Bulls finally have some momentum behind them, but don’t sound the all-clear just yet

The bulls finally have a little momentum behind them. All sorts of technical indicators started flashing green Tuesday. It was one of the best days of the year, with 98% of the S & P 500 closing higher. The S & P 500 also broke out of a one-month trading range, ending the day above its 50-day moving average for the first time since April. The S & P is now 8% off its mid-June low, helped by a weaker dollar and lower natural gas (nat gas is back up today), and a Volatility Index (VIX) below 25. The NYSE advance/decline line, a measure of how many stocks are advancing versus declining, hit a 52-week low last Wednesday and has been up every day since then. Inflation watchers have also been pleased: The average price of a gallon of gasoline has declined for 35 sessions, according to Piper Sandler. Can this continue? The modest rally off the lows is based on distracting investors from the current problems (high inflation, an aggressive Federal Reserve) and getting them to concentrate on the bright shining future they want everyone to believe will emerge in the fourth quarter. Under this bull scenario, macro data will have improved by the fall, the Fed rate hikes which are now front-end loaded toward the next few months will be passed — and the markets will be anticipating rate cuts in 2023. Earnings, which may experience a modest dip in the third quarter, will rebound as margins improve. Bulls insist that many sectors (speculative tech, banks, industrials) have seen notable price declines in mid June, and much of this is already priced in. One caveat, though: Behind all this “hopium” is the assumption that any recession will be mild. If you swallow this, it’s easy to get to the central idea: own growth stocks for later in the year. Typical is UBS strategist Keith Parker, who is continuing to overweight technology, arguing that the sector is seeing “improving relative growth, higher quality and strong pricing power. Valuations and rates overhang may have peaked.” The idea that after a possible retest of the lows in August and September stocks (particularly growth stocks) will see a rebound in the fourth quarter is a fashionable opinion, but it’s still a minority viewpoint. Morgan Stanley’s Mike Wilson, who has been bearish recently, pushed against this in a note to clients last night: “We’re skeptical of this optimism amid continued broad cost pressures and decelerating top line, and think it’s just a matter of time before 4Q22 and early 2023 margin estimates are revised lower.”

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