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A Word of Caution, Bull Markets and Bear Market Rallies End on Good News

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35 comments on A Word of Caution, Bull Markets and Bear Market Rallies End on Good News

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Facebook chart courtesy of StockCharts.Com, annotations by Mish

Word About Gaps 

  • Gaps in a chart happen when a stock opens above the high of the previous day or below the low of the preceding day.
  • Long time readers know that I expect gaps to fill sooner or later. 
  • The huge Facebook gap down in October closed (stock rallied above the gap down price) in January. The gap down in September just closed.
  • There are now four open gaps, all up. 

Facebook Good News 

It was that latest usage report that caused the gap up. 

Shares in parent company Meta surged more than 15% in after-hours trade as boss Mark Zuckerberg declared 2023 the “year of efficiency”.

He said he was focused on cost cuts.

“We’re in a different environment now,” he said, pointing to the firm’s revenue, which declined in 2022 for the first time in its history after years of double-digit growth.

“We don’t anticipate that that’s going to continue, but I also don’t think it’s going to go back to the way it was before.”

Regarding buybacks, it seems to me that $40 billion would have been better spent before the share price more than doubled. 

Of course, a primary reason for buybacks is to counter dilution from execution options. There is no real incentives for buybacks at the right time. 

Hooray For Jobs

Assuming you believe the data, the Unemployment Rate Hits New Low of 3.4 Percent

Meanwhile …

Payrolls vs Employment Since May 2022

  • Nonfarm Payrolls: +3,031,000
  • Employment Level: +1,893,000
  • Full Time Employment: -166,000

Please click on the link for a discussion of annual adjustments that sent jobs and employment soaring.

Bear Market Rallies

Long-lasting bear markets come with massive rallies. Don’t confuse them with new bull markets.

I expect all four of those Facebook gaps to close. 

Great Time to Buy

The Fed and Lags

If you have been net long for this rally, congrats! But think about where things are headed as the Fed Commits to More Rate Hikes. 

Also consider my January 30 post How Long is the Lag Between Fed Rate Hikes and Real World Activity?

I strongly suspect that any good news is now mostly behind us. 

This post originated on MishTalk.Com.

