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Markets are again showing their persistent resilience, the Buffett indicator has again risen to 20% above the historical average and the S&P500 is a good 400pts above fair value. I guess it's not too surprising as most retail traders have never seen a bear market and so think that buying the dip will work forever also believing a stock that has lost 40% to 50% will recover all the losses... true for the Index but not necessarily true for all individual stocks.
Wed rally in stocks has put the stock market at odds with the bond market that believes the Fed has stuffed up again, therefore, leading to a greater than necessary economic downturn. I believe that the Jan lows will be revisited and may even be breached, but for now, some more upside might be seen. On Wed I took profit on my longs and will be trading the volatility as it comes but progressively increasing the magnitude of my long position as prices get closer to the Jan lows. A capitulation to an oversold level might occur soon, this will be buying opportunity if it happens.
January lows on the indices? Yeah, I'd like to see them taken out as well. That would bring us close to ATH.
Monday was a weird session showing that the mindless dip buyers are still active... mindless in the sense that any headline reminding these people of a name will trigger a buy action based on previous falls but without much thought to the new news itself. A case in point is the Nvidia downgrade, its Q2 revenue fell to $6.7bn, down from the forecasted $8.1bn, but despite the huge miss showing a gross margins decline, the stock price rallied based on its previous 70% fall showing disregard to the context of the new announcement, the stock did declining later in the session. Time of caution is with us, I am not at all convinced that the current rally has legs, however, I need to add that 2020 and 2021 market prices were disconnected from the fundamentals and did not make much sense so, trying to predict the 2023 price moves is more art than science, we are in unchartered territory created by 2 years of monetary & economic manipulation. After hours Monday, Novavax cut its full 2022 revenue guidance in half, quite a bold move that should make players re-access some forecasts, the stock tanked 33% in after-hours trading. It is also to be noted that many companies that have reported in Q2 gave no guidance for Q3 and Q4. I have some buy orders at below 32,400 for the DOW. To through some political uncertainty into the mix, I draw attention to Ray Dalio's recent essay on China/US tensions over Taiwan heightened by Pelosi's visit (Unecessaty provocation), he calculates the possibility of a major conflict at high.
Fri sell-off was sparked by the UK's badly timed and inflationary Tax cuts heightening fears of a world recession. Markets were already drifting lower, the announcement added volume to the sell-off. S&P and DOW tested the June lows but rebounded from there however many analysts see the S&P braking 3,600, Francis Stacey and Ray Dalio see 3,200 and possibly 2,500 if the double bottom of March 20 is taken-out. The Buffett indicator has fallen to 147% from the 210% highs but it is still higher than the historical value. The bright spot is that Nov VIX is below the Oct VIX indicating that players are not panicking. The Fed has distorted normal market levels since 2020, now they are in panic mode having waited too long to normalize rates and halt QE, Powell has been called the arsonist that works at the fire department, not the hero he should be. The bottom line is that no one is calling a bottom yet but steep bear-market rallies also can't be ruled out. I am pencilling in 28,500 in the DOW as a time to consider going long, presently I am net short with view to move the shorts higher on any rally. It's been a difficult year for winning trades as the volatility is highly unpredictable and markets have been mispriced since March 2020. It is unlikely that we will see stable and somewhat predictable pricing until the FED moves aside or a more component person replaces Powell.