Tuesday August 9: The Bear Market Rally is not done yet

By Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.
Chicago Quantum
President and Investment Advisor Representative

We look at a few data points and overall, cannot say that the bear market rally is over. It could be, and it may end shortly, but not feeling it today. 

Here is what we see:
1. New Quantum Computing firm hit the market. $QBTS
2. Stock market breadth (US Equities) is more positive and bullish than we have seen in a long time. 3:1 New Highs to New Lows.  Also, more than 6,400 stocks are trading above their 50 day simple moving average (SMA) and only 2,400 are trading below. This has been significantly reversed for a long time.

3. Fixed income is still negative, more new lows than new highs. In fact, Fixed Income declined yesterday despite lower US Treasury long-term rates. This means the fixed income market sees more risk in corporate borrower ability to pay.

4. Semiconductors are 100% lower in early pre-market trading. I wonder if people are worried about an economic blockade of Taiwan by PRC's military? Could be, or this is just a bet against high BETA and economically sensitive stocks.  The PRC military escalation against the US, and China letting their currency weaken further against the USD could be a sign of supply chain risk.

5. Yesterday's market action resembled a Lazy Boy TM Recliner. (Lazy Boy is a registered trademark). It pumped in pre-market, rose for 90 minutes, then fell for 135 minutes to the opening level, then was up and down for the rest of the day, closing at the opening price. 

6. We also continued to tweak our Chicago Quantum Net Score (CQNS) model parameters to see how bullish or bearish the market could be. We took the expected return for new money, inclusive of dividends (1.39% paid on the S&P 500 last year), down to 8%. This implies a 6.61% capital gain on new money invested in either the QQQ, SPY or IWM.  The analysis continues to be very bullish and risk on. 

Notes from our discussion:
We adjusted the expected return of stocks by investors (new money) inclusive of dividends, down to 8% (from 10%).  Dividends were 1.39% Stocks deliver a capital gain of 6.61%, not unreasonable.


High BETA stocks chosen, and those large-caps that consolidated recently.


Bitcoin finance
Semiconductors
E-Commerce
Money Managers
Software
Big Tech


If you like dividends, you want to hold the money managers.

Finally, we took a look at indices, and the S&P 500 looks the weakest. The big red candle is about 100% overshadowed by the big green candle (Monthly chart) and so the question is whether the support level at 4,120 will hold. It may or may not, only time will tell.  However, the NASDAQ Composite 100, or QQQ, looks stronger and better. Not sure this will drop given the trend.

This week, and in fact the period starting June 16, has been an aggressive, RISK-ON time for stocks and bonds. Bond yields at the long end have fallen, which increases the prices of bonds. Stocks have risen ~15%, which is a large and aggressive rise and 'earned back' about half the loss in the first part of the bear rally. Commodities in economically sensitive areas are down, foreshadowing a recession. We even have a recession-calling 'yield curve inversion' that we can talk about. This is another foreshadowing of recession. What's funny is that stocks seem to have temporarily moved beyond that. We also have geo-political tensions, and those seem to be of minimal impact on market action. Finally, this is the Summer, and most 'big money' traders are desks are on holiday. That all changes in early September.

Saddle up and let's ride.

Good luck to all in the markets (and in life) today!
​