Wednesday's Market Minute: If Stocks Don't Rally Now, It's Capitulation Time

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If you ascribe to any of the bull cases that are still lingering and in no short supply, stocks should be rallying right now. Yes, there’s been a bounce since last Thursday, but it’s hardly noticeable on any timeframe outside of an intraday one. Yet the setup looks as good as it’s going to get for a bigger relief rally. Skim through the main bull cases to see why:
1) Fed hikes have been “priced in.” Easily the most popular bull case, and on the surface true, given bonds and the Fed are in alignment for two 50 basis-point hikes the next two months. Powell’s interview yesterday with the Wall Street Journal should have surprised no one. But what exactly are bulls rooting for from the Fed? Powell went surprisingly dovish at the last FOMC, and stocks sold off anyway, so there’s no evidence that a slower path for hikes is necessarily a bull case for stocks. That actually makes sense, if you consider inflation to be the biggest threat to the economy (and thus earnings), and that a slow-moving Fed heightens the risk of inflationary damage. I also think people are misapplying the notion of what can be “priced into" stocks. The Fed will begin tapering next month; these are events that physically withdraw liquidity from the market, so I think it’s extremely presumptuous to assume investors can know their effect until they happen. If anything, the proper framing may be that all this volatility has occurred even without any balance sheet unwind.
2) Stocks are “oversold.” Basically, this just amounts to a plea for help. The carnage has indeed been severe, and breadth did deteriorate in a fairly extreme fashion the past five months. Tech stocks are also selling off faster than the peak from Dot-Com, according to a Morningstar index tracking the group. But actually, one of the simplest measurements of momentum, 14-day RSI, isn’t oversold! It’s at 43 for the Nasdaq and S&P 500, a decent amount above the traditional “oversold” level of 30.
3) Inflation is peaking. Technically, there is some evidence for this, judging by the last two CPI prints, as well as pricing data from sectors like used cars and shipping. But it is a bold, bold assumption to extend it out any further. Not only did that last CPI print come in warmer than expected, but commodity prices are rising again, from agricultural goods to crude oil. 
4) Global risks are abating. Probably the most compelling bull case right now is that Russia’s position in Ukraine appears to be steadily weakening. If peace breaks out, the risk of global conflict subsides dramatically, and it could start a path toward easing some of the supply-side inflationary pressures. Meanwhile, China looks to be on the mend after a fierce wave of COVID lockdowns, which could also release some inflationary tension. But resolution of these issues also means the European and Chinese central bank will be less accommodative.
Clearly, I don’t find any of these bull cases to be particularly compelling, but it would be silly not to recognize their merit and their ability to form a short-term positive narrative. Framed another way, I think this is as good as the bull case gets right now. If buyers don’t seize the moment, that capitulation trade lower that will bring down the house is probably the natural alternative.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.