The Bulls Have the Ball, Where is Yogi Bear?

Good Morning:

• I harken back to our call that the market had bottomed on October 13th, when the crowd called for a crash. Now the crowd calls for a Recession.
• And we discussed the Nominal Hurst 20-week cycle (red Xs on the chart above) – slated to trough again around February 10th. We also raised the possibility that this 20-week cycle could share a trough with the 18-month Hurst cycle. But perhaps the 18-month cycle shared the October 13th low instead? 
• The problem with long-term Hurst cycles like the 18-month is that the cycle can average between 16 and 20 months. This renders the cycle useless, so I prefer the 20-day and 20-week for swing and day trading purposes.
• But here we sit, with stronger-than-expected growth as reported yesterday, though the headline GDP numbers were somewhat distorted/overstated by some non-defense airline orders.
• We get the Personal Consumption Expenditures (PCE) report this morning, which the Fed considers a more accurate representation of inflation. It is still expected to be 5% – far from tame.
• Then we head straight into the Fed meeting and rate announcement next week. Will they pivot? Only in Wall Street’s dreams!
• And if it were a perfect world, we would see the next 20-week trough on February 10th, as indicated by the last red “X” in the chart above. These cycle troughs are rarely so perfectly timed – but the trough will appear again soon.
• And If the 18-month Hurst cycle bottomed in October, the first 20-week dip will be a blip on the radar screen. That may be exactly what is unfolding.
• Why should the Fed “pivot” into easy monetary policy now? They have been emphatic that they won’t. At best, they will slow the rate of increases as they get closer to 5%. And we cannot assume Wall Street is completely stupid (crooked, yes).
• Yet, the character of the market has changed. And I see true, bullish behavior across the board – much more so than we have seen at previous peaks in the sequence over this past year. So what is up with all this bullish behavior?
• The bears have to hope for a double top with the December peak – or they lose the game. At the same time, the bulls look to reach out to the green Xs and measured moves on the chart above – also a distinct possibility. And right now, the bulls have the ball.
• But I believe the bull case goes beyond Fed interest rate hikes, which only a blind fool thinks will abate soon. Assuming it is solid, this market turnaround is more about earnings expectations than anything else. Fear of Missing Out (FOMO) is also a factor – as many hedge and other funds are sitting on a pile of cash.
• Picture this theoretical conversation: “yes, Mr. Client, I lost a lot of your money last year, but I will make up for it this year by missing the recovery and rally.” Never underestimate FOMO – Wall Street is a business.
• Of course, pundits have been expecting the worst Recession ever – a Depression by any other name. Earnings are expected to freefall in sympathy. The bears have a sound argument – with one of history’s biggest yield curve inversions. Still, the bears could be right, but early?
• But analogous to what I said in October about the crash, my bottom line is, where is the Recession? What if the crowd has it wrong? And what if we have returned to “normal” rate levels – and earnings (especially in “real economy” stocks) will be ok?
• Based on the price behavior alone, this 20-week cycle has been bullish compared to the others on the road down from the January 2022 peak. The wave will have a bullish, right translation even if we dive into the 20-week trough on October 10th.
• And even the last 20-week cycle peaked in the middle, rejecting the left-translation, bearish wave structure.
• We have been in the bear for more than a year – certainly in tune with an average bear timespan. And then there is the deficit spending, inflation, and war spending.
• To be sure, we have a volatile week ahead. But my best judgment is that the bulls have the ball if they don’t fumble it. They will win the game if they can sustain prices above the 12/1/2022 high just above 4100.
• We still have a dip on the table soon, and nobody can say how deep it will carve, but it would take a hell of a catalyst to take out the October 13th low.
• As I have been counseling, the positive 60-year cycle has been correlating at 85% plus, and therein lies the wisdom of using multiple disciplines to predict the future. The market continues to follow it, and it points higher, with its own dip on the table, anticipated to come in higher than last October.
• Though the Navigator Swing Strategy is still in a buy signal, the Founders Group is in cash as we navigate the next few sessions; we have substantial year-to-date gains, so we can afford to sit out and miss a rally if it ensues.
• We want to deploy into the next 20-week cycle dip on the daily charts, as is anticipated to occur soon.

So my bottom line is this, (i) the stock market is still in the nosebleed seats by traditional measures, but the process to correct valuations finally started with this first bear decline from January 2022, (ii) as outlined in our 2022 forecast, the market may move sideways into its long-term, 100-year channel with a series of bear and bull legs forming a trading range similar to the market’s behavior in the 1966-1982 inflationary period, (iii) for now, the market may be finishing out the first bear leg, unless a catalyst arises to force the market to challenge the October 2022 low, and (iv) the market can tolerate a rally up to 4350 and still be in a bear market.

A.F. Thornton