Some of the 9 percent plus gains in the benchmark S&P 500 Index since October should be pared back in the week ahead. That doesn't mean Santa will thumb his nose at investors for the rest of the month. I am still expecting a traditional end-of-year rally.

 

Thanksgiving has come and gone, but stocks have hung in there as November ends. And while technology has marked time this week, we have seen basic materials, precious metals, industrial and financials come back to life.

 

The declining U.S. dollar is largely responsible for those gains. I don't think this upward momentum is over either. I am thinking that the greenback is going to continue to fall and as it does assets that are negatively correlated with the dollar will continue to gain. 

 

Some investors may remember that back at the beginning of August when I expected markets to decline into the September-October period, I wrote a column called "The Catch-up Trade." I highlighted basic materials, commodities, mines and metals, agricultural equities precious metals, small caps, and China as potential adds to your portfolio. 

 

I wrote that "All the above areas have been left in the dust this year as everyone's focus was squarely on the Magnificent Seven and lately AI stocks. As a contrarian, I am attracted to unloved areas like this. That is not to say that the technology sectors of the market will not participate. They will, just not at the same rate as those in a catch-up trade, in my opinion."

 

Except for China (and even there I am still waiting for a snap back higher), all the above areas are rising. Gold and silver have had pretty good runs. I am expecting energy to begin to climb as well. Even crypto, another beneficiary of a falling diamond, is doing well. I expect these areas to continue to climb in the weeks ahead.

 

As I have said, the main locomotive for this trade has been and will continue to be the dollar's decline. As investors see inflation coming down, and an end to the Fed's monetary tightening regime of the last two years, the yield on the U.S. ten-year Treasury bond has fallen by more than 70 basis points in the last few weeks. In turn, that has made the dollar less attractive, so traders are looking elsewhere for more attractive currencies, such as the Yen or even the Euro.

 

On a near-term basis (next two weeks), I am expecting the equity markets to consolidate with a risk of whittling down some of the gains we have enjoyed over the last several weeks. The American Association of Individual Investors (AAII) over the past week has seen the spread between bulls and bears widen by almost 30 points. The percentage of bulls has reached a six-month high, while bears fell to below 20 percent. As readers know, I use the AAII data as a contrarian indicator, meaning the more bullish the date, the higher the risk of a pullback.

 

On a technical basis, it looks to me that we are hitting peak levels on the main indexes. Technology and financials are close to July 2023 highs. Over in the bond market, I expect the decline in yields has been overdone, and we should expect to see a push back up to relieve overbought conditions.

 

If we do pull back, I am expecting something like a "W" pattern of ups and downs, but this should be completed by mid-December. And then what? I expect we will make new highs and continue to climb to as much as 3,800 or beyond on the S&P 500 Index. As such, I would use any pullbacks to add to positions both in technology as well as industrials, and the catch-up areas I highlighted. 

 

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.

This stock market rally lasted nine straight days. That was more than enough to trigger some profit-taking.

 

"Too far, too fast" is my interpretation of the nine-day continuous climb in the equity and bond markets. The rally that started early last week continued this week, although it was clear to me that it is showing some signs of faltering.

 

And as has happened throughout the year, the Magnificent Seven group of stocks was the focus of most of the buying but on less and less volume. Since they represent such a large part of the indexes, it was not hard to see that the indexes were supported by a handful of stocks. However, the remaining 493 stocks in the S&P 500 Index are rolling over, which they have done all year.

 

Bond yields, on the other hand, have stopped going down. Instead, the U.S. 10-year Treasury bond had been consolidating. That is until the bond auctions on Wednesday and Thursday. The 10-year bond auction was fair, but the 30-year sale on Thursday did not go well at all. It was the weakest auction in almost two years. There was little to no appetite for long-dated bonds after the large decline in yields last week. On Friday, yields, and with them the stock market, recovered a bit.

 

To be clear, I am not convinced that we have seen the peak in long-term interest rates. If I look out further than January, I know that next year the U.S. Treasury will need to auction even more bonds simply to finance the government's existing spending plans. Some bond analysts expect more than $2 trillion in fundraising will be on the docket. If so, that should push interest rates back up and yields higher than where they are now.