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Mike Shedlock

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35 Comments
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Oldest Most Voted
ohno
ohno
3 years ago
Simple explanation………The ‘good news’ is complete BS of epic proportions and has finally produced enough evidence to the contrary.
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vanderlyn
vanderlyn
3 years ago
Reply to  ohno
economic news has always been BS, just to fit the situation of more buyers than sellers of stocks, bonds, r/e, currency pairs………
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Salmo Trutta
Salmo Trutta
3 years ago
AD = M*Vt where N-gDp is a proxy and subset
M is decelerating
DivisiaReports.xlsb (centerforfinancialstability.org)
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Salmo Trutta
F=MA where A is creative accounting.
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8dots
8dots
3 years ago
SPX weekly speed. The distance between June 13 low and Aug 15 high is equal to Oct 10 low to Jan 30 high, but it took 10 weeks vs 17 weeks
to cover the same distance. The uptrend looks tired, despite the high beta week. SPX might close Aug 15/22 open gap and turn down. Might do it later, after taking a break to fill the tank..
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vanderlyn
vanderlyn
3 years ago
pro tip. stocks move up when more buyers than sellers. the “news, good and bad is all rubbish. just stories that stock promoters from morgan stanley to wall street journal to online blogs all tell others”. the only thing that has statistical positive correlation in the relatively short term like next few years, is demand side, meaning printing of money available to buy. and the number of stocks on the shelf from IPOs and buy backs…………….. all the rest is rubbish and not worth paying attention to. the only thing this game is all about is gambling. and there is gaming theory. trend following works. jump on a stock heading up. if she keeps going up, hold on. if she goes down, sell. quite simple. but hard for most. more buyers than sellers is why stocks go up. end of story. the rest pure rubbish. gaps and earnings etc. earnings is positively correlated if the holding period is about 15 years. and even then we are talking law of large numbers. statistically valid. the same theory applies to house prices too. more buyers than sellers. and supply and demand. of housing and money supply. quite simple. but oh so elusive for most.
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Doug78
Doug78
3 years ago
Reply to  vanderlyn
There are equal numbers of buyers and sellers. What determines the price action is which group is more aggressive.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Doug78
That’s after the fact.
More interesting is the number of prospective buyers and sellers which is typically not in balance.
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Doug78
Doug78
3 years ago
Reply to  Lisa_Hooker
But it is how the buyers and sellers act that counts.
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Kirby.farner
Kirby.farner
3 years ago
#missionaccomplished
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8dots
8dots
3 years ago
Mish : Gail Tverberg , Talkmarkets chart : Energy cost as percentage of GDP. // 2022 exceeded 2007/13, but still below the 1980’s.
For a decade, from 1974 til 1984 Energy cost/GDP was on new high plateau. We might exceed the 80’s !
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  8dots
Gail Tverberg: “We are running out of oil.”
Me: Yeah, eventually.
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Webej
Webej
3 years ago
Mish, a question:
Just how strong is the tendency of open gaps to be closed upon retracing?
Is there some statistic or measure that indicates how ironclad that log is?
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Webej
Not every time on “retracing.”
It’s kind of like record high and low temperatures.
Eventually the gaps are filled.
Just because.
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8dots
8dots
3 years ago
SPX weekly might drop to 3,700 area, for RS, for fun.
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shamrock
shamrock
3 years ago
The Nasdaq has had an annual loss 12 times since 1975, 10 of those times it went up the following year, usually by a lot. The 2 exceptions were 2001 and 2002.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  shamrock
You mean when Greenspan dropped the Fed rate to 1% and the borrowed money went to building factories in China and buying residential homes?
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8dots
8dots
3 years ago
Meta monthly line : Jan 2018 / Mar 2018.
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PapaDave
PapaDave
3 years ago
“If you have been net long for this rally, congrats! But think about where things are headed as the Fed Commits to More Rate Hikes.”
Where to from here?
No one knows. But I suspect slow growth and moderate inflation going forward. And I expect Powell to give a couple more 25 bp hikes this year.
We all try to place our bets, based on our best guesses for the future. Some of us are even brave enough (or is it perhaps foolish?) to suggest some investments ideas. Of course, many here never say what they are invested in, but are more than happy to criticize others who do.
As I mentioned in late December after the majority here were trashing Tesla (as it neared $100), it seemed like a good time to pick up Tesla for a trade. I bought and sold it several times. The last time I sold it was at $129. Today it almost hit $200! I made some good money in a few weeks. I won’t complain about missing out on the huge run after my last sale.
And I am still holding a lot of oil and gas stocks. I continue to think that they will keep doing well for the rest of this decade, particularly the Canadian oils. After two years of high free cash flows, most of them have paid off so much debt that they have now reached their targeted low debt levels, or NO debt levels. And many have committed to returning 50-75% of future free cash flow to shareholders through share buybacks and/or dividend payments.
Even with a slowdown or recession, I expect the oil and gas companies to make a lot of money as I can’t see oil prices dropping much from here; and if they do drop, it won’t be for long. OPEC will cut production as needed to shore up prices. And demand from the rest of the world is still climbing.
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randocalrissian
randocalrissian
3 years ago
Reply to  PapaDave
I think the LNG sector will offer some great buys soon. I was in AR and EQT, it was too early, got out will try again once spot prices turn and Freeport is back online. I continue to like uranium just as I like LNG for long term reasons, perhaps uranium more so. Lots of interesting plays there CCJ maybe inflated a bit much, but UUUU, UROY, NXE are interesting and smaller players like SMR partering with GVP may be interesting over the coming 5-10 years.
When volatility and level seeking on indexes are in fashion, I like taking numerous small positions in the 3X ETFs for QQQ, IWM, SOXX, and just noticed the ones WEBL/WEBS for Dow internet stocks. CCL is a bounce play I have been working for singles lately, it’s nearing a nice little move up to 14-16. Also looking at some beaten down solars.
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PapaDave
PapaDave
3 years ago
Reply to  randocalrissian
Thanks for sharing!
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Matt3
Matt3
3 years ago
Reply to  PapaDave
Thanks for posting ideas. I’m long oil and gas but have been selling other things into the rally. Probably selling too early but I don’t have much confidence is the tech sector continuing up. It has run very far very fast.
So I’m raising cash and am always interested in ideas.
On the business side, things are still very good. Actually seem to be finding employees and are hiring.
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PapaDave
PapaDave
3 years ago
Reply to  Matt3
Thanks for sharing your ideas.
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vanderlyn
vanderlyn
3 years ago
Reply to  PapaDave
the FX carry trades are back. some juicy returns. short the EUR/MXN is a 8% handle. lever it up 3 or 4x and make 32% per annum, pay zero interest. paid every night. lots of good currency pairs with higher yields than that, too. this trade went away since panic of 2008, for 15 years. so glad it’s back. the easiest money in all capital markets, imho. also in lots of energy trades and now MSFT and APPL and a ton of other companies. schnitzer steel a great play on domestic industrial policy. same with NUE
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PapaDave
PapaDave
3 years ago
Reply to  vanderlyn
Thanks!
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Esclaro
Esclaro
3 years ago
The DXY took off like a rocket going from neat 101.5 to just shy of 103. Precious metals were absolutely annihilated as a result. Gold lost $50 on the day. Gigantic job gains mean that the Fed is going to have to raise interest rates a lot this year which will crush the precious metals.
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Cocoa
Cocoa
3 years ago
Reply to  Esclaro
As Mish.mentioned the other day the job gains were mostly adjustments of around 110,000. Total political fraud
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shamrock
shamrock
3 years ago
Aren’t buybacks subject to a 1% tax now? Doesn’t seem to have slowed them down in the least bit.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  shamrock
Isn’t the 1% tax deductible?
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Captain Ahab
Captain Ahab
3 years ago
“…BBC reports Quarter of global population…” are mindless idiots. Given the global IQ distribution, that ‘quarter’ would seem right right.
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Maximus_Minimus
Maximus_Minimus
3 years ago
Reply to  Captain Ahab
Did BBC only count their global viewers or in general?
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Captain Ahab
Why is the preponderance of global idiots in American blue cities?
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dtj
dtj
3 years ago
“Fed Commits to More Rate Hikes”
Market doesn’t care. Mortgage rates down since the latest hike.
Stock market already bottomed out and is now going back up up up.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  dtj
Fiction has always outsold history.
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randocalrissian
randocalrissian
3 years ago
Good eye on that META chart, those twin daily candles are super odd looking, though a late fade may negate their near exact similarity. Lots of epic reversal candles brewing, they concealed them with the buy imbalance ramp into close yesterday, but semiconductors, Nasdaq, and Russel small caps looking pretty ripe for shorