A Fatigue Rally?

     Today’s market activity saw some welcome buying, or short covering, it’s hard to tell. From my perspective the rise is what I refer to as a fatigue rally. Given the deep decline, in price and technical conditions, for the past three months, some might like to call today’s rise as a dead cat bounce. I prefer not to as I love cats. In short, one rally doesn’t alter the scenario, however it does serve to pique one’s interest.

    The challenges that capital markets in the western democracies are facing have much to do with the war in Ukraine, challenges from the historic increase in oil prices are the unintended consequences of intercontinental  sanctions on the industry, but also the small but loud community of investors that never miss a good opportunity to  fuel uncertainty, in this case through the oil futures market. For this reason, there is no way to predict how high the price of oil can go, notwithstanding today’s retracement, nor what the western economies can do to bring it down. In the meantime, our domestic economy is still showing signs of employment growth and productivity growth. The rise of states dropping rules on masks and proof of vaccine mandates suggest some rationality is entering the narrative even with some risk that will likely prevail in the minds of many. But, as the warm weather approaches the consumption habits of the public should show some vigor in spite of the challenges of inflation. In a nutshell, the markets are focused on uncertainty in Ukraine, and if any certainty should peek out of the negative narrative, the focus could shift to the economy.

    So why are the markets rallying? Russia put out a statement suggesting a potential diplomatic solution that Ukraine has shown some agreement with. Clearly enough certainty to rally the capital markets, but in my opinion, it’s too early to legitimize given what appears to be continued ground attacks by Russian forces. On the economic side and upcoming Fed rate hike, neither has a place in the financial media narrative. In short, the markets are oversold in price, but also in technical terms, where much damage has been inflicted, especially on many of the momentum tech names found in the NASDAQ 100. It’s also not unusual that when the broad indexes suffer through a decline over 10% (NASDAQ 100 down 18.3% from its 52 week high) that a day or two of 2-4% rallies ensue. Such moves are as much a result of the covering of short positions as the initiation of new investments. Of the latter, I’ve engaged in such initiations, but remain with enough cash to be prepared should the rally run out of steam and resume its downward trend.  

    Since the thick of the pandemic the words new normal has taken hold of many conversations, conspiratorial and rational with each trying to make sense of the hazy terminology. As Mark Twain once stated, “history doesn’t repeat itself, but it often rhymes”. That’s why, my current opinion is this isn’t the new normal, in fact it feels more like the old normal. Throw in the current human crisis brought on by the war in Ukraine and it’s more like the ancient normal. All of which confirms that patience is still the best strategy and opportunity can still be found, especially in Healthcare, Technology, and Energy beyond oil which make up my primary focus.