 

As for the Fed, right now the betting is that there will be no rate hike at the December FOMC meeting. Some now predicting a rate cut as early as June 2024. Those kinds of predictions usually crop up to justify why stocks can continue to climb higher. I don't put much faith in that, especially when not one Fed member has even discussed rate cuts in the coming year.

 

In a speech before members of the International Monetary Fund on Thursday, Federal Reserve Bank Chairman Jerome Powell said the Fed is 'not confident' it has done enough to bring inflation down. He warned that more work could be ahead in the battle against higher prices.

 

 This statement was only a week after the FOMC meeting in which Powell's words were interpreted by the market as indicating the Fed was through raising rates. The moral of that tale is one usually hears what one wants to hear.

 

We are once again getting close to the deadline for a government shutdown. The Nov. 17 deadline is fast approaching and there is still no plan to keep the lights on in Washington. House Republicans are all over the map in what they want. Unfortunately, the new Speaker has yet to table any plan that would satisfy all his members. 

 

What is worse, Senate Republicans are now also demanding stricter border policies as a condition for Ukraine aid. At this point, the best that can be hoped for is yet another continuing resolution that would stretch funding out for another month or two. If not, I would expect the financial markets to hit some turbulence.

 

Chair Powell's words, combined with the poor bond auction, all on the same day (Thursday, Nov. 9), had bulls rethinking the market direction in the days ahead. I am looking for a minor pullback in the averages here short-term. A decline of 30-50 points on the S&P 500 Index should about do it from here. Anything lower than say 4,300 would tell me that there is more trouble in paradise than I am expecting.   

 

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.

Sometimes good news on Main Street is bad news for Wall Street. Let's start with the good news. The U.S. economy grew at its fastest pace in nearly two years during the past three months. Third-quarter Gross Domestic Product grew at an annualized pace of 4.9 percent blowing away economists' expectations of a 4.5 percent growth rate.

 

The resilient U.S. consumer continued to spend, which has boosted growth, defying those who have been expecting the economy to slow down under the weight of 18 months of interest rate hikes. The bad news is the stronger economy will make the Fed's fight against inflation that much more difficult and therein lies the rub for the stock market.

 

The nation's second-quarter GDP came in at 2.1 percent, so the economy is accelerating not slowing. Despite past predictions of a slowdown that has not occurred, many economists are now predicting that this quarter will turn out to be the peak in economic growth. They point to a restart in student loan payments, the impact of lagging monetary policy, and a weakening worldwide economic backdrop as the negatives that will provide a huge impediment to further economic growth.

 

I remain doubtful, at least until U.S. employment begins to roll over. As long as the job market remains strong, Americans will continue to spend. The Fed knows that as well, which is why Chair Jerome Powell is adamant that he will continue his higher for longer interest rate policy. On numerous occasions, he has insisted that before he can relax this stance, he needs the economy to slow. It is doing just the opposite. That is bad news for the stock market.

 

However, the inflation fight, which has long occupied Wall Street's attention, is now in second place behind the fears that government spending is out of control. It is one of the reasons why we are seeing yields on longer-dated bonds continuing to rise. Sure, we have seen some minor pullbacks in yields, but not enough to make a difference.

 

For some reason, investors like round numbers. We hit a 5 percent yield on the benchmark U.S. 10-year Treasury bond early this week and traders bought bonds in a knee-jerk reaction. But is that the yield that will pay bondholders enough to satisfy their fears of higher deficits? I'm thinking we could go higher, possibly to 5.3 percent-5.5 percent or more.

 

Investor sentiment is really in the doldrums. The election of a new House speaker should have been good news, but it wasn't. Whether Mike Johnson, a far-right representative from Louisiana, can compromise with Democrats is anyone's guess. He is the least-experienced speaker in 140 years and his political stance on a whole host of social and economic issues may make cutting a deal with Democrats difficult at best. Miracles do happen, however, even in the Capital.

