This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. The market moves to capitalize on the collective expectation of favorable post-election tailwinds, an ebb in bond volatility, an apparent backstop to the crypto market and further bounces in recently punished marquee megacap stocks. A key feature of the market in recent weeks, noted here constantly, has been the refusal of the broad market to succumb to assorted earnings blowups, an unfriendly inflation print, more hawkish Federal Reserve commentary and more resilient labor market than many investors prefer. Rotation toward industrials (defense, machinery), financials, smaller caps and health care have provided much of this resilience. Now heavyweight tech got oversold enough to rebound, and the indexes are benefiting. It’s a good formula, but it’s still all occurring within the broader downtrend and against a considerable burden of proof: another 8% to 10% upside at least before the stubborn bears and chart chasers would defer to the rally. The multi-day bounce has now taken the S & P 500 back to where it sat as Fed Chair Powell started taking questions and overtly raised his own outlook for how high rates must go six days ago. The reprieve from searing bond-market volatility has taken off the pressure (as has a backing off of U.S. dollar strength), allowing investors to believe for now that the likely Fed policy path might be reasonably priced into the rates complex. The ICE Bank of America MOVE Index (the Treasury market’s VIX) is still in an uptrend but these pullbacks have coincided with equity rallies all year. This, along with some including Goldman Sachs economists holding out for the prospect of a “soft landing,” is allowing a bid to return to the market from under-exposed investors now that the broad S & P is in the “fair value” zone. The average stock has dropped 36% from its high and the equal-weight S & P is at a relatively undemanding 14-times forward earnings. Of course, bear markets typically overshoot fair value to the downside. Yes, 2023 profit forecasts are sliding, but the historical tendency of markets to rally into the nd of the year and beyond after midterm elections means probability-minded investors must allow for the chance that a surprise might come to the upside at some point. The quality/value trade is very well sponsored on the Street, for clear and justifiable reasons. But the performance spread between “safer” dividend aristocrat blue chips and the “pure growth” cohort has grown pretty wide, the latter hinting at having a retested low in place. Credit spreads have retreated from the “danger zone” though still shows substantially tighter financial conditions in place versus a year ago. Corporate debt issuance has been active this week, another source of possible support. Market breadth is solid: 3:1 upside volume. VIX is steady under 25, with some potential downside momentum beyond Thursday’s consumer price index data. VIX bottoms (and equity rally tops) have come a few times this year near 19.
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