Thanksgiving is right around the corner and then the Christmas holidays are upon us. Will Santa deliver coal, or will the stock market find gains in their stocking?

 

The bulls are expecting a pretty good market between now and year-end. Historically, the evidence is on their side, although there have been several years when the Grinch stole Christmas, stocks usually gain during the coming holiday season.

 

On the other hand, history has not been as reliable in predicting the market's direction of late. That is understandable, given the continuing presence of COVID mutations, a European War, soaring inflation, and rising interest rates. If the equity market wanted a wall of worry to climb, it surely has one.

 

On the plus side, we have had two inflation indicators, the Consumer Price Index, and the Producer Price Index for October, signaling that if inflation isn't declining, it is at least not rising as fast. As a result, interest rates and the U.S. dollar have also declined a little. All the above has given equities a reason to reach my target area (4,000-4,100). This week, the S&P 500 Index hit 4,028.

 

I expect that we are running out of bull fuel. We could hit the higher end of my range, but if we do, the markets would be rising on fumes and would not likely stay there very long. Does that mean we have to immediately re-test the year's lows? Not necessarily.

 

Over the next week or two, I see increased volatility with a risk of a 100-point pullback on the S&P 500 Index down to 3,850. However, a bounce could happen after that. Slowing consumer demand, worries over Christmas sales by U.S. retailers, and further layoff announcements should dampen enthusiasm for stocks. And then what?

 

We have three inflation points in December. The Personal Consumption Expenditure Price Index (PCE) will be released on Dec. 1. It is this inflation index that carries the most weight with the Fed. It sets up a binary event for the markets.

 

If this number is cooler than expected, investors will believe it confirms that inflation is dropping. Markets would rally if that happened. If it comes in hotter, then we swoon. Either way, we still have the next CPI and PPI numbers to contend with, so prepare for further volatility.

 

On Dec. 9, the CPI is released, followed by the PPI on December 13, 2022. Those could be wild card events -- either to the upside, or the downside. And on Dec. 14, the next FOMC meeting decisions will be announced, along with Chairman Jerome Powell's Q&A session afterward.

 

As you can imagine, the fate of the markets will rest on how all these data points line up.

 

Economists argue that market participants are asking for trouble by resting their hopes on just two inflation numbers. I agree. We are bound to see a lot of fluctuation in the coming months in the inflation data. Rarely, do we see inflation drop precipitously without some exogenous event to trigger a free fall. Economists would expect several conflicting inflation reports, some up, some down, before seeing a new trend form.

 

The Fed has already stated that while they welcome the good news on the inflation front in the short-term, nothing is going to change in their stance. This message was underscored repeatedly last week by a long line of Fed Heads who messaged the markets that interest rates are going to stay higher for longer.

 

So where does that leave us regarding the cherished Christmas rally? I imagine we will see several rapid moves up and down in the markets before the FOMC meeting in mid-December. At that point, I am hoping (but not expecting) that the Fed will be less hawkish. There is a high probability that Powell will walk on that stage and dun his Grinch mask. If he does, it would likely be a "look out below" moment for the markets. In which case, think coal in your stockings. However, given the soaring price of coal worldwide, a little coal in my stocking would not be all that bad.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

It should have come as no surprise, but it did. Investors were poised for a slightly less hawkish Jerome Powell but were once again disappointed by the Federal Reserve Bank chairman.

 

Chairman Powell and his Federal Open Market Committee's decision to maintain a course of rising interest rates for longer punctured this most recent bear market rally. The three major indexes dropped more than 2 percent and continued to fall for the remainder of the week.

 

There was nothing new in the FOMC statement, nor in Powell's remarks afterward in the Q&A session. To some observers, he seemed even more hawkish than usual. Sure, he conceded that at some point, the Fed might pause in their tightening but not yet, and a pause would not mean a pivot toward a more dovish stance anyway.

 

How many times will the Fed have to reiterate its stance before the markets get it? If there is money to be made in promising hope without reason, traders will continue to suck investors into these bear market rallies. However, there may be other more interesting areas that an investor might want to consider.

