Why the bear market rally should continue (for now)

The S&P 500/SPX (SP500) recently jumped 7.5%, possibly forming another short-term tradable bottom in this grizzly bear market. This week will bring even more exciting action despite the big five banks and other flagship companies reporting in recent sessions. Additionally, the S&P 500 and other major market averages are hovering around critical resistance levels, representing crucial inflection points in the market. With all the trillion-dollar mega-caps reporting earnings in the next few days, we’re about to see the biggest earnings week of the season. I expect most flagships to continue beating their highs and lows. Also, I suspect most companies’ forecasts will be better than many analysts expect. Therefore, we should see plenty of action breaking out, and the SPX could reach around 4000-4200 before the next short-term high.

The market is at another inflection point here

The SPX made a strong panic-driven capitulation-type reversal around the critical support level at 3,500. This price action was the signal to close hedge/short positions and increase long asset positions at risk, as we explained in Band/AWP Chat and supporting articles”Recent Coverage Explained” and “Stocks are rising at the moment.”

So, we’ve seen a move of around 7.5% from the recent low in the S&P 500. The question at $64,000 is, can stocks continue higher from here despite the next meeting? from the November Fed? I believe so, they can! First, we see a bullish head and shoulders pattern developing here. Second, the SPX is encountering critical resistance at the 3,750-3,800 level. Once the SP can move above this crucial point, we will likely see a continuation of the current rally to around 4,000 and possibly higher. We are also seeing technical indicators such as the RSI, CCI, Full Stochastic and others improving, illustrating the improving movement and adding to the likelihood of further upside in the near term.

Now I want to be clear on something. I don’t call the bottom of the bear market. However, we must recognize that we are not dealing with the same type of bear market that we saw in 2000 or 2008. The current bear market is not as steep, is much more choppy, should produce many powerful bounces from against the trend and may take longer. unfold more than some market participants expect.

We have already seen several very strong countertrend bear market rallies. The most recent lasted from mid-June to mid-August and increased the SPX by about 19% in about two months. Therefore, the current rally could reach 4000 – 4200. However, this does not mean that the market has bottomed yet. A continuation of this rally to the 4000-4200 level would equate to a gain of around 15-19% from the 3500 SPX low. Therefore, it is plausible to see this rally persist through earnings and the next Fed meeting, but the market could start heading south once sentiment changes again.

Earnings Snapshot – So far so good

The big banks kicked off the earnings season with big beats. J. P. Morgan (JPM), Wells Fargo (WFC), Citigroup (VS), Bank of America (BAC), Goldman Sachs (GS), and others provided great results beating both the top and bottom results. The Big Five US Banks crushing all net and top earnings is a great prelude to earnings season for the broader market.

It’s not just the banks

We also saw J&J (JNJ), Netflix (NFLX), United Health (A H), IBM (IBM), Danher (HRD), AT&T (J), Dow (DOW), Verizon (VZ), American Express (AXP), Schlumberger (SLB), and other big names shattered earnings estimates last week. So, we have seen great results from some top names. However, the real test comes this week as the mega-techies prepare to release Q3 results.

Tuesday – Google, Bellwether’s first major tech report

On Tuesday we have Alphabet (GOOG) (GOOGL), Visa (V), Coca Cola (KO), and others reporting third quarter numbers. I expect online or better results from Google, Visa and most of the other big names reporting Tuesday.

Wednesday – Maga-Tech Profits Continue with Microsoft and Meta

Microsoft (MSFT), Metaplatforms (META), Bristol-Myers Squibb (BMY), Boeing (BA), and other big names announce on Wednesday. I suspect most will beat their earnings and EPS estimates. Additionally, Meta and others may surprise with significant margins and provide better than expected forecasts for the fourth quarter.

Thursday – World’s Most Valuable Company Reports

Amazon (AMZN) and Apple (AAPL) report on Thursday, and I expect both mega-caps to deliver numbers above and below expectations. Many other big names like Mastercard (MY) and McDonald’s (MCD) report on Thursday, and I expect most to beat earnings projections. I am concerned about Intel (INTC), but I think the stock may present a buying opportunity if it declines due to another bad quarter.

Friday – Major oil indicators set the tone for the sector

Friday isn’t too busy, but we have the two biggest oil companies reporting. I own Exxon (XOM), but I like both actions. Also, I think we’ll see better-than-expected revenue and EPS from the oil majors, in general, this earnings season.

Takeaway meals

We had a good start to the earnings season and the market reacted well. The big banks have generally set the tone for earnings season in general, and early results from the big banks have been strong. This week is the busiest and most crucial period of the earnings season. We’ve got all the trillion-dollar tech mega-stocks in the next few days. Given recent earnings, economic indicators and other factors, I expect most leading companies to continue beating analyst estimates in the days and weeks ahead. This should serve as the main catalyst to continue fueling this rally towards the resistance range of around 4000-4200 in the S&P 500, around 8%-12% above current levels.

If you’re concerned about the Fed

Fed’s FOMC Meeting and Interest Rate Decision Approaching November 2, in nine days. If you’re worried about the stock selling off during the meeting, it’s probably too late for that. We saw a 17% drop in the SPX from the mid-August high to the recent mid-October low.

Target Rate Probabilities

Additionally, there is now a 95% chance that the Fed will raise the benchmark rate another 75 basis points within days. Therefore, the next rate increase is currently priced into the stock market. Moreover, we see no signs of deterioration in the labor market (unemployment rate of 3.5%) or indications that the economy is about to collapse. Instead, we see signs of a possible soft landing, and the Fed should slow the pace of rising interest rates In the coming months.

To be clear, I’m not convinced the labor market will stay relatively strong for long, and I’m not optimistic about a soft landing. Additionally, I think the Fed will have to “pivot” due to deteriorating market conditions across the board. However, whatever I think will happen several months from now. Instead, what the market perceives will happen in the short term is key. The market is seeing that most economic indicators are not deteriorating, the labor market is strong, and most earnings are better than expected.

Additionally, the market may perceive that the economy is relatively healthy, the Fed knows what it is doing on inflation, and rates are not going much higher. There might even be a Fed pivot soon. This momentum is bullish for short-term stocks, which is why I want to have increased exposure to risky assets until the next top of this bear market arrives.

Portfolio overview

While the AWP is almost fully invested, parts of the portfolio are still in defensive positions. I own physical gold, bond instruments, commodities, defense and several healthcare stocks. However, the AWP is positioning itself more aggressively in the short term. I deployed almost all of my dry powder (around 25% of portfolio holdings) around recent lows in October. I closed the rest of our collar hedges the morning the market bottomed (reported in real time in the AWP chat room).

Note: All portfolio additions have been publicly announced in the Financial Prophet’s AWP chat room.

To advance

I expect the S&P 500 to break above the 3,800 resistance level and move towards the 4,000-4,200 area. Therefore, I am bullish on near-term risk assets and position my portfolio Consequently. However, once the enthusiasm dies down, sentiment may deteriorate again and we may see further selling pressure building around the 4000-4200 resistance zone. As such, I will adjust holdings of the AWP near the next high in the market, increasing dry powder, reducing risk and putting in place hedges to avoid unnecessary losses in my portfolio. QTD, the All-Weather Portfolio, is up about 4.4%. Due to portfolio adjustments around large peaks and troughs and effective hedging strategies, the AWP is up by about 11% YTD.