Let's face it, Wednesday's price action wasn't great, and it worsened during the after-hours session following Tesla's (TLSA) underwhelming earnings report. Some of Wednesday's crummy price action in stocks can be blamed on continued selling in the bond market and buying in the US dollar. Still, it's easier to acknowledge that this is a brutal bear market, and we probably need an earnings, election or bullish bond market surprise to trigger a year-end rally.
Beginning with the election, I don't expect the market to run wild to the upside if Congress flips from blue to red, but I agree with the consensus that a GOP-controlled Congress, or merely a flip of the House, would support gridlock. And gridlock, if nothing else, will keep a lid on future spending, and reduced spending is likely to be viewed as favorable when lowering inflation.
Regarding the bidless bond market, the most bullish thing I see is how universally hated bonds, or in this case, the iShares Barclays 20+ Year Treasury Bond ETF (TLT) , is. How often do you see TLT fall 20% in a near-straight line over a mere 10 weeks? But that is what has occurred since TLT traded $120 on Aug. 1. There is price support around $88.50, which dates back to the lows from 2008, 2009 and 2010. If I were a betting man, I'd bet TLT revisits $110 before we talk about a test of $88.50.
Equities have stood impressively well considering how terribly bonds have traded. With that in mind, I suspect a rebound in bonds (dip in yields) toward $110 would give some juice to the prospect, or dream, of a year-end rally.
Turning to earnings, most traders I speak with daily are scared to invest heavily in the face of what's likely to be a tough earnings season. The thinking goes that for every ASML Holdings (ASML) or Intuitive Surgical (ISRG) , there are likely to be several Generac Holdings (GNRC) . And it only takes one or two Generac-like 25% declines to ruin a whole fistful of ASML gains.
Despite the terrible price action in the bond market and the potential for a lumpy or just plain crummy earnings season, my bias is toward a fourth-quarter rally. We know the market expects the Fed to hike rates by 75 basis points on Nov, 2 and again on Dec. 14, so let's not use that as an excuse to rule out a bear market rally.
Assuming most companies reign in earnings and sales expectations going forward and don't annihilate current estimates, I'm looking for any hint of a turn higher in bonds to kick-start another six- to eight-week bear market rally.
Yes, I ultimately anticipate any forthcoming rally to be another head fake. Until the Fed begins to articulate its intent to keep rates steady (rate cuts are necessarily required) to contain inflation further, I don't believe a new bull market can emerge.
If you don't have it bookmarked already, you can keep track of the market's rate hike expectations via the CME FedWatch Tool.