 

For example, those who have been hiding in cash, or those who may be losing their shirts invested in equities, may want to consider purchasing some U.S. Treasuries. One-through-five-year notes are yielding between 4.87 percent and 4.44 percent. Granted, that is only giving you about half the present inflation rate, but even the Fed is expecting the inflation rate will come down over the next 12 months. In the meantime, you are at least earning something, instead of losing more money in the stock market.

 

Another suggestion might be to consider Series I Bonds, which are U.S. savings bonds that protect you from inflation. You earn both a fixed rate of interest and a rate that changes with inflation. Twice a year, however, the government resets the inflation rate for the next six months. Nov. 1, 2022, for example, was the last day you could have purchased an I Bond that was giving you more than 9 percent. That rate has since dropped to 6.89 percent for the next six months and will likely see a comparable drop six months hence. You must keep I Bonds for one year after purchase.  

 

Now that doesn't mean you should go out and sell everything and pile the money into U.S. Treasuries. But investing some money in short-term debt might be a smart investment. I would at least ask your investment advisor about the possibility if you haven't done so already.

 

So, is this latest rally over? Not necessarily, but if the markets are going to continue to move up, at least for another week or two, it will have to be on something other than Fed policy. About the only bullish event in the U.S. that I could see that would trigger another rebound would be the results of next week's mid-term elections. 

 

As of today, Republicans are expected to take back the U.S. House, and maybe the Senate. If so, a two-year period of paralysis will likely descend again on our government. Historically, financial markets have liked that kind of political standstill. No new major legislation would likely be passed. That means taxes will not rise, nor would spending increase, except on the margin. Predictability is the grease that oils the wheel of market gains, all things being equal.

 

Rumors that China may be considering lifting its Zero-Covid policy propelled the markets higher on Friday. If this rumor, which is based on a news story from Bloomberg News, turns out to be true, that could give a major growth boost to world economies. China’s economy has been disrupted by their frequent openings and closings of cities, factories, ports, etc. based on virus outbreaks. A change in policy could boost demand, imports, exports and impact many companies worldwide. However, even if the rumor is true, a full reopening of the Chinese economy wouldn’t happen until March 2023.

 

Could that outcome trigger a rally in the markets for a couple of weeks? Probably, and we might be able to put together a bullish scenario that could see my target of 4,000-4,100 met on the S&P 500 Index achieved. I warned investors that this relief rally would be different and so far, it has been — lots of ups and downs. In the meantime, equities are still at the mercy of interest rates, the strong U.S. dollar, and geopolitical events.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Traders are hoping for good news from the Federal Open Market Committee meeting on Nov. 2. Stocks have been rallying in anticipation, but the Fed has disappointed before. Will they do it again?

 

The bulls figure it this way: The economy is expected to weaken, at least moderately. However, the third quarter Gross Domestic Product (GDP) came in a bit better than expected rising 2.6 percent versus the 2.3 percent expected. So, there is no real proof that the bulls are right quite yet.

 

As for the slowing of inflation, there is little evidence of that as well. The Personal Consumption Expenditures Price Index (PCE) is a measure of prices that Americans pay for goods and services and is closely watched by the Fed. The PCE for September did come as expected, 0.5 percent. The University of Michigan Inflation Expectation index also rose in October.

 

Bond yields continue to gyrate and are held captive by every macroeconomic data point that is released. The dollar seems to be topping, at least in the short term. However, topping may not mean down, but just a period of moving sideways.

 

Nonetheless, the above combination of macro fundamentals is supporting stocks. The strength of the market has been even more remarkable given the earnings results of Google, Microsoft, Amazon, and Meta. Together these stocks comprise an enormous weighting in the overall market. Earnings results have been bad to terrible for these FANG stocks. Apple is the lone positive, beating analysts forecasted results. However, even Apple warned that the coming holiday season would not be great for the company.

