Stocks surged last week after seven consecutive weeks of losses.
We have held a positive tactical view on the market for the last couple of weeks because investor sentiment had become extremely pessimistic. The catalyst for a rally, we argued, could be lower bond yields brought about by lower US inflation, which may have peaked.
This view has been playing out as bond yields have fallen this month. Longer term, we still think yields are headed up, but that might be a story for Q4 22, or perhaps H1 23. In the meanwhile, our view is that the stock market could trade sideways, perhaps with a slight downward bias, before a recession caused by higher interest rates finally arrives next year.
After the bullish action last week, the market is no longer oversold, but we would not fade this rally too early. Levels closer to 4300 on the $SPX500 would provide a more attractive exit point for those considering adopting a more defensive posture, in our view.
Last week’s rally does not change our strategic outlook, which is that 2022 will be a weak year for the market. There will be tradable bear market rallies, however, and although ours is not a market timing strategy, we will try to lean into and out of these, depending on how pessimistic we see investor sentiment at any given time.