Consensus. The Webster Dictionary defines it as a general agreement: unanimity. In markets we view it the same way, only more often than not those of us who take a contrarian bent usually prefer to go against the consensus.
Why? Because a contrarian believes that if the consensus says the market is going higher then they are already positioned for that move higher. The best recent example I can offer is energy. As we headed into November it was consensus that energy stocks were where you wanted to be positioned. But energy went nowhere for nearly five weeks and then there was one little whiff of negative energy news and wham! The stocks went down. It was right to fade the consensus.
Recall just a mere two weeks ago the consensus call was for the market to rally into Christmas and then come down again in January. But here too, the market having been positioned for that move had a rug pull instead. Now we hear that the window has closed on the Santa Rally (more on that below).
The new consensus is that the market will be down in the first half of 2023, but by midyear the Fed will see the error of their ways and the recession will hit and interest rates will come down and just like that the market will rally in the back half of 2023. In fact, it is such consensus that Barron's had it as the cover story this week.
Barron's cover stories aren't always a fade, but recall it was just two months ago, just a week or so off the peak of the U.S. dollar that they put the buck on the cover. Since then, the U.S. dollar is down about 10% and now the chatter is how much weaker it will get. To reiterate my view: I still think this 104 area holds on this first trip down.
While I still think there is more work to do on the downside based on the intermediate term indicators, I do think we are getting oversold enough to have another short-term rally. Look how far down the Nasdaq Overbought/Oversold Oscillator has come. With two exceptions this year (late January and late September) this indicator is heading into the spot that has produced a bounce.
It's hard for me to get bullish here because the intermediate term indicators are not close to oversold. Also because the number of stocks making new lows has been rising. Note the 10-day moving average of new lows for Nasdaq turned up in early December and is now closing in on 300 and rising.
It's going to take time (and likely more downside) to get the sentiment indicators back to an extreme. The way they have been working for the past year and change tells me that it is not going to take until June (midyear) for sentiment to get negative enough coupled with oversold enough to have another multi-week rally. In other words, while I think they can bounce now and think they then come down again, I find it hard to believe the market will play out as the consensus has decided it will in 2023.