 

 Weeks ago, I explained to readers that this rally would be led by energy stocks, materials, precious metals, financials, utilities, and health care. For the markets to continue to hold their own (or move up), will depend on the strength of those segments of the market. I also advised, "don't expect markets to move straight up. Each economic data point will provide an excuse for traders to move markets up or down, but overall, the trend should be your friend." That has been the nature of this bear market rally.

 

Most strategists had been warning that this third-quarter earnings season would be a make-or-break event for the markets. I have ignored buzz kill predictions like that. As you know, I am cynical about the Wall Street quarterly earnings game. The way it works is that analysts cut their forecasts drastically in front of earnings, which then enables companies to "beat" these forecasts. Usually, a "beat" will see a company's stock price stock move up several percent or so.

 

The facts are that earnings, sales, and corporate guidance have not been stellar, despite the supposed "beats." More and more corporate managers are predicting a recession. Some have even given up providing guidance claiming that the environment is so uncertain that they cannot predict sales and profits with any certainty.

 

However, that is not what is moving markets in my opinion. It is the decline in the U.S. dollar and the recent pullback in bond yields that has done the yeoman's work, along with what I'll call "hopeification" that the Fed will turn less hawkish.

 

In recent days, we have seen the dollar decline on the back of intervention. The Japanese, Chinese, and British treasuries have been selling dollars. At the same time, the fear of recession has put a halt to rising yields in the bond market, at least in the short term.

 

What has not been a factor in the markets thus far is the mid-term elections, which are right around the corner. In past years, there was much more discussion, positioning, and predictions on what would happen to the markets and the economy depending on which party came out on top. I assume that neither party will have a meaningful impact on resolving the problems of the economy over the next two years, despite campaign promises.

 

I still think we continue higher with the S&P 500 Index reaching the 4,000-4,100 level in the days ahead. Of course, all bets are off if the Fed turns even more hawkish next week but I'm betting they won't be.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

It was a week that looked promising. The three main U.S. averages spiked higher, gaining almost 4 percent in two days on no news. The remainder of the week saw profit-taking. Blame higher interest rates and a stronger dollar. 

 

The benchmark yield on the U.S. 10-year Treasury bond has topped 4 percent this week and hit 4.3 percent on Friday. The greenback climbed higher as a result. It is about one percent below its year-to-date high on the U.S. Dollar Index (DXY) of 114.78. As interest rates and the dollar continue to climb higher, stocks can still go up, but only to a point. We have reached that point this week.

 

The impetus for these rising rates is the bond market's belief that the Federal Reserve Bank will be unrelenting in its promise to raise interest longer and higher than the equity markets had hoped. Underlying this belief is the continued strength of the economy and the persistent strength in the inflation rate. Nothing in this statement is new. So why do both the bond and stock markets continue to ignore that fact?

 

I believe there is a hidden conflict among traders and investors that explains this divergence. It has its roots in the underlying, short-term behavior of equity and fixed income traders today versus the longer-term approach of the Fed.

 

This is understandable given the nature of the markets. Bond investors historically have thought in terms of months to years. That has changed somewhat as young, inexperienced, bond vigilantes attempt to push interest rates up and down rapidly. Many argue that the volatility in the bond market outstrips that of the stock market.

 

That is more difficult to accomplish given the depth of assets in the bond markets. In short, it takes a lot more money to move bonds around than it does stocks. However, applying leverage can amplify price movements.

 

In comparison, the Federal Reserve Bank thinks in terms of years. Inflation is high, and in their view, it will take anywhere from a year to three, or more, before they can manage to bring inflation down to their stated target of 2 percent. No matter how many ways they express those sentiments to market participants, investors, fail to believe them. Why?

 

Equity and bond players, I believe, have become increasingly short-term in their trading behavior. Generally, 70  percent of them (day and algo traders) are immersed in trading where the time horizon is in minutes, if not seconds. Long-term to them is, at best, a couple of weeks. Why is that significant?

