The S&P 500 closed on Friday 6.5% higher than it was on July 14. Is the correction over, or is this simply a bear market rally?
My guess: a bear market rally.
I will admit that the advance from the depths of the pandemic lows in March 2020 to the high on January 3, 2022, was impressive: 120%. If you used the crash as a buying opportunity, you did very well. But, as the chart above indicates, since then, the SPX is down around 18%, notwithstanding the recent bounce.
Here’s another perspective: since February 2020, just before the lockdowns, the SPX is up 16%. That’s 126 weeks, well over 2 years, for a 16% gain. That’s not nothing, but it’s also not a booming bull market. A retest of the February 2020 top around 3400 is very possible, so I’m not deploying fresh capital at this point.
In fact, this mini-rally is likely a good opportunity to take some cash off the table, and live to fight another day.
This brings us to:
Bitcoin
Bitcoin is up almost 20% since the low on July 13. Same question: is the the start of a new bull run, or merely a bear market rally? The chart tells the tale:
This sure looks like a bear market rally.
It’s possible that the bottom is in, but it is also very possible that to confirm the bottom a retest is required, and that hasn’t happened yet.
So again, the logical strategy is to use the recent uptick to take some cash off the table, conserve cash, and be ready to deploy it when and if a March 2020 style collapse occurs again.
I have no idea if that’s how it will play out, but for now, that’s the game plan.
Let’s see how it plays out. See you next week.
Deflation and Recession
by JDH on August 6, 2022
Yup, I said it. Deflation. I know, all of the stories in the media are about inflation, but look at the evidence: commodity prices are down significantly from their peaks in February. Consumer expectations are crashing.
Ask yourself this: are consumers more concerned about inflation, or about interest rates?
The answer, for anyone with variable rate debt, is interest rates. With higher interest rates it’s more costly to buy a house, or a car, or service your existing debt. Less buying is deflationary. Simple as that.
But unemployment is low!
Yes, but unemployment is a lagging indicator.
It takes time to hire and train an employee, so employers are always playing “catch up.” Employers don’t say “I think I will be busier in six months, so I’ll incur the expense of hiring and training employees now, because I may need them in the future.” No, when you are busy you start hiring, and as you get less busy you are reluctant to incur the severance costs to reduce your workforce, so you hang on to your employees longer than needed.
That’s how it works.
So, stay tuned.
Higher interest rates are crashing the real estate market, and everything else, and that will lead to much lower inflation this winter.
That’s also not good for the stock market, so be forewarned.
Or not. What do I know?
See you next week.