It finally happened. The S&P 500 successfully closed above its 200-day moving average (red) for the first time in over six months.
Chart by TradeStation
This was the final hurdle the large-cap index needed to clear. It gives a green light for institutional money to enter from the sidelines. I think we're going to see a solid end to the year, as well as a strong start to 2023.
It's time to lean further to the long side. We've recently added names in retail, home improvement, and discount stores.
But I'm less bullish for the markets beyond early next year. What I'm hearing lately almost amounts to irrational exuberance.
For example, the term "bull market" keeps popping up. Technically, we are in bull market territory, since the Dow Jones industrial average bounced more than 20% off its lows.
But despite the recent rally, the S&P 500 is still down 14.47% for the year. The Nasdaq Composite is down more than 26%. Maybe it's not time to wear the party hats just yet.
Wall Street launched into celebration mode on Wednesday when Fed Chairman Jerome Powell indicated a slower pace of rate hikes. Investors are ignoring that he also said, "It is likely that restoring price stability will require holding at a restrictive level for some time."
Translation: Rates will be higher for longer than most of us expect.
Another point to consider is that some pretty sharp minds are calling for a significant recession.
Earlier this week, in a since-deleted tweet, Scion Asset Management's Michael Burry wrote, "So, we are really looking at an extended multi-year recession. Who is predicting this? There are none."
Burry is the hedge fund operator who made a fortune during the 2008 crash, as depicted in the film The Big Short. Two weeks ago, he tweeted the cryptic statement, "You have no idea how short I am."
It sounds to me like Burry is preparing the sequel to The Big Short. Perhaps it'll be called Big Short 2: The Bigger Short.
Tesla (TSLA) CEO Elon Musk tweeted the following earlier this week: "Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession."
What does it all mean? We're looking at a strong market in the short-term, but I'm less confident that we'll maintain that pace after January. Yes, it's time to lean into longs, but only for now. I'll be partying along with everyone else, but with one eye on the exit.