 

The markets have been in a downtrend since December of last year. The decline has tried the patience of these new financial jockeys. They simply do not have the temperament to accept the longer-term perseverance that is required in these troubling economic times. They might be able to accept that the Fed will continue to raise Fed funds to some terminal rate of 4.5 percent or so, but then what?

 

The mistaken assumption is that the Fed will immediately start reducing interest rates again. What if interest rates simply remain at these higher levels for much longer? Most traders can't conceive of that happening. What if interest rates remain elevated for a year, maybe more? If so, we may face declining markets at worse, or sideways markets at best for longer than many might expect. 

 

For someone who began his financial career in 1979, I know how dreadful a sideways market can be. At the time, I think the S&P 500 Index gained a total of 26 points from 1979 to 1982.

 

From a technical point of view, we are still in a downtrend, and to see markets do what I want, we need to get above 3,800 on the S&P 500 Index by 20 points or so. I believe we will see that happen over the next week. However, we could easily see a hundred points or more down before that happens. 

 

How high could we go if I am right? A guess on the upside would be as high as 4,100-4,200, over a few weeks.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Oversold, stretched to the downside, too bearish, call it what you will, stocks bounced from another bottom this week. How long can this rally last?

 

It was the first time the Dow Jones Industrial Average fell at least 500 points and then rose 800 points in one trading day. The S&P 500 and NASDAQ gained 2.6 percent and 2.2 percent respectively. The huge turnaround was even more impressive when you consider that this week's inflation numbers, the Producer Price Index (PPI), and the Consumer Price Index (CPI) both came in hotter than expected.

 

The Bureau of Labor Statistics revealed that in September the CPI rose 8.2 percent over the prior year and 0.4 percent over the prior month. Core CPI rose 0.6 percent, month over month. Investors were hoping that inflation was at least flat-lining, but that does not seem to be the case. September's PPI came in hotter than expected, indicating a 0.4 percent jump in headline PPI. These numbers bolster the Fed's case that equity investors should prepare and accept that interest rates will be higher interest for longer.

 

However, the disappointment and subsequent sell-off that one would have expected didn't quite happen in the way day traders expected. The PPI announcement on Wednesday caused a bit of a downturn, but nothing major. Before the CPI was reported at 8:30 a.m. on Thursday, Oct. 13, the S&P 500 Index was up over 1 percent. An hour and a half later, the disappointing data had driven the market down to a new yearly low of 3,491.

 

At their lows, the NASDAQ was down 3 percent, the Dow nearly 2 percent and the S&P 500 dropped more than 2 percent. By the end of the day, however, we closed at 3,669, which was an intraday swing of 175 points off the day's low! Financial commentators were at a loss to explain the massive move up on after hitting yet another yearly low this week.

 

The explanation is simple for those who understand the options markets. Options are contracts that give the bearer the right — but not the obligation — to either buy a call or sell a put an amount of some underlying asset (in this case, stocks) at a predetermined price at or before the contract expires.

 

There were a ton of put options in place that professional investors and market makers had purchased over the last few weeks. Puts make money when the markets go down. The purpose was to hedge (protect) their stock portfolios in the event of further bad news, which is a common practice in the financial markets. They were bracing for the worst to happen and got what they wished for.

 

The CPI inflation data triggered massive selling. Billions of dollars of put options were suddenly "in the money" and traders began to take profits. What happens when you sell all these puts? The selling pressure in the markets subsides, and the markets, like a beach ball underwater, pop to the surface. Of course, Friday, we retraced more than half the prior day's gains on both the S&P 500 and the NASDAQ Indexes. That is what happened this week.

 

Technical target levels around the 3,500 level on the S&P 500 Index had been reached. It was a downside target that I, and many others, have been predicting for weeks. Markets reversed from there. Were there massive amounts of fundamental buying? No, it was simply another exercise in short covering on a grand scale. That, in a nutshell, has been behind every one of these bear market rallies this year.

 

I am expecting several more days of up-and-down consolidation before traders try to move the markets higher. I will keep my fingers crossed that this relief rally continues.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.