Santoli: Bulls and bears expected today's rally, but few see it lasting

Published Mon, May 23 20221:34 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. A fitting market bounce was likely — even if relatively few handicappers seem to have confidence that it's the start of a trend change. Seven straight down weeks are rare, sentiment and some oversold conditions have become more extreme than they were preceding previous 5-10% bounces this year (Nasdaq 100 sank 20% below its 200-day average – deeper than any time but 2001-2002 and 2008-2009), post-options expiration weeks have been stronger as has this particular week in May ahead of Memorial Day. So the bounce isn't a surprise to bulls or bears. Semis, biotech, speculative tech, banks all stopped going down relative to the S & P 500 in recent weeks, a sign the rolling bear market had for now rolled beyond the most overheated, most-clobbered groups. The hole is deep enough that even a 10% rally off Friday's close would not reverse downtrend or even threaten its April high. The question is around what's already discounted in terms of economic slowing, inflation and Federal Reserve policy aggression, and whether the "sell the rallies" trigger will continue to be pulled as quickly as it was last week after a 5% relief rally. So far, that 3,800-3,900 band on the S & P 500 has continued to hold, adhering to a variety of approaches that identified it as a place the market might gather itself. That's where the down-20% threshold sits (so far, we haven't closed below it, and by now the history cited here of the frequent drops that stopped between down-19% and down-20% is well aired). It gets to some technical objectives in terms of retracing, but not quite 40% of the post-March 2020 rally. It takes the forward P/E of the index toward a more neutral 16x. Source: FactSet Also helping on the macro/fundamental side is a retreat in market-based inflation expectations, the U.S. dollar coming in off its recent highs and Treasury yields calm well below recent highs. Of course, a lot of this owes to concerns over the growth outlook but suggests the market has tightened financial conditions enough to do some of the Fed's work — perhaps, optimistically. It makes sense to have a recession scare — we usually have scares both when a recession is and isn't imminent as the cycle ages. So far, Leading Economic Indicators, credit spreads, and unemployment claims are softening but haven't yet tripped the wires that always get tripped right ahead of a sure recession. There's much talk of how stock-market declines dampen household asset values and reverse the "wealth effect," something the Fed wants as part of its restraint of demand and inflation. Yet, it seems to me the more direct transmission mechanism from stock declines is to CEO attitudes. Feedback is direct and rapid to heavily equitized executives and workforces. So expect a rethink of hiring, investment, debt capacity, etc. It's notable that we saw a similar decline to current levels of CEO Confidence in 1998, 2011 and 2018 – all near-misses on a recession and bear market – but only when confidence has plunged further have we been in recession. Banks are the standout performer today after JPM investor meeting and Bank of America CEO comments lent a bit of confidence in the outlook for interest income and credit quality of borrowers. The banks have been trading as if credit was eroding quickly or as if the risk of a financial "accident" was rising. Some relief on those fronts, and a day when the indexes are not beholden to growth/tech. Market breadth is decent, 70% upside volume on NYSE, though less strong on Nasdaq. High-yield credit is a good bit firmer today as the average effective yield of the junk-debt has approached 8% (similar to late-2018 selloff levels, well below the early-2016 correction highs). The VIX is sluggish and noncommittal, just under 29. It shows a wary tape but not a panicky one, though market lows do often occur with a "lower low" on VIX than was reached the prior down leg, so I'm not among those who thinks the VIX "needs" to surpass 40 before the market can stabilize a bit.