Will The 2023 Bear Market Rally's Musky Smell Turn Musty?

Samantha Subin and Carmen Reinicke of CNBC report stocks close higher Friday, Nasdaq posts fourth week of gains:

Stocks rose Friday and capped off a winning week fueled by better-than-expected economic growth and a pop in Tesla shares.

The Nasdaq Composite jumped 0.95% to settle at 11,621.71, while the S&P 500 gained 0.25% to close at 4,070.56. The Dow Jones Industrial Average added 28.67 points, or 0.08%, to finish at 33,978.08.

All the major averages posted a positive week and are on pace for a month of gains. The tech-heavy index rose 4.32% and closed out its fourth week of gains. It’s on pace for its best monthly performance since July. The S&P and Dow added 2.47% and 1.81%, respectively, this week.

Earnings season pressed on, with strong guidance boosting American Express shares by 10.5% despite a top-and bottom-line miss. Some chip stocks rose even as Intel slumped more than 6% on a dismal earnings report that missed expectations.

Tesla rose 11% Friday, and more than 33% for the week after reporting record revenue. It marked the electric vehicle stock’s best weekly performance since May 2013.

So far this year, markets have bucked 2022′s selloff trend. The Dow is up 2.5%, while the S&P has gained 6%. The Nasdaq has surged 11%.

“We’re putting the final touches on an extremely strong January on the heels of lower inflation, and an economy that’s hanging in there,” said Ryan Detrick, chief market strategist at Carson Group. “We’re not out of the woods though. We’ve still got the Fed next week, and they might want to throw some water on this rally.”

Investors weighed more economic data Friday ahead of next week’s Federal Reserve policy meeting. The personal consumption expenditures price index, excluding energy and food, showed prices rose 4.4% from a year ago, the Commerce Department said, and in line with the Dow Jones estimate. So-called PCE is a preferred inflation gauge for the Fed.

A better-than-expected fourth-quarter gross domestic product report Thursday also helped stoke hopes that the Fed may manage a soft landing.

These are some of the last data points before the central bank’s widely expected 25 basis point hike.

Stephen Culp of Reuters also reports Wall Street ends higher, notches weekly gains as Fed meeting looms:

Wall Street advanced on Friday, marking the end of an rocky week in which economic data and corporate earnings guidance hinted at softening demand but also economic resiliency ahead of next week's Federal Reserve monetary policy meeting.

All three major U.S. stock indexes ended the session green, with the Nasdaq, powered by megacap momentum stocks, enjoying the biggest gain.

From last Friday's close, the S&P and the Dow posted their third weekly gains in four, while the tech-laden Nasdaq notched its fourth straight weekly advance.

So far in the early weeks of 2023, the Nasdaq has jumped 11%, while the S&P 500 and the Dow have gained 6% and 2.5%, respectively.

"It's a nice end to another solid week of what's shaping up to be a historically strong month," said Ryan Detrick, chief market strategist at Carson Group in Omaha. "It's a realization that inflation continues to come down quickly and that is alleviating a lot of worries regarding the economy."

The Commerce Department's hotly anticipated personal consumption expenditures (PCE) report arrived largely in line with consensus, showing softening demand and cooling inflation - which is exactly what the Federal Reserve's restrictive interest rate hikes are intended to accomplish.

"(The PCE report) is another building block to the inflation data we’ve been seeing recently," Detrick added. "Supply chains continue to open up and improve, opening the door for the Fed to end its aggressive rate hiking cycle."

Fed Chair Jerome Powell has clearly stated that the central bank's battle against decades-high inflation is far from over, however. Financial markets still believe the central bank will hike the Fed funds target rate by another 25 basis points at the conclusion of next week's policy meeting.

Fourth-quarter earnings season is running on all cylinders, with 143 of the companies in the S&P 500 having reported. Of those, 67.8% have beaten Street expectations, slightly better than the 66% long-term average, but well below the 76% beat rate over the past four quarters, according to Refinitiv.

Analysts now see aggregate S&P 500 earnings falling 2.9% year-on-year, compared with the milder 1.6% annual drop seen on Jan. 1, per Refinitiv.

