It's been a relentless rise as the market keeps making fresh all time high after all time high. In my last post I suggested that pullbacks would be shallow...what pullbacks? It's been nothing but pain for bears who got trapped shorting that first big rally from the bottom in early October. So now what? Well, pretty much all short term indicators are redlining here which suggests at the very least that the market is due for an immanent rest but I suspect that rest will be relatively shallow and short lived and we close out the year at a high. We'll see. I reserve the right to change my mind if evidence suggests doing so. I've sold almost all my energy holdings at this point. We'll see if I end up regretting that.
So what's causing this rip higher in the market? I think the market is sensing peak inflation here. Remember, inflation scares are what caused bond yields and energy prices to spike and markets to sell-off in September. Now we've recovered all those losses and then some. Freight rates have rolled over energy prices have stabilized and are are possibly rolling over, and there are early indications that some supply chain bottlenecks are starting to subside. I read how Ford and some others have reported that chip shortages are easing. The big bad tapering event this week turned out to be a non-event which caused further FOMO capitulation.
The key to this market all year has been to avoid chasing/embracing the narrative of the day. In my last post I mentioned how financials and energy were being chased and therefore due to underperform. That has certainty been the case. Growth and US stocks have resumed their dominance since mid May. For many months Ken Fisher has suggested that the COVID decline was a large correction in the bull market that started in 2009 and therefore the sectors/factors that were leading prior to COVID should eventually resume their leadership. It looks like he's going to be proven right especially if inflation pressures subside and we get back to low but stead growth in the coming months which seems poised to happen. The huge fiscal boost we've gotten during the past 2 years is set to subside significantly next year.
So, the big question is, how does this all end? When will the next big bad bear market happen? What we've been missing is the full embracing of the bull market at a time when monetary and fiscal conditions are unfavorable. We've seen some instances over the years where froth was apparent like earlier this year, but then we would get a shakeout that washed out the froth and revert it back to pessimism/skepticism. I don't know what it will take for us to get the ultimate peak but there's certainly some late bull market stage indicators out there. Margin debt levels, the high level of quit rates for example. Will next year's fiscal drag be the trigger to cause a bear market or at the very least a 20%+ correction? Stay tuned ad stay vigilant...
