Wednesday's Market Minute: Respecting The Limits Of A Bear Market Rally

In the past two weeks, stocks have rallied through scorching-hot inflation data, the possibility of a 100-basis-point hike by the Fed in July, a revenue slowdown in bank earnings, and almost a million subscriber losses by Netflix NFLX. It’s an unmistakable tone change that has crypto and stock prices at the highest in a month. 

The technical action in risk assets is the most impressive of this 8-month bear market, with the Nasdaq and bitcoin both steadily putting in higher lows on the chart and doing it despite a fresh 20-year high in the U.S. dollar just five days ago. Last Friday, the red light on stocks in my Risk Radar turned yellow, and today the same happened for bitcoin as it breached resistance of $23,000. If it holds, a reasonable target for bulls to test next would be the level from which we broke so hard a month ago: $30,000 bitcoin and 13,000 Nasdaq. 

Don’t get carried away.

The best explanation for why this is happening is that the implications of a likely recession have been well-processed by the valuation destruction that’s already happened in U.S. equities. In the context of an entrenched bear market downtrend, a relief rally that recalibrates short-term expectations should not be confused with absolute trend reversal. There is some compelling logic for a sustained bounce – the way stocks just rallied through bad data recalls the bottom of the 2020 COVID crash – but we still haven’t heard from the most important people in the room: corporate CEOs.

Netflix, a stock that boomed during COVID and bombed in the recovery, is a good representation of one of today’s big predicaments: sell companies that will never top the growth rate they posted during COVID, or buy them as they mature into sustainably profitable businesses? Volatile quarantine winners are secondary to economic powerhouses like Apple AAPL and Amazon AMZN, but this season’s big test will be how retail businesses fared during record-low consumer sentiment, and whether anyone wants to buy cloud stocks that somehow still don't make money.

Nothing’s changed with inflation and the Fed. The dollar is still solidly trending higher, which means we should expect bond yields to follow unless the greenback plunges. It’s dumb to not recognize a bullish stampede when it’s gathering, but it’s equally unwise to wander far into grizzly territory.

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