The rally everyone saw unfold yesterday is going to continue to unfold at today’s open.
Currently, the S&P 500 futures are up 84 points and are trading 2.3% above fair value, the Nasdaq 100 futures are up 280 points and are trading 2.6% above fair value, and the Dow Jones Industrial Average futures are up 625 points and are trading 2.1% above fair value.
There is an effort to pin this positivity on better-than-expected earnings results from Dow components Goldman Sachs (GS) and Johnson & Johnson (JNJ). That has a little something to do with it, but it is not the main source of thrust.
Although both Dow components exceeded earnings estimates, both Dow components also reported a decline in earnings from the prior year. Moreover, Goldman Sachs CEO David Solomon said on CNBC that there is a good chance that we will see a recession and that it is time to think more cautiously about risk.
So, naturally, what are market participants doing today? They are increasing their exposure to risk by bidding up stock prices.
The thrust of this morning’s positive bias isn’t so much about the earnings news as it is about technicals and positioning. The same was largely true yesterday, although a nice improvement in the gilt market after UK Finance Minister Hunt announced the cancellation of most of the proposed tax cuts served as a rally catalyst as well.
What we have this morning (and had yesterday) is an appreciation for the market being oversold on a short-term basis and an awareness that it has designs for the time being on turning the corner to a better place.
That is putting the squeeze on short sellers, thereby driving short-covering activity, and prompting a “flat squeeze” whereby sidelined participants are putting cash to work out of fear of missing out on a material rally effort and possible bottom.
A BofA fund manager survey showing cash holdings at their highest level since April 2001 has helped fuel the turnaround effort.
There is very little regard right now for bad news, like Secretary of State Anthony Blinken saying he thinks China will seek to annex Taiwan sooner than prior prognostications have suggested, Hasbro (HAS) missing earnings estimates, or Germany’s ZEW Current Situation Survey for October reaching an all-time low.
The market is also tolerating the Bank of England refuting an FT report that it is likely to delay its quantitative tightening plan to improve market functioning. The 10-yr UK gilt is down three basis points to 3.95%.
Similarly, the 10-yr Treasury note yield is looking better. It is down five basis points to 3.97% after reaching 4.04% earlier.
An inability to break convincingly above 4.00% and hold there has created an additional boost for market sentiment, which has clearly needed a boost following the 19.3% decline in the S&P 500 from its high on August 16 to its low last Thursday. That is a huge decline in a short span of time. Alas, the stock market, tired of being dragged down, is now taking a big step forward that is putting the squeeze on anyone short, or flat, the market.
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Originally Posted October 18, 2022 – Bear market feeling the squeeze
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