The Stock Market Is Like a Cat with Nine Lives.

Over the last few months, the stock market’s behavior has been reminiscent of a cat with nine lives as dip buyers have materialized after every meaningful decline. In the market’s slang, this is known as BTFD: Buy the FN Dip. Of course, even a cat with nine lives, has a limited lifespan. But if the post CPI mini-crash bounce is any sign of the times, the cat may still have a couple of lives left.

I’ve been known to say, it’s not the event, but how the market reacts, while frequently noting that the action in the bond market is often more important than what happens in stocks. This week’s action is a perfect illustration of why I say these things.

The worse than expected January Consumer Price Index (CPI) knocked the wind out of the rally in stocks. Yet, at least as of 2/14/24, the market had not broken, as the cat found another life. As usual, the real action was in the bond market, where the U.S. Ten Year Note yield (TNX) rose above the psychologically important 4.25% point on the CPI news, which is now the chart point to watch. That’s roughly a 30% reversal in interest rates since TNX bottomed out in late December, based on the October 2023 top of 5.01% and the December bottom of 3.8%.

In the real world, rising bond yields mean that auto loans rates and mortgages will rise. Barring a quick reversal, they may have already seen their bottom in the short term. Under normal circumstances, this translates into a slowing of the economy as auto sales fall and mortgage rate conscious investors delay or outright pull the plug on home sales.

What makes this situation more precarious, is the disconnect between the official U.S. government employment numbers, which are overall positive yet are divergent from private sector numbers, where anecdotally, layoffs are rising, especially in the technology sector.

Somebody Help Us

The truth is, given the disagreement in the different data sets published on a regular basis, and the statistical distortions and revisions, we don’t really know what’s going on. So, we often must rely on anecdotal data, which unfortunately may only be locally or regionally reliable.

For example, an important, but mostly ignored contributor to the rise in CPI was the influence of persistently high rents and high home prices. Specifically, the composite shelter index rose by 0.6%. This was the third highest contributor to the higher than expected CPI number, behind food and energy.

Yet, regional data, paints a different picture. Consider recent figures from Austin, Texas which show a 12.5% reduction in the year over year rate of multifamily rents. According to the report, the average monthly rent fell from$2270 to $1985. That’s a big drop which occurred well within the time range in which the data might have bled into the CPI, not to mention that it’s unlikely that the month of January saw an equitable jump in rental rates.

Is Austin the only place where rents are falling?

The reasons cited for the developments in Austin, are an oversupply of apartments and a slowing of the post pandemic population growth in the area, which was related to an expansion of the technology sector’s presence in Central Texas. In my area, which is North Texas, I haven’t seen much of a slowing in out of state license plates. Yet, the number of apartments which are near the end construction, and will hit the market by the summer is impressive. Rents here are also flattening out.

My point is that given the disparity of the data, the best approach to making investment decisions, is the market itself.

It’s Better When There’s No Data

The market’s message of late has been simple. If there is no macro data released, stocks are in an uptrend. That’s a sign that there is still plenty of money available to trade stocks. This is more remarkable when viewed in terms of what has been a nearly all or nothing earnings season, where companies have either hit home runs or struck out. Moreover, a few days after a bad set of numbers, the dip buyers are back, loading up on shares.

Bull markets certainly don’t last forever. But, taken as a whole, this is a more positive than negative trading environment, where once the dust clears after a bad number, investors are willing to take their chance on buying stocks. On the other hand, it’s a sign that perhaps many more individuals than will admit are relying on the stock market to pay their expenses – and thus are forced to trade stocks despite the prevailing fundamentals of the economy.

Until recently, the major indexes were making new highs. Most recently, even the ever important, but often ignored market’s breadth indicator, the New York Stock Exchange Advance Decline line (NYAD) finally delivered a bullish confirmation of the potential for higher prices, although it only lasted for a day, thanks to the worse than expected CPI. Yet, NYAD did not break down on the bad news.

The S&P 500 (SPX) recently broke above 5000. But it did so with little fanfare, a fact that as I pointed out to my PCA premium subs last week was of concern. A closer scrutiny reveals that prior to its rolling over on the bad CPI number, SPX failed to rise above is upper Bollinger Band (upper green band), although it was measurably overbought based on the above 70 reading of the RSI (Relative Strength Indicator). Moreover, even after its dramatic post CPI plunge, SPX did not break below its 20-day moving average.

In addition, note that even though the OBV for SPX line dropped as buyers panicked, the ADI line turned up, a sign that short sellers covered their positions at the end of the day, forecasting a bounce of some sort, which materialized on 2/14/24.

This price chart setup suggests that, until proven otherwise, this pullback, albeit a painful one, may be a pause, rather than a collapse. Of course, a meaningful break below the 20 and 50-day moving averages would suggest that things are getting worse.

Furthermore, there was evidence of buying on the dip in selected large cap stocks such as chipmaker Nvidia (NSDQ: NVDA), whose brief sojourn below $700 was met with a flurry of bids, both in terms of short covering and actual buying.

The selling in Warren Buffet’s Berkshire Hathaway Class B stock (NYSE: BRK.B) was also negligible. This is a good sign because Buffet’s holdings, although diversified, are greatly concentrated in consumer related companies as well as in his directly owned businesses, such as large swaths of real estate brokers and retail stores, such as the upscale Nebraska Furniture Mart franchise.

Does the Cat Have Any Lives Left?

Neither the stock or bond market liked the worse than expected CPI figures. But by the next day of trading, the algos, as they often do, had already forgotten the bad news. The U.S. Ten Year Note yield (TNX) remained above its recent resistance level of 4.15%, while the S&P 500 rolled over but did not break below key short term support.

Some stock sectors did better than others. Selected stocks saw active buying on the CPI induced price dips while others kept their losses to a minimum…think of Teflon NVDA and Buffet’s cash cow BRK.B.

Certainly, this is not a time panic, or to be cavalier. Investors who have been raising cash, via taking profits on big winners are in the best position. Indeed, astute investors will continue to evaluate each individual portfolio position based on its relative performance to the markets and how it fits into their overall financial plan.

If the buyers dive into the dip, the odds will favor a continuation of the recent uptrend in stocks, and the cat will live on. On the other hand, every time the dip buyers come in, the cat gives up one of its nine lives. Of course, there is always more data, which means that Thursday’s Retail Sales and Friday’s PPI may well change everything – for better or worse.

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