A Dead Cat Bounce or Yet Another Bullish Reversal?

Peter's Market Rap for the Week Ending November 3, 2023

A Dead Cat Bounce or Yet Another Bullish Reversal?

Fascinating.  That was my word for the week.  Indeed, for a market handicapper like me, this was one of the most interesting weeks in the economy and stock market in recent memory.

After about two painful months of a downward trend that resulted in the S&P 500 plummeting below a key support level of 4,200, the market rebounded sharply for the week, gaining nearly 5%. 

The question is whether this is a so-called “dead cat” bounce of a market destined to fall back down again and HARD or whether we are in for yet another ride up a range-bound market ripe for short-term trading.  One possible answer lies in parsing some of the bullish factors driving the upward move to see if they have any lasting power.

The first thing we can rule out is that stock market investors are betting on growth in the economy to catalyze a related growth in earnings that would justify a move up in stock prices.  (Almost) all signs point to slowing growth, certainly over the next several quarters and perhaps for a year or more as interest rates remain high.

Here, the consensus about the Fed has subtly shifted from the view that, with inflation persistent, rates will be “higher for longer” to the view that, with inflation moderating somewhat, it will be inflation “high for longer.” 

In other words, we can expect 5% short term interest rates, mortgage rates at least in the range of 8% or higher, and credit card debt rate well above 20% for the foreseeable future.  Together, these tight money boa constrictors will slowly squeeze the US economy as we are seeing them now do now.

Once we rule out the “higher growth, higher earnings” theory of a bullish move this week, we are left with the alternative theories of: (1) the zero-sum nature of capital as it is invested across different asset classes, e.g., stocks, bonds, gold, and cash; and (2) a purely technical phenomenon driven by short seller profit taking coupled with a possible short squeeze.

On the zero-sum theory, the news of the week collectively pointed to slower growth even as it yielded a Fed decision not to raise rates. Comments by the Fed chair following that decision were interpreted as dovish.   In response to expectations that rates would not rise further, some cash moved off the sidelines and yields fell sharply on the long bond.  As for gold, it took a volatile plunge midweek but regained most of its luster by end, but still finished down for the week.  With these dynamics, equities would benefit.

In fact, after briefly crashing through key support levels, stocks had one of their best weeks of 2023.  The S&P 500 jumped from 4,153 to 4358.11 or nearly 5% while SPXU fell from $13.18 to $11.40, an almost 14% percent decline. 

Now how about the technical aspects of this week’s market surge.  If you think about it from the smart money’s point of view, you saw a lot of the following behavior:

With the markets in a possible oversold condition and considerable profits showing from short selling over the last month in particular, Monday’s rally triggered profit-taking among the short sellers and as momentum in the week built perhaps a bit of a short squeeze.  This propelled equities higher.

My conclusion from all of this is that for the next week (or more), betting on the market trend long or short will not be an intelligent speculation but rather a reckless gamble as this all gets sorted out, which is another way of saying that cash is once again king.

If you are part of the smart money crowd who believes as I do that stock market risk remains to the downside and you want to be aggressive, you will begin to once again build a short position by SLOWLY layering into that position, effectively dollar cost averaging your short in the conviction that yet one more downward turn of this market is destiny. 

So stay tuned – and remember here, I’m not offering stock market advice but simply helping you to better understand how markets work in the hopes of helping you preserve your wealth and protect your job.  Let’s finish up with a few things that caught my eye:

First, in a classic “macro play” based on the kind of trades I liked to engineer back when I was writing books about the market like “If It’s Raining in Brazil, Buy Starbucks,” I had to laugh at an article about how Krispy Kreme was downgraded as a stock on fears that the diet drug Ozempic might cut into the American public’s appetite for the KK poison. 

Yea, I know Krispy Kreme tastes good, but your heart valves don’t love it and neither do our love handles.  Of course, it won’t be just Krispy Kreme stock that will suffer if the analyst is right; keep your eye on that one.

A second article that tickled my forehead talked about how the TikTok zombies of the GenZ ages of 15ish to early 20ish not only like talking politics at the workplace unlike older cohorts but are also more inclined to reject job offers from companies that don’t support their politics. 

I can’t wait here until the job market cools and these woke young’uns discover that jobs don’t really grow on trees.  What is far more frightening is that in 20 years or so, they will be in charge of an America that many of these GenZ whippersnappers appear to hate.  Yes, Facebook, TikTok, Instagram, et al are doing a very good job indoctrinating our youth into the ways of the woke world.

Ok.  That’s it for now.  Watch your back, watch out for your job, and watch your portfolio carefully.  These are indeed interesting times.