The Dow Jones Industrial Average (DIA) rose 28.67 points, or 0.08%, to 33,978.08, the S&P 500 (SPY) gained 10.13 points, or 0.25%, to 4,070.56 and the Nasdaq Composite (QQQ) added 109.30 points, or 0.95%, to 11,621.71.

Among the 11 major sectors of the S&P 500, consumer discretionary (XLY) led the percentage gainers, while energy (XLE) suffered the largest percentage loss, down 2%.

Shares of Intel Corp (INTC) plunged 6.4% after the chipmaker provided dismal earnings projections.

Chevron Corp (CVX) posted record 2022 profit, but its fourth quarter earnings fell short of expectations, dragging the stock down 4.4%.

Rival payment companies American Express Co (AXP) and Visa Inc (V) reported consensus-beating results, easing worries of waning consumer demand. There shares jumped 10.5% and 3.0%, respectively.

Next week, in addition to the Fed meeting and January employment data, a string of high profile earnings reports are on tap, notably from Apple Inc (AAPL), Amazon.com (AMZN), Alphabet Inc (GOOGL) and Meta Platforms (META), among others.

Advancing issues outnumbered declining ones on the NYSE by a 1.40-to-1 ratio; on Nasdaq, a 1.34-to-1 ratio favored advancers.

The S&P 500 posted 15 new 52-week highs and no new lows; the Nasdaq Composite recorded 94 new highs and 32 new lows.

Volume on U.S. exchanges was 11.88 billion shares, compared with the 11.10 billion average over the last 20 trading days.

Alexandra Semenova of Yahoo Finance also reports that Tesla, ARKK rally as 2021 energy returns to 2023 stock market:

A market rally on Friday accentuated by rips higher in some battered and bruised technology stocks that faltered last year are making this year's price action look a lot like 2021's rally.

Beaten-down names including Tesla (TSLA), Carvana (CVNA), and Coinbase (COIN) were each up more than 10% on Friday.

Cathie Wood's ARK Innovation (ARKK) ETF, a bellwether for high-flying tech, advanced 5.5%. ARKK has gained more than 25% this month alone, which Reuters notes puts the fund on pace for its best monthly gain on record.

A mini meme trade was also in the works on Friday.

Shares of BuzzFeed (BZFD) skyrocketed as much as 150% midday after an internal memo reveled the media giant was planning to lean heavily into AI to generate content. Shares closed up 85% on Friday.

That marks a big turnaround for the company, which has lost about three-fourths of its value since going public through a SPAC combination in late 2021.

Reddit-trader favorite GameStop (GME) rose 14% to cap a volatile session.

And Lucid Group (LCID), an electric vehicle manufacturer known for its mega SPAC merger in 2021, surged 43%.

Tesla, which wiped out 65% of its value in 2022 for its worst year on record, rallied 11% on Friday. For the year, Tesla is up 44%.

The stock's rally this week also comes after Tesla's quarterly results beat expectations, with the company telling investors it plans to begin production of its Cybertruck later this year.

"The recent rally in meme stocks and profitless tech stocks is a headfake and there is still plenty of excess capital in the system, even with all that the Federal Reserve has done over the past year," David Trainer, CEO of investment research firm New Constructs, told Yahoo Finance on Friday.

Wall Street’s risk-on mood comes as investors speculate moderating economic data will prompt the Federal Reserve to end its rate hiking cycle sooner than expected. The U.S. central bank is expected to downshift its pace of interest rate hikes to 25 basis-points at its meeting next week.

Friday's moves come in tandem with a broader push higher across the major stock averages that has all three indexes higher to start the year.

The tech-heavy Nasdaq Composite, which shed a third of its value in 2022, is leading the way with a 9% gain so far this year.

Earlier today, Ms. Semenova reported the 2023 rally bears an 'eerie resemblance' to last summer's headfake:

It's been "risk on" for investors in the first few weeks of 2023.

The Nasdaq has gained 9% after losing one third of its value last year.

And some of 2022’s hardest-hit trades — the very ones investors judged most vulnerable to higher interest rates — are clawing back in a big way.

Tesla (TSLA), for example, is up 30% year to date as of Thursday's close. The ARK Innovation ETF (ARKK), a bellwether for speculative tech, is up 20% in 2023. From their lows reached last year, Netflix (NFLX) shares have more than doubled.