 

The AAII sentiment readings are extremely bearish, as is the CNN Fear index, which is almost at panic levels. "Stockmarketcrash" was one of the top ten searches on Twitter this week. Good earnings results from some of the market heavyweights like Amazon and Microsoft have not been able to support the averages. All of the above tells me from a contrarian point of view that we are nearing the end of this bottoming process.

 

Since the Israeli/Gaza conflict and the dysfunction in Washington, I have been extending the period of this equity pullback. Originally, I thought all this mess would have been concluded by the end of the second week in October. At the same time, I increased my downside target for the S&P 500 Index level.

 

As of last week, I was targeting the 4,100 level or possibly a little lower. We were only 37 points above that level before we bounced on Friday. Close but no cigar. I could see a worst-case scenario where the S&P broke below 4,100 by 30-50 points. Either way, I expect a rebound to begin in November if not sooner. Future events in the Middle East, however, will remain a wild card for the markets.

 

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.

Investors sold stocks, as bond yields reached new multi-year highs. Third-quarter earnings are almost an afterthought in this climate, and geopolitical events did not help either.

 

The 10-year, U.S. Treasury bond hit the 5 percent mark. The 30-year bond has already broken through that number and then some. The higher yields climb, the more investors fear that they will rise even further. As it stands now, the return you can get by putting your money in bonds is becoming more and more attractive versus stocks.

 

This is happening despite the cessation of long-term bond auctions by the U.S. Treasury this week. Short-term bills and notes have been auctioned instead. The next tranche of longer-dated securities won't begin again until November. You would think that with the pressure off yields, longer-term bonds would have rallied but they didn't.

 

The explanation is simple but also troubling. After years of ignoring the growing U.S. deficit, the financial markets are becoming worried that the government's continued spending is rocketing out of control. I have written about this in past columns, but it seems investors are starting to pay attention to the problem at long last.

 

A reader may wonder why it is so hard for politicians to corral their spending. The simple answer has nothing to do with whether we are talking about Democrats or Republicans. Two-thirds of U.S. spending is earmarked for just two programs: Social Security and Medicare. That's it, and no one in their right mind is going to cut back on those programs unless they want to lose their jobs.

 

That leaves a much smaller piece of the pie to squabble over. Liberals want spending to go to social programs and cut the rest. Conservatives insist it is spent on things like defense and investment instead. In a political landscape, where compromise has become a dirty word, the only answer is to keep spending more and more to satisfy the demands of both sides.

 

A great example of the conundrum we all face is President Biden's emergency funding request to Congress this week. The president is asking for $75 billion to aid Israel and Ukraine. There is another $30 billion he wants to fortify border security.

 

So, who among us is ready to say no to that kind of spending? Sure, some might, but most Americans and their representatives in the heat of the moment are going to want to approve those additional funds. But it was no accident, in my opinion, that when the president first announced this additional spending request on Oct. 18, the yield on the benchmark, ten-yield bond spiked even higher and hit a 16-year high.

 

The Chairman of the Federal Reserve Bank Jerome Powell gave little comfort to investors in a speech before the Economic Club of New York on Thursday. Some investors hoped that he might be willing to relax his monetary policies instead of the recent run-up in bond yields. Instead, Powell said inflation is still too high and warned that more interest rate increases are still possible if the economy stays strong, or if the tight labor market does not ease further.

 

The most he said about the recent surge in long-term bond yields was that "we remain attentive to these developments" acknowledging that if this situation persists "it can have implications for the path of monetary policy."

 

As for the continuing saga of failed governance among the Republicans in the House of Representatives, the facts speak for themselves. Rep. Jim Jordan, the radical politician and Trump lackey, has failed in his attempt to claim the position of speaker for a second time. His followers used social media to browbeat and threaten some Republicans into voting for him. That ruse backfired leaving him no choice but to try again on Friday. Once again, Jordan failed to convince his fellow legislators that, somehow, he had changed his stripes.

 

One hopes that he will accept the "three strikes you're out" verdict, but given his nature, he could very well claim the voting was fixed. He has done it before. The country remains in limbo as a result, with no progress in averting a government shutdown or aiding our allies around the world.

 

Last week, I said we were still in a bottoming process. I expected this period should have been over a week ago. It is still not done. I blame the Hamas terrorist attack in Israel for prolonging this process. I warned that we were going to test the low 4,300s on the S&P 500 Index. If the geopolitical events worsened (and they have) we could fall all the way down to the 4,200 area. That is just what we did. 

 

As of noon on Friday, we were trading 35 points above my low-end target. We bounced off the 200 Day Moving Average at 4,233, which was to be expected. Is it almost over, maybe? I still think we could go lower if the geopolitical news gets worse.

 

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.

As the market enters October, there is both good and bad news. The sell-off that started in September is continuing. The good news is that we should be close to the bottom.

 

Blame the waterfall decline in the price of the 10-year U.S. Treasury bonds, the continuing gains in the U.S. dollar, and the seasonal pattern in the equity market. Throw in the absolute mess in Washington and the market's free fall can be understood.

 

None of this should be new to readers because this is exactly what I predicted would happen back in August. I expected markets to correct into the second week of October and here we are with one week to go. The argument over government spending levels and the potential shutdown has forced investors to focus on not only the amount of our national debt but also the rising cost of servicing it.

 

The fiscal deficit this year is more than $1.5 trillion. Overall, the U.S. government debt is roughly $33 trillion with a debt-to-GDP ratio of 120 percent. Estimates are that we are now paying 8 percent of Gross Domestic Product (GDP) to holders of Treasury bonds worldwide just to service this debt. That number could easily rise to 9-10 percent, or more.

 

I suggest that you take a peek at my Thursday column. It will explain the background and risk to the markets caused by the dysfunction in Washington. Bottom line: we can expect Moody's credit agency to cut its rating of our government debt unless the country and its politicians can get their act together.

 

The Fed's policy of keeping short-term interest rates higher for longer doesn't help. But the bond market is now also bidding up the yields on the longer-end of the bond curve as well. The 30-year bond is almost 5 percent. This is shaking investors' confidence in the soft-landing scenario popular among many economists.

 

As such, all eyes are on the employment numbers. These are the keys some believe to what is happening to the economy. Stronger job numbers and wages mean more tightening from the Fed. Weaker data is okay, but if it is too weak, that would set off fears of a deeper recession. That leaves investors in an impossible situation where they are looking for a Goldilocks scenario where jobs are neither too hot nor too cold. Good luck with that.

 

This Friday's non-farm payroll numbers were almost double the 171,000 job gains expected. The U.S. economy added 336,000 jobs, which sent yields even higher, and stocks lower on the news. And yet, yields, the dollar and stocks all reversed during the day. That should tell readers that we are in the bottoming process.

 

Yield-wise, the benchmark 10-year, U.S. Treasury bond hit 4.83 percent, which was its highest level since 2007. And we all know what happened in 2008 (the financial crisis). Not that I am expecting something similar, but a lot of the investment community is freaking out at where interest rate yields can go from here.

 

I think we may be close to a short-term top in yields, at least in the short-term. That is one reason I am expecting a bottom in the equity markets. And where yields go, so does the U.S. dollar. The two asset classes have moved together over the last month. Friday's jobs number pushed the greenback up .65 percent on the news but it quickly gave all its gains back. The dollars’ gains have trashed just about everything from commodities, foreign markets, U.S. equities, and precious metals. That could be changing.

 

Underlying the rise in yields has been the avalanche of U.S. Treasury auctions that began in earnest this quarter. I'm guessing that yields have risen in anticipation of that event. Could we therefore see a "sell on the news" event where bond traders cover their shorts and buy back bonds at some point soon? Stanger things have happened.

 

Last week I targeted the 4,200 area on the S&P 500 Index, which is the 200-day Moving Average as a level we could look for in the bottoming process. I also said that looking for a perfect number like that is not usually the end of the story, since markets overshoot on the upside and the downside. We could easily slip below that number before all is said and done.

 

Keep an eye on the dollar and yields because they are the big dog wagging the tail of the equity markets. When they roll over, as they may be next week, stocks will have reached a bottom.

 

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.