What does the market need to keep going up? It needs signs inflation is moderating and that the consumer is holding up. It got some modestly good news today on the consumer front from Walmart and Home Depot. But the data is really choppy. The economic data yesterday — both in the U.S. and China — was pretty shabby: lousy China data (July retail sales and industrial output both well below expectations), lousy Empire Manufacturing data (the weakest since May 2020, as shipments and new orders were weak), and lousy housing data (NAHB Housing Market Index at 49, lowest since June 2020). Yet the market keeps rising. Most of the major indexes are now well into overbought territory. Jonathan Krinsky, technical strategist at BTIG, noted the S & P 500 is now more than 8% above its 50-day moving average, the widest spread since September 2020. Why? Sentiment is improving, Marko Kolanovic from JP Morgan says, because there are growing signs that peak inflation is behind us, “which reinforces the idea that Fed hawkishness is likely behind and a soft landing is increasingly likely.” Still, the S & P has moved roughly 500 points (13%) in just under a month. That is one heck of a rally. It’s now veering into overbought territory by almost any standard, whether you are looking at technicals (relative strength indicators) or market multiples (the P/E ratio has risen close to 19 today from 16 in June). Many professional traders say that while the first leg up may be due to a change in sentiment and short covering, this last leg up has elements of a different sort of rally: panic buying. “You have light volume, low volatility, with no big sellers out there,” Chris Murphy, co-head of derivative strategy at Susquehanna, told me. It’s simple: a lot of traders were heavily in cash in April through July, and many still are. Cash is useless in a rising market, so many are being forced back in. “With the market moving up and many people still underpositioned, you’re going to have a lot of people chasing stocks,” Murphy told me. Still, at some point that game is going to stop, particularly if the economic data don’t hold up. “The bounce has not been backed by fundamentals, which deteriorated heavily last month,” Kolanovic noted, specifically referring to small and midcap stocks which have staged a notable rally, with the Russell 2000 up 23% since its June low and the S & P MidCap 400 index higher by 20%.
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