But one Wall Street strategist isn't convinced this year's rally isn't a move we've seen before. Which could spell trouble for emboldened stock market bulls.

"So far, price action in January 2023 bears an eerie resemblance to that in July 2022, when risk assets rallied and rates fell as investors bought into the idea of a 'soft landing,'" wrote Gargi Chaudhuri, head of BlackRock's iShares Investment Strategy, in a note to clients this week. "That argument faded and price action reversed as the Fed held firm and went on to hike policy rates by 75 basis points in September."

Just like in July 2022, investors again seem convinced inflation is in the rearview mirror, and that weaker economic data will do away with any more rate hikes.

In fact, market pricing suggests investors see rates ending the year where they stand today, according to the CME's FedWatch Tool. This means investors are effectively ignoring the Federal Reserve's latest forecast published last month, which suggested interest rates would likely close 2023 at 5.1%.

"We think, just as in July 2022, that markets are misreading the outlook for inflation," Chaudhuri said, adding inflation is likely more persistent than the market hopes and pointing to still stubborn shelter costs.

The Consumer Price Index (CPI) released earlier this month showed prices rose 6.5% over last year in the final month of last year, a marked slowdown from the 9.1% high seen back in June.


But while the headline figure is down from its peak, underlying pressures remain prevalent. The cost of shelter, for example, a "stickier" component of inflation that accounts for about one-third of the total index, continued to run hot, rising 0.8% over the prior month and 7.5% from the prior year.

And Fed Chair Jerome Powell's new preferred measure of inflation — services excluding housing — rose 7.4% over the prior year in December.

"We need activity weakness to translate to job losses to address Powell’s preferred services ex-shelter inflation metric, where wages are the primary driver," Alexandra Wilson-Elizondo, head of Multi-Asset Retail Investing at Goldman Sachs Asset Management, said in recent emailed comments.

"We continue to think that we should not fight the Fed because they will demonstrate a slow reaction function on inflationary risk management."

Moreover, incoming economic data continues to show the U.S. economy remaining resilient in the face of elevated inflation and higher rates. The labor market has breezed through monetary tightening, adding 223,000 jobs in December and an average 375,000 per month across 2022. Meanwhile, data out Thursday showed gross domestic product (GDP) grew a faster-than-expected 2.9% in the fourth quarter.

"Just as importantly, markets are disregarding the consistent Fedspeak suggesting that the FOMC is more inclined to keep policy tight to ensure that inflationary pressures do not return," Chaudhuri added.

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on Dec. 14, 2022. The U.S. Federal Reserve on Wednesday hiked interest rates to their highest point in 15 years, signaling that the central bank's battle against inflation is far from finished. (Photo by Liu Jie/Xinhua via Getty Images)

According to BlackRock data, year-to-date flows to fixed income ETFs stand at $30 billion, higher than equity ETF inflows of $16 billion. The last time this happened was, you guesse it, in July. Bond prices rise and interest rates fall, hence the argument these flows suggest the Fed will not raise rates as high as it is forecasting.

According to BlackRock data, year-to-date flows to fixed income ETFs stand at $30 billion, higher than equity ETF inflows of $16 billion. The last time this happened was, you guessed it, in July. Bond prices rise and interest rates fall, hence the argument these flows suggest the Fed will not raise rates as high as it is forecasting.

Moreover, many of Wall Street's forecasts have stocks ending the year little changed or even lower if a recession unfolds.

"We expect inflation to stay persistently high and we take the Fed at its word that it remains committed to achieving its mandate of long-term price stability (which it defines as about 2% inflation) and raise rates to between 5-5.25%," Chaudhuri wrote.

"We do not expect the Fed to ease this year, even as growth slows, making it likely that we will see a recession in the U.S. in the second half of 2023."

Alright, it's Friday, I am in a good mood as I had lunch with a former colleague of mine from PSP Investments,  Frederic (Fred) Lecoq and then he came over my place for an espresso and to go over market charts.

I wrote about it on LinkedIn here.

If it wasn't for my latest bloody inflamed sciatic nerve attack, I'd be in a much better mood (it's a bad one, it's terribly painful and I'm always petrified of making a wrong move to irritate my sciatic nerve).

Anyway, let me begin by answering my question above, despite the fantastic start to the new year in all the crappy stocks that got decimated last year, it's another bear market rally and that musky smell will soon turn musty, more like an awful stench that will lurk all year and possibly next year too.

