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The first two weeks of July are historically the most profitable two weeks of the year. At least the bulls can champion a small win for 2022, as July has started off higher. Not a massive win for the bulls but a step in the right direction. Positioning is light, so there is not a lot of credence being put in market moves, as the restaurants in the Hamptons and beaches are packed. Try to ignore its crazy summer movements.
Sentiment is stretched to the downside, as the reliable Bank of America Bull/Bear Indicator has been stuck at zero for weeks – an indication of a buying opportunity. Investors refuse to bite for two reasons. One, it is the summer, and who wants to commit capital when volume is so light. The second reason is that everyone believes we are on the cusp of a recession and that markets need to go down another 10-20%.
Everyone knows the recession is coming. It was the talk of the town this weekend at dinner and the golf club. Everyone thinks that the market will go down to 3000-3600 on the S&P 500. Why doesn’t the selloff come? Everyone is looking through the mountain. The expectation is that the Fed raises rates until they start lowering them. Why sell? It always goes right back up. Right? Right?
Everyone is recognizing the looming recession. I see a recession looming but with a strong jobs market. What does that mean for markets? I see underweight investors and, most critically, systematic strategies positioned for a fall in equities. If that fall does not come, these computerized strategies will be forced to buy stocks and push the market higher. Most investors will be scratching their heads as the market rallies and the long-anticipated capitulation selloff does not arrive. Quite frankly, that selloff would make things too easy.
When everyone thinks something is going to happen, something else will happen.
Well-respected investors are making the point that market valuations are elevated and that they need to present better value given interest rates, Fed policy and inflationary geopolitics before they commit more capital. My response to that argument is that asset prices do not necessarily need to go lower. If the market just holds its valuation long enough, corporations will earn increased profits over time. Markets can correct by going down or sideways. Time heals all wounds.
The pain trade is that the market begins to levitate higher. If the market begins to rise coming out of earning season, systematic investors will be forced to chase. Pension funds and insurance companies will be hot on their heels. On July 27, the FOMC will meet and rise rates again. The corporate earnings season will be complete, and corporate buybacks will come flooding back out of their blackout period.
Will a rally be the real thing or just another bear market rally? We would lean to the latter.
We would love to see a capitulation event, but that would seem to be too easy.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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