by Bryan Perry

November 21, 2023

Investors would be hard pressed to find an experienced market technical analyst that doesn’t think the major averages are “pegged” at current levels – that is, hovering in extremely overbought territory and due for at least a short period of consolidation. This poses a quandary in that the FOMO (Fear of Missing Out) crowd missed the 10% run up in the S&P 500, and they believe the Fed’s next move will be to cut the Fed Funds rate, and the history of year-end seasonality supports this bullish upside move continuing.

The one-year chart of the S&P 500 (below) shows the index roaring up 400 points, from 4100 to 4500 in three weeks, now 150 points above its 50-day moving average (yellow line) with the 20-day moving average (blue line) just underneath, and both turning higher. Connecting the tops of the previous rally attempts, it is clear that when the SPY broke above 4400 in dramatic fashion, it was game on for the bulls.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This torrid rally created some clear gaps, which market technicians would contend must be filled to bring structure to what looks to be a new primary uptrend, following three months of intense consolidation. A pullback to 4400 is a reasonable assumption that qualifies as a “pause that refreshes,” with a full 50% retracement to 4350 a possibility – but much less likely – given the appetite to go long equities.

It’s interesting that while the Dow, S&P and Nasdaq are all trading squarely above their respective 200-day moving averages, Wall Street and the financial media are jumping for joy about the belated move in the Russell 2000, which, in my view, was the mother of all short-squeezes, with questionable fundamentals to support the move. (For some background, the largest subsector in the Russell 2000 is Financials (23%) followed by Health Technology (11%) and Technology Services (10%) as the third highest weighting.)

Shares of the Russell 2000 iShares ETF (IWM) show the index putting in a massive reversal, again on overwhelming short-covering, and trading up to its 200-day moving average (black line) where it slammed into overhead technical resistance and then backed off. For this index to truly break out to the upside, it will require a broad recovery of the small to medium-sized banks, and that’s a tall order.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

For this rally to be confirmed as more than just another Magnificent Seven (top tech stock) breakout, it will require broad market participation, some of which is genuinely taking place in other sectors.

It stands to reason that a sustainable rally will involve some much-needed repair in the banking sector. Drilling down a bit more, we need look no further than the regional banks. Shares of the S&P Regional Banking SPDR ETF (KRE) show this subsector trading right back up to its downward sloping 200-day moving average, following nearly nine months of consolidation from the spring meltdown.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There is legitimate concern about the ongoing risk leverage ownership of sub-2% Treasuries on the books, as well as commercial real estate exposure and the ability to refinance semi-vacant properties with dramatically reduced valuations in a considerably higher environment for commercial mortgages.

The math simply doesn’t work. According to Bloomberg, “The value of distressed U.S. commercial real estate neared $80 billion in the third quarter, its highest level in a decade, as rising interest rates and sagging office demand shook the property market.” And this $80 billion figure pales in comparison to what’s on the horizon. “Those depressed prices make it harder for the industry to refinance the $2.2 trillion of U.S. and European commercial property loans due to mature by the end of 2025.”

For now, it seems this whale-sized problem is of no concern to market participants. Neither is the latest negative outlook by Moody’s regarding the now $34 trillion in federal debt, nor the war in Gaza or the potential of more stress from future Treasury auctions to finance our ever-rising national debt.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

At present, market sentiment is galvanized on the rally in bonds and the perceived surety of a coming Fed “pivot,” with over $5 trillion sitting on the sidelines as potential powder for further market gains. Whether the market does in fact provide the desired pullback of, say, 5%, it will probably be a function of further data that shows the consumer tightening spending into the all-important holiday shopping season.

The latest read on consumers from the University of Michigan survey, showed a fourth straight month of declines for sentiment. This might change for the better with gas prices retreating. In addition, numbers from Black Friday will be out this coming weekend, to add some data. Most weakness in the sentiment poll reflects lower income and millennial spenders that are now having to service student loans again, but those with stock and bond portfolios seem to still be spending freely on discretionary goods and services.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Will investors get their shot at buying the market at a lower level? That’s a hard call. It is rare when a big gap underneath the S&P 500 isn’t filled at some point. It could come soon, or in early January. Just keep an eye on the Russell 2000, the Regional Bank Index, retail sales data and upcoming Treasury auctions.

Most of the eleven S&P market sectors are seeing marked improvement in their respective charts, but again, everything bounced hard on the notion that inflation and interest rates have peaked, and are heading lower.’

A period of digestion over the next couple of weeks would be very constructive to resolve the current overbought market conditions, while affording underinvested investors a chance to leg into equities on a meaningful dip. Whether Mr. Market provides that Christmas gift is another thing. After all, Wall Street’s version of Santa Claus has been known to deliver a hint of Ebenezer Scrooge in years past.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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