Morning Comment: Turnaround Tuesday?

I am very excited about a change that will be taking place with my publications. I will begin self publishing next week! I will send you details about how to subscribe to my work early this week..

With this change, I will also be changing the names of each piece, but they will be essentially the same as I've been providing for several years. The "Morning Comment" will now be called, "Before the Open"...and the weekend piece will now be called, "Weekend Insights".

Again, I will be publishing through Marketfy until this Friday...and I will send you details about how to make the switch VERY soon. Thank you very much!

The stock market sold off yet again yesterday, but we saw more signs that it’s getting ready for a short-term bounce. Yes, the S&P 500 did fall by more than 1%...and it did make a new low for the year (after the DJIA did the same thing on Friday)…and the decline came on breadth that was quite negative (more than 10 to 1 negative). HOWEVER, the volume was lower than it was on Friday…and the tech laden Nasdaq did not fall anywhere near as much as the S&P did on a percentage basis. Given that the bond market took it on the chin rather hard again yesterday, the fact that the tech stocks were able to outperform was encouraging.

We’d also note that yesterday’s decline took the major averages further into oversold territory. As we highlighted in our weekend piece and in our daily piece yesterday morning…the major averages were hitting oversold levels on their RSI charts. Yesterday’s decline brought them solidly into oversold territory. We do admit that these oversold readings are not wildly extreme. We have seen other times where the stock market has become more oversold before it has seen a short-term bounce. However, sentiment HAS become extreme. The Daily Sentiment Index shows that bullishness among futures traders has fallen to just 5%! In fact, it has been just 5% for two days in a row! So, among the short-term traders, there are almost no bulls left!...…..These are the types of readings that tell us that the downside potential for the market…at least on a very-short-term basis…should be quite minimal.

We do not, however, believe this will signal the ultimate bottom for this bear market. Valuation levels are still too high…and as the effects of the Fed’s tightening policy finally have their real impact…which will cause earnings and sale to decline…investors will realize that valuation levels are even higher than their readings are telling us today. That said, no market moves in a straight line…and the oversold/over-hated condition that we’re looking at right now tells us that we should see a near-term bounce.

The stock market is not the only one that is seeing extremes. The yield on the 10yr note has become extremely overbought…as has the RSI chart on the DXY dollar index. With people like Chicago Fed President Evans softening their tone just a little bit this morning, several different markets sure seem to be setting ripe for a reversal that lasts for more than one day……Mr. Evans indicated that he’s getting a little worried about going too fast with rate hikes. Don’t get us wrong, this was not a major shift in rhetoric. In fact, we’re sure some other Fed members will stay very hawkish this week (with the enormous amount of “Fed speak” we get this week), but it looks like they want to have a few members soften their tone just a bit…and this could/should be enough to help the markets see some short-term reversals.

(BTW, Mr. Evan’s comments prove once again that we are correct in our long-held opinion that the Fed is much more “market dependent” than they would ever admit…….We believe that they still want even lower asset prices, BUT they don’t want it all at once! They don’t to create full scale panic.)

Anyway, it will be interesting to see how those who have short positions will react today. We’ve all heard a lot about how much the bearish bets have built up in recent weeks, so many of them are likely quite nervous this morning…with the futures on the major indexes trading higher by more than 1%. Will they get a nice midday dip to cover their positions? If the past few weeks are any indication, they certain should get that opportunity. However, if the market doesn’t pullback much…those shorts might feel the “squeeze” sooner than they thought they might.

Then again, maybe the market will indeed roll back over in a significant way…and take us to new lower-lows almost immediately…just like it has so many times over the past 6 weeks. However, we believe that the technical condition that exists right now…and the very bearish sentiment that also exists today…tells us that at least some sort of short-term bounce should take place over the near term in the stock market.

We do want to reiterate, however, that we see any near-term bounce as something that will create another opportunity to raise cash and get more defensive. This is something we have been saying since December (when the Fed confirmed that they’d not only be tapering back on their QE program), but they’d also be raising interest rates and shrink their balance sheet. This strategy has worked out exceptionally well over the past 10 months…and we think it will continue to work well in the weeks ahead.

Bear markets do not bottom when they’re still overvalued. In fact, they don’t even bottom when they reach “fair value”. They always fall to a level that is considered under-valued (cheap) before they make their ultimate lows…..The stock market frequently sees a big “capitulation” phase before it bottoms, BUT that’s not always the case. However, it IS always the case that the stock market reaches a “cheap” level before it bottoms…or at least that has been the case for every bear market since the Great Depression. (This might be true going back even further as well, but we haven’t gone back any further than that timeframe in our work.)……In other words, enjoy the bounce while it lasts!

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Sep 27, 2022 — 8:09 AM
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