Published November 16th 2022

Daily Brief - Are market bears winning?

When the inflation report last week brought much needed relief to the market, it seemed like a little bit of sunshine after the storm. But the strong price reaction suggested something else was happening. Sure, inflation news was good - but that good?

The S&P 500 jumped 5.54% to 3,956.37 in its biggest rally since April 2020. The Nasdaq Composite surged 7.35%, its best since March 2020, closing at 11,114.15.

The details of the closely examined report were solid, to be sure. Core and headline both came in below expectation. But it was some more esoteric measures that provided real hope.

The “trimmed mean” inflation produced by the Cleveland Fed that excludes the biggest outliers in either direction from the index’s components, and takes the average of the rest, dipped ever so slightly. But dip it did.

When this measure rises, it sets off alarm bells among policy makers because it’s usually a sign that inflationary pressure is gaining strength. The reverse is also true: a dip is consistent with the notion that the overall peak is in, although it falls short of actually proving it.

trimmed mean

So why then such excitement?

One big factor behind bounce rallies getting more powerful is that bears have been winning. Short trades are working. Negativity has paid off. The cranky uncle that thought it was all a bubble all along is delighting in the “I told you so.”

As a result, positioning is starting to look quite extreme. Below, the CBOE put/call ratio shows short bets are higher than any time back to the Global Financial crisis.

cboe equity put to call ratio

There is more evidence that the bear view is deeply entrenched. Speculative positioning in S&P futures is similarly at historically short levels as the chart below reveals.

net futures positioning

So at least in part the strong reaction was realignment more than reassessment. Of course, the odds of a more aggressive hike must come down, logically. Inflation numbers offered real hope, and more than a glimmer.

But short covering also had a large part to play in the historic price action we witnessed on Thursday. Don’t be surprised if the downswing is just as violent as bears try to re-assert control.

Idea Spotlight: Alphabet

TOGGLE analyzed 6 similar occasions in the past where momentum indicators for GOOG:NASD have been mostly positive and historically, this led to a median increase in price. This insight received 5 out of 8 stars in our quality assessment.

With the stock down 33% YTD, Marketbeat published an article stating that Alphabet stock offers a "rare buying opportunity."

alphabet c price history

Daily Brief - Are market bears winning?

Button to Twitter
Button to Facebook
Button to Linkedin

Button to Twitter
Button to Facebook
Button to Linkedin