“When I look at the market behavior today, I'm a
pessimist … but when I look at market behavior over history, I’m an optimist”
The opening of the year has been a good one for the markets. Rallies, even modest ones, are welcome, and the reason is the focus on inflation. The problem as I see it, ignores the fact that the markets left the previous year oversold, and a rally can be expected, just as they had infrequently occurred last year. To hear a narrative the concludes that inflation is under control and the Fed will have to slow down are still, in my opinion, too premature. However, I’m also not pessimistic, and push aside those in our industry who dispense a narrative that all too easily pervades individual thought and, in my opinion, mutates doubt into blind certainty. Here’s what I’m becoming more certain about.
Economics
Today the Data for the Core Consumer Price Index (CPI)
was released and showed a modest December decline of .01%. The overall
inflation number for the full year came in at 6.5%, a clear decline from the
high of 9.1% last July. Without going over the other calculations, such as
removing the more volatile food and energy data, it’s worth noting that the
data clearly shows a slow decline in the overall inflation rate, but a number
that would still have the focus of Fed concern as well. This is important
to me because I live a reasonably simple life and can experience inflation
first hand. So, the question I keep asking myself is has the linear data that
is reflected in the numbers already peaked, and my answer is yes. Now, will
inflation at the grocery store continue per diem, my answer is also yes. In
short, the data that reflects the monthly and yearly changes in inflation will
continue to slowly move lower, but my favorite Pistachio Gelato is still going
to be $9 a pint.
The markets are definitely seeing some buying that is as
much about short covering as it is about genuine buying. But the volume is
good, going into a holiday weekend, and the only thing to wait for is what’s next.
First of all, the markets finished the year marginally oversold in the short
term. Hence, the rally we’ve been experiencing in the beginning of this year.
As of today, that technical condition is starting to show the market somewhat
overbought. Therefore, while the overbought condition could continue into next
week’s Producer Price Index (PPI) release on Wednesday, it is also the start of
earnings for the fourth quarter, and that could impose some relief on the
rally. I bring this up because in the recent overall rebalancing of accounts
the available cash will continue to find opportunity, and the reckless
interpretation of earnings from our Algochums and Analysts should prove useful.
Until then, the economy and inflation suggest, in my opinion, that the bear
market is nearing an end and, sorry for the redundance, patience and focus are
still the best strategy at hand.
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