.S. interest rates could stay higher for longer, with the Middle East conflict further denting sentiment.”

Once again, worries, fear, shivering is driving the sentiment. Investors are like little Chihuahuas. Always shivering and worried. But indicators are pointing to stronger market today.

As I mentioned yesterday, we were supposed to get September’s retail sales data. As expected, it was strong. Consumers are spending like crazy. And Wall Street, instead of enjoying good, strong economy and consumer, is wobbling about “higher for longer.” We all know that already. Instead of worrying, take it into account.

Good question, right? Investors turned bullish again as we started earnings season and banks turned out strong. Jamie Dimon, who recently warned us about gloomy future as the most dangerous time the world has seen in decades suddenly turned around with bullish claim that the earnings recession may be over (whatever that means).

We only have a headache in front of us tomorrow (retail sales report) that may shake the recent rally. Who knows what Wall Street will do. If the sales come in strong indicating that consumers are confident and spending like crazy (which they are), it could indicate a strong economy. Wall Street may take it bullish as soft landing will be very likely, or they may take it bearish out of fear that this may keep inflation high and the FED rising rates more. Flip the coin.

Today’s trading was well below our “Crumbs” Iron Condor we opened last Friday. In my trade reports I indicated that the upside and downside protection was so good that it would be almost impossible for the trade to go bust. Of course, anything can happen, but the market would have to either rally or crash more than 2.4% in a day. This could happen only in a crazy bear market (in 2020 and 2022 we had a few 3% daily crashes, in 2022 we even saw a 4.41% crash on September 13th). So, this can happen. But we are not in this environment anymore.

Despite crazy selling on Thursday and Friday last week and another crazy rally today, the trade expired worthless and finished with a nice 2.36% profit (after fees) in 3 days. Annualized profit was 102.61%. I would gladly collect this every other day. We opened a new trade with Wednesday’s expiration. Our protection is again below 2% on both sides. the chances that the market would rally tomorrow and on Wednesday more than 2% (or crashes) are there but the odds are slim. In a normal market, this trade should expire worthless.

You may have asked this question because at the beginning of the year or in 2021 you bought a few REITs you were told that they were great, mainly those high-quality ones like Realty Income (O), VICI, ARCC, MPW, and many others. And today, these shares are biting the dust. Reddit is full of people lamenting about their REITs declining so much that even the dividends can’t keep up. And long-term dividend growth investors turned into short-term gamblers.

So why are REITs falling? It is simple. Interest rates are the reason. And fear.

REITs are required by law to pay over 90% of their income to the shareholders to avoid taxes, so they rely on leverage – borrowing money, and issuing new shares to finance their acquisitions. In today’s high interest rate environment rising new capital may be problematic. So, investors are panicking and selling.

But I can assure you. This is a temporary phenomenon. The good REITs will eventually adapt. Inflation will keep slowing, and the FED at some point will start easing again. And REITs will recover. They did before, they will do it again. So instead of panicking, be buying.