Swing, Swing: Wild Week

However, one (important) difference between the environment over the summer and now is that there was no data-based basis for the launch off the mid-June market low. Pivot hopes were just that—hopes. We were decidedly not in the camp that the Fed would soon have anything resembling a green light to pivot from aggressive rate hikes to rate cuts as soon as the first half of 2023. A pause-to-assess by the Fed, which we expect sometime in the first half of next year, is not the same thing as a pivot.

The rally was also aided by quite dour investor sentiment conditions leading into last week. We have been pointing out the better (contrarian) environment for stocks—at least as it related to attitudinal measures of sentiment. Last week's "crypto carnage" (more on that below) was a likely trigger for behavioral sentiment measures finally falling into line with attitudinal measures.

SentimenTrader's Panic/Euphoria Model, which is a blend of attitudinal and behavioral sentiment indicators, recently inflected higher from a historically low reading, as shown below. As the accompanying table highlights, although equity market performance was mixed historically in the near-term after similar inflections; it was universally strong a year later.

So, even though inflation has likely peaked—which takes some downward pressure off equity multiples—the denominator (earnings) in the P/E equation may be under increasing downward pressure. That, all else equal, puts upward pressure on equity multiples.

Naturally, cryptocurrencies and related stocks initially took a beating on the news. Bitcoin dropped last week by 20%, making November thus far the worst month since June (which saw a drop of more than 40%), as shown below.

We'll need to see a series of performance divergences to confirm that crypto's struggles aren't hitting the stock market materially. That can't be ruled out just yet, partially given our suspicion that an increasing number of investors have had (and/or may still need) to liquidate equity positions in order to cover for any ongoing crypto weakness by way of margin calls.

As shown below, last week's rally did little to chip away at losses over the past year. By way of example, even with last week's double-digit surge for non-profitable tech, the cohort is still down by more than 70% from its all-time high. Even the best performer in this group—a cohort of stocks favored by retail traders—is still down by more than 40% from its high.

We continue to emphasize that stock-oriented investors should stay up the quality spectrum, and focus on factors like positive earnings revisions/surprises, strong free cash flow, healthy balance sheets, dividend growth, and high return on equity. There are times when moving down the quality spectrum makes some sense, as a way to "leverage" a potential sharp inflection higher in economic growth. Like with the incomprehensible "pivot perspective" that fueled the rally from mid-June to mid-August, last week's mildly positive inflation news is insufficient to suggest that inflection is upon us.

We'll conclude by revisiting the conclusion of our August 22nd report titled "Fade." To wit:

"The flash rally and crash of stocks like many of the memes should serve as an important reminder for investors: Neither 'get in' nor 'get out'—and/or 'get rich quick' schemes—are investing strategies. They simply represent gambling on moments in time—the antithesis of investing, which should be a disciplined process over time."

That's a good place to end.