Moreover, I agree with those who think this bear market rally is "similar to the one in August when the market felt invincible":

As stated above, I also think this market is setting up nicely for bears and the catalyst might be the Fed raising by 50 bps at its next two meetings

That's not what the market expects. it expects one, maybe two 25 basis points rate hikes at the next two meeting, followed by a pause and Fed easing late this year, early next year.

But with financial conditions easing and markets literally behaving as if a new round of global QE was announced, I wouldn't be surprised if the Fed comes in hard (50 bps) at its next meeting and Powell retains his hawkish tone in his presser following the FOMC announcement:

Regardless of whether its 25 basis points or 50 basis points, stick a fork in this bear market rally, it's going to roll over soon:

In fact, this morning Francois Trahan of Trahan Macro Research sent me his latest weekly comment, "The Top Four Factors Every PM Should Not Ignore In 2023," and he clearly states in his email the following:

The bear market rally is about to end. That much is clear from our work. The same tools we used to foresee the current rebound in equities (Sept. 28th Bear Market Rally webinar) are now calling for the bear market to resume starting in February. I wish the market had longer to run and we could avoid what comes next, but alas these are the macro cards we were dealt. Unfortunately, we have a long way to go before EPS find a cycle low and we can start to think about sustainably higher equity prices. 


One thing that clearly stands out is that sentiment has changed during the rebound. Bearish sentiment sat at 61% back in late September and is now down to 33%—it’s been almost cut in half. We were always fearful that higher stock prices would convince investors that a new bull market had begun. We did a follow up conference call on the bear market rally that focused solely on this phenomenon back in November (November 15th Webinar). In our minds, this is a classic bear trap.

It‘s interesting that the equity market and investor sentiment have evolved almost exactly like in the events in the Spring of 2008. We strongly believe that the similarities will continue from here and that serious downside remains for equity indices throughout 2023. This week, we home in on the key factors investors should focus on this year. They are consistent with a bear market scenario and the risk-aversion phase of the cycle. Everyone might want to keep this report handy. It has shelf life and might help throughout the rest of this year.

I'll provide you with the first page of the report below:


Again, don't be cheap, especially if you're an institutional investor in these markets. 

When it comes to top research, pay up for it, which is why I am a huge believer that every large fund that reads Pension Pulse should subscribe to Trahan Macro Research.

In his weekly market wrap-up, "Leap of Faith", Martin Roberge of Canaccord Genuity writes:

Our focus this week is on the US economy and the Q4/22 GDP report, which we believe does not appear as growthy as reported by the media. The headline number came in at 2.9% QoQ CAGR, above consensus (2.6%). While positive at face value, the internals hide a rapid slowdown underway, in our view. First, inventories accounted for 1.5% of the 2.9% quarterly increase (or ~50%). Second, to measure how much US residents are actually spending, we subtract exports (foreign consumption) and add imports (domestic consumption). Doing so, we obtain real final sales to private domestic purchasers and this measure grew at a meager 0.2% QoQ CAGR pace in Q4. Finally, when looking at the highly cyclical components of the GDP, mainly real PCE on durable goods (+0.5%) and gross private domestic fixed investment (-6.7%), both measures suggest the US economy is not performing as well as advertised. In fact, monitoring similar contractions in real gross private domestic fixed investment since the 70s, 8 out of the last 9 episodes preceded/coincided with a recession (Chart of the Week); 1987 stands out as the exception. Thus, the soft-landing narrative currently driving stocks higher makes little sense to us. While looking through the 2023 earnings recession may appear a legitimate stance, as we said before, in the past, this stance required monetary reflation to offset the negative force of downward EPS revisions. We doubt the Fed’s message next week contains the reflation word. More colour on our views when we publish the February 2023 edition of the Quantitative Strategist next Wednesday.

Again, a lot of hype on US GDP growth but when you look beneath the surface, not much there. 

