Wall Street’s Grinches Say Sell, But The Santa Rally Ain’t Over Yet

There are persistent whispers among Wall Street’s big trading houses, which have been leaked and amplified by perma-bear pundits and websites, especially those who missed the October bottom and subsequent rally, that the current uptrend is just about over. They are citing the usual factors to justify their negative opinion:

  • The Federal Reserve won’t lower interest rates anytime soon;
  • Financial conditions are tight;
  • Inflation is still lurking under the surface;
  • The U.S. consumer is tapped out; and
  • Corporate earnings have topped out.

They may be right. Or not!

Read This Story: Can The Rally Be Trusted?

Remember, these were the same talking points that preceded the October 2022 and 2023 market bottoms. And while everything can change at a moment’s notice, it’s tough to be bearish on stocks during the months of November and December.

So, here are some counter bullets:

  • Regarding the Federal Reserve; at least one Fed Governor, Christopher Wallace, in a recent speech noted he is “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.” The market, which had been falling on 11/28/23, reversed nicely on his comments and may be heading higher.
  • When it comes to inflation, recent data suggests its rate of ascent has flattened and that the worst may be over. Recent EU inflation numbers clocked in at a 2.3% annual growth rate. Of course, the upcoming U.S. CPI and PPI numbers, due out in mid-December may change that.
  • On the other hand, U.S. consumers are indeed struggling. But they seemed to find ways to hunt for bargains during Black Friday and Cyber Monday. And finally, there is the issue of corporate earnings having topped out, which is most likely sector and company related.

My point is that most media reports won’t sort through Wall Street’s headlines or compare them to what’s happening on the ground, in the real world. And given that there are many news sources which specialize in delivering negative points of view, no matter what’s happening, there is a better way to sort through information. I prefer to look at price charts, to see things for myself in the real world and then compare the tangible evidence to Wall Street’s chatter and the financial headlines.

Let’s go through a few of my favorites. But first, let’s get a bit more granular.

Can’t You See? Financial Conditions Are Tight.

A prevailing line of thought is that financial conditions are tight. That’s because higher interest rates dampen loan demand which in turn shrinks the amount of money available to do business. This is also known as a decrease in liquidity. Periods of low liquidity are usually negative for stocks.

Yet, the picture painted by the Chicago Fed’s National Financial Conditions Index (ANFCI), a reliable measure of the financial system’s liquidity, is currently bullish. That’s because its components are all moving lower.

The Black line, the composite/summary of all the variables leads the way. But it’s not alone. Note also that each individual component; leverage, credit, and most important – risk, are all heading down.

Compare today’s NFCI to that which we saw in the spring of 2020 when the pandemic shut down the economy and liquidity dried up.

But The Consumer Is Tapped Out

This is another popular reason for Wall Street to trumpet a top in the market. Certainly, inflation has not been kind to the average person. But aside from distress, it has brought about behavioral changes in consumers. Indeed, because consumers are more cautious, and retailers are adjusting, Black Friday and Cyber Monday sales were better than expected, even as reports of a rise in the use of the so called Buy Now Pay Later strategy are plentiful. My office cleaning lady took the opportunity presented by Black Friday bargains to buy a new, quieter, vacuum cleaner…she got a 54% discount!

None of this negative talk is new. Retail CEOs, ranging from Walmart (NYSE: WMT) to Target (NYSE: TGT) have warned about changing customer attitudes and penny pinching, and have reduced future guidance. Yet, while Walmart shares are struggling, shares of one of its major rivals, Costco Wholesale (NSDQ: COST) continue to scale new heights.

I’ve seen rising store traffic on recent visits to Costco. On the other hand, on a recent trip to Walmart there were few shoppers. And get this! I negotiated a lower price for some outdoor furniture. Yeah, I talked Walmart down on a backyard table. They were glad just to make a sale.

The consumer may be struggling, but is not tapped out. Instead, people are changing where and how they shop.

Bond Yields Tell a Different Tale

If inflation is still running rampant, why are bond yields heading lower? The U.S. Ten Year Note yield is the bellwether for the U.S. Treasury bond market, and the benchmark for the U.S. 30 year mortgage. As a result, its trend affects the housing market which accounts for 16% of U.S. GDP.

Moreover, the bond market is a highly sensitive inflation marker. And its current down trend suggests that the fear of inflation is fading, even as the inflation bogey man talk circulates in the media.

Its positive effect on the homebuilder stocks is evident as the SPDR S&P Homebuilder ETF (XHB) is in a tight consolidation pattern after its recent gains. What makes this rather remarkable is that new home sales data for October were worse than expected, yet there was no crash in the homebuilders. Moreover, as I drive around, I see a steady rise in new homes being built. Meanwhile mortgage rates are dropping steadily, which will likely bring potential homebuyers off the sidelines.

The Big Picture for Stocks

It’s not what Wall Street says that matters, but how the stock market responds. And until proven otherwise, the market isn’t buying into the negative talk.

Check out the price chart for the New York Stock Exchange Advance Decline line (NYAD, above). Note the following:

  • NYAD has just crossed above its 200-day moving average. This means more stocks are rising than falling, and are likely to do so for the long term until the line falls below the 200-day line;
  • The CBOE Volatility Index (VIX, upper panel) is near its recent lows. That means that market participants are currently in bullish mode. When VIX rises it’s a sign that pessimism and the risk of lower prices are rising; and
  • The RSI (Relative Strength indicator, lower panel) is below 70.

Together, these indicators are hardly gloomy.

Where is the Money Flowing?

It’s important to follow the money to where the profits are. In addition, it’s often the sectors of the market with positive money flows which offer clues as to where the economy may be headed.

The Materials Select Sector SPDR Fund (XLB) is a perfect example. This ETF houses all types of non-sexy stocks; the ones Wall Street loves to hate. Here you can find companies in the chemical, and related industries such as those who manufacture paints, insulation, asphalt and so on. Because there is no glitz, Wall Street ignores these companies.

Yet, XLB is well off its recent bottom and looks to be heading higher. Usually, chemical companies don’t rally unless there are expectations of an increase in demand. There is usually no increase in demand unless people are building things. And people don’t build things unless borrowing money is easy. And of course, no one lends anyone money during periods of tight money conditions, which according the NFCI, is not currently the case.

Bottom Line – Trade What You See.

Wall Street is calling for a market top. The big banks and trading houses are citing tight monetary conditions, a tapped out consumer, persistent inflation, and a top in corporate profits as the reasons for the current rally in stocks to fizzle out.

They may be eventually be right. But, then why is the NFCI moving lower? Why is the New York Stock Exchange Advance Decline line charting a constructive path? How is the tapped out consumer buying holiday gifts on Black Friday and Cyber Monday? Why are bond yields falling, if inflation is still running rampant? And why are economically sensitive stocks such as homebuilders and builder materials doing well?

Is everything peachy? Of course not. Many people are working multiple jobs and struggling to make ends meet. There are pockets of weakness and uncertainty everywhere. But the lost art of bargain hunting has returned. The system is adjusting.

So, check out some price charts and compare them to the chatter. Go out and kick some tires. Drive around town and see where the building action is taking place. Negotiate with Walmart. Stalk those bargains.

In the end, it’s all about connecting every day events with what’s happening in the market, trading what you see and always being prepared for the inevitable changes, which may be just around the corner.

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