Once More Into the Breach

Once More Into the Breach

Realistically, the market is having a fight between those who are thinking the Santa Rally has started and those who are worried about an overbought market concentrated in a few megacap tech stocks. I can see that in my own market measures. My short-term, volatile measure says the market tried to start pricing in a bottom on Friday, Nov. 3rd. Meanwhile, my slower-moving trend system hasn’t even stopped the trend towards indicating a slower economy.

These tensions happen all the time. Is this the start of something? If so, how big can it get? Where should you invest?

That, of course, is hard to know. I’d say the major focus of bullishness seems to be the Quarterly Refunding Announcement (QRA) selling fewer long-duration bonds than expected. Thus, bonds are something we need to focus on.

It wasn’t a great sign that the 30Y bond auction went poorly. Some want to excuse that on the troubles of a huge Chinese bank ‘glitching’ the auction. Color me skeptical but we should find out more about how bonds behave as this week goes on.

The economy is still looking pretty good but the market has been acting like the best of times are behind us, which seems reasonable. We’ve been living on enormous stimulus for most of the year, and that looks likely to have peaked. While that’s getting us closer to a recession, we still haven’t seen enough data to say anything is imminent.

The highlight of the week is likely CPI on Wednesday, though the potential government shutdown on Friday should also be noted. The broad expectation is for the headline CPI number to move down from 3.7% to 3.3% but Core Inflation to remain flat at 4.1%. Since Core inflation is more of a focus of the Fed and it’s more than double the desired target of 2%, is that an issue? I think that makes it hard to get excited about aggressively buying bonds, which in turn makes it hard to aggressively buy stocks.

Nonetheless, the stock market has bounced and thus far refuses to head back down. Risk management puts pressure on participating in these rallies or risk being left behind. That’s reasonable but I’d strongly favor buying quality stocks at good prices. This is a dangerous environment with a very real possibility of a strong reversal, and quality stocks can survive that much better than riskier stocks. Further, I’d far prefer quality companies over megacap tech. Tech’s become an expensive, overloved area. While it’s possible they can continue to outperform, the odds are against you, as the top chart helps indicate.

As we head towards the holiday season, investors are eager to greet Santa and his rally? Are early adopters endangering themselves? We’ll see what happens, this week.