Montreal's Numera Analytics also sent me this excellent comment in the morning, stating the consumer will drag US growth moving forward:

This morning, the BEA announced that US GDP rose at an annualized pace of 2.9% in the fourth quarter, slightly exceeding consensus expectations. Continued consumption growth and a build-up in private inventories were the main factors driving growth in Q4, which mainly reflects cooling goods inflation and a slightly uptick in consumer confidence. However, households have rapidly worked down their pandemic-era savings, pointing to weak consumption growth this year. Our baseline scenario is for real US retail spending to decline 2.3% this year. In addition, our modelling work suggests that elevated interest rates will weigh heavily on activity in coming quarters, translating into a 60% probability of a downturn in the US this year.  

 

Please join us on February 8th at 11AM EST for our online briefing covering our key macro views as well as our top global asset allocation recommendations for 2023.  Please use this link to register if you are interested in joining us.

Are you getting the picture? Forget about the US economy, it's rolling over fast and the stock market will start reflecting this again very soon.

Don't get too caught up in these bear market rallies, they're fun, no doubt but ultimately they're meaningless as stocks roll over and crash harder each and every time.  

Now, I'll admit some of these sectors like semiconductors look like they breaking out here:

But don't fall for it as I predict chip stocks will get destroyed over the next two years.

Yes, chip stocks have rallied sharply, ripping the faces off short sellers, but they're going to roll over soon. 

The other stock ripping short sellers apart this month is Tesla.

Recall in my Outlook 2023, I wrote this:

My (not so) bold prediction for 2023 is Tesla shares will be trading below $30 this time next year and Ark Innovation Fund will be closing its shop:

Yeah, I know Cathie Wood is a woman and I'm all for gender and other diversity but here's the thing, in a really bad bear market, the market will dictate how good you are, and the market will be brutal, it doesn't care about your gender, race, religion, disability, sexual orientation, etc.

The Cathie Wood honeymoon is over, it's been over since I wrote my comment on the unARKing of the market, but now it's really over.

I have nothing against the lady, her time has come and passed. 

In the environment we are headed toward, the men and women will be separated from the boys and girls. 

And that brings me to my other piece of advice, you'd better hire experienced people in your organization, people with brains, brawn and intestinal fortitude because a prolonged and nasty bear market requires true leadership.

Enough of this ESG fluff, responsible investing is here to stay, everyone with half a brain knows and understands this, but it's time to return the focus on money and risk management.

Responsible investing can complement this but the key work is complement not supplant it.

And what did Tesla shares do, they rallied 44% to start the year after getting clobbered 66% last year.

This week's massive rally was brutal for short sellers and it smelled like a huge short covering rally:

Sure, Elon Mush loves it, his net worth jumped this week but it won't last.

Looking at the daily chart, at best Tesla shares might go back to their 20-day moving average at around $230 but even that's a stretch:

All I know is when Tesla rolls over, it's going to be the beginning of a bloodbath and I still maintain Tesla shares will be trading below $30 this time next year.

That brings me to US long bonds.

I think US long bond prices are gong to retest their lows and go lower as the Fed keeps hiking and that means yields will go higher from these levels, sending stocks in a freefall:


In fact, I wouldn't be surprised if the yield on the 10-year Treasury note hits 6% as core inflation comes in sticky and wage inflation starts picking up this year.

That not good for stocks, especially long duration growth stocks, so get ready for some rock 'n roll in the stock market very soon.

One last thing, the market is to complacent and the VIX is set to shoot up from these levels:


Alright, let me wrap it up there.

Below, Jeremy Siegel, Wharton School of business professor, joins 'Closing Bell: Overtime' to discuss the Fed's next meeting and what the next rate hike would mean for the markets.

Next, Former US Treasury Secretary Lawrence H. Summers breaks down the latest GDP data and why he believes the economy is in an "uncertain state." He also explains why the Fed should maintain maximum flexibility.

Third, Ethan Harris, BofA Securities global head of economic research, joins 'The Exchange' to discuss the state of the economy and the Fed.

Fourth, Subadra Rajappa of Societe General says markets may be "underpricing" the risk of Fed hikes this year. She's on Bloomberg Surveillance with Lisa Abramowicz.

Fifth, Former Fed Vice Chair Richard Clarida joins 'Closing Bell' to discuss whether inflation is moderating fast enough, how he sees the job market, and more.

Lastly, Kari Firestone, Bryn Talkington and Jim Lebenthal join the 'Halftime Report' to discuss the Fed ahead of its February meeting and the latest market rallies.

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