Everything Rally is Awesome…or maybe Not

Market surge creates a Catch-22 for wannabe Bulls

Wages rise, but not enough to keep up with inflation

China shocks with interest rate cut, hoping to delay a larger disaster

Everything Rally is Awesome—or Maybe Not

August 17, 2022

“A true bear market has a lot further to run because nothing has been learned, and the lessons that needed to be learned are not remembered. The second major phase of decline is what you would expect between now and year-end. You could look for geopolitical predicates for that. You could look at a cooling global economy. You can look at the declining economic reality within China. What it suggests is that we’re going to be challenged by at least one, if not multiple, factors by year end.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. 

David, you and I have both flown small aircraft. If you recall, when you’re training, sometimes they put you under the hood where you can’t see outside of the window. You can only see your gauges. That’s an interesting experience because while you’re training, they put you into what they call an unusual attitude, unusual attitudes exercises. You can feel rising and falling in your body. You think you can fly by the seat of your pants, but if you actually look at the gauges, they’re oftentimes showing you opposite what you feel. I’m seeing in the markets right now, Dave, I’m seeing this surge. All of a sudden, inflation is less of a concern, that people who were getting their heads handed to them earlier are now going back and rebuying the various stocks that they got chopped up on. Do we look at the gauges? What are we looking at? What’s the narrative? What’s the truth versus what we feel?

David: I think the idea of an unusual attitude— I might draw a different meaning from that than is appropriate from the flying lingo.

Kevin: You’re thinking about your daughter, possibly, on the days where she might be a little bit more difficult than others, huh?

David: Oh yeah. Or me on a Tuesday morning. Occasionally, there’s a little grit in my craw. But it is interesting. The stocks have rallied to a key resistance level and—

Kevin: This is a test, isn’t it? We’re at a testing moment.

David: Absolutely. The S&P; 500 is both at a 50% retracement level, that is 50% of the first half selloff has been recovered, and it’s also coming up to the 200-day moving average. That convergence provides a test for the bulls. When you look at those retracement levels, a 50% retracement is very common. If you had an additional move higher, your next destination would be 61.8. How these numbers mathematically coincide with the emotional energy of the markets is very, very intriguing. These are Fibonacci numbers, and somehow there’s coincidence. Maybe it’s more than a coincidence, but a 50% retracement, very common. Additional move to 61.8% retracement, also not unusual. What you have is a testing of the up trend at those junctures. Will additional buyers enter the fray? 

When autumn volumes pick up— There’s lower volumes in the summer times. As we get the kids back to school and fully engage with portfolio management, as autumn volumes pick up, will there be sufficient fear of missing out to draw individual investors back in? There’s a reasonable argument that short covering has run its course. In recent weeks, you’ve seen miraculous moves higher on very low summer volumes. That’s been the context. Now, you need. Now, you must have organic buyers to propel prices into a next leg higher. The enthusiasm is growing. Short covering being transformed into an extended rally, certainly that cannot be ruled out. But as a reminder, these kinds of rallies are frequent in the context of a broader market decline.

Kevin: Oh yeah. Remember the 2000 sell off? How many rallies did we have during that complete devastation of the market?