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If you haven’t been following the latest moves in the cryptocurrency world, don’t worry, you don’t have to – they are going to make this one a movie. Why is this important? It shows that the easy money game allowed some shenanigans and worthless investments to survive and thrive. The Fed is breaking stuff, like we told you they would. The tighter money policy is having its effect, and the tide is going out on speculative assets. This is a good thing and takes us one step closer to a legitimate bottom in asset prices and a better investing climate.
All is, of course, not right with the world, but I think the Holidays are going to help fend off most of the trouble. While we are itching to de-risk at these levels and sell more equity holdings, the Holidays have a way of keeping Wall Street at bay and letting the good times roll. The cap on this market appears to be between 4050 and 4150 on the S&P 500. The options market had a decent-sized expiration on Friday and has the potential to become unlocked, but the slow holiday week may encourage traders to hold off a bit. However, December’s expiration is very large and will impact prices. The first week of December should give us some clues. There is not sufficient support in the market at the moment, so markets could either move up slowly or down very quickly. The Santa Claus Rally people may keep the party going, but if we have any negative news, the downside opens up quickly. Year-end funding issues could become impactful. I am preparing for the quick move. The slow one is easy. That I can manage. The quick one calls for preparation.
December employment reports should show some degradation of the economy. That would help support markets and the Fed pivot scenario. The pivot, however, may be of concern to traders, as we don’t think that they have considered the impact of a slowing economy on profits. That may trigger the group to rethink and hit asset prices. The economy must stumble for the Fed to pivot. The economy stumbles. Then the market stumbles. Then the Fed pivots. I don’t think we get to skip steps here.
The rally this week was again led by the lowest-quality and the most hated stocks of 2022. Not the signs of a lasting rally. The thing that will make this rally last is FOMO. Investors are afraid of being left behind and underperforming with a Santa Claus Rally on tap.
We look to de-risk further and perhaps add duration. Bonds could be the better performers in the first half of 2023. The post-pandemic shift to headwinds rather than tailwinds is still in place, and we need to be patient and buy cheap. Valuations are still elevated singles and doubles. No home runs right now.
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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