Up or Down?
Igor Manukhov - Nov 25, 2022
The market is at a crossroads. Some indicators suggest that its likely to go up, while others call for more caution.
The market continues it's rally in November and is currently facing a very important test - the 40 week (200 day) moving average (falling blue line on the top panel). The previous attempt in August failed this test, hopefully this time it can overcome the resistance.
What's encouraging is that we are in a seasonally strong period for the market (November through January) and high yield bond spreads over high quality bonds have been falling quite steadily since July (red line is falling). This is good news. The bond market tends to lead stocks and when the bond market sneezes, stocks gets sick soon after. Falling junk bond spreads mean that the bond market is getting more comfortable (yields on low quality bonds are falling and getting close to the yields for high quality bonds). That is positive for stocks.
On the other hand what's absent from this rally is a strong leadership from consumer discretionary stocks. Despite the strong market rally, it is consumer staples (think food, toilet paper) that are outperforming consumer discretionary stocks (think iPhones and other nice to have things) at the moment. iPhones should outperform toilet paper during bull markets not the other way around. At the moment, toilet paper is doing better that iPhones (see pink line at the bottom is falling). This is not so great.
Time will tell how this resolves, but for my money, I would proceed with caution given all the mixed signals that we are seeing at the moment. Keep existing positions open, but be careful putting new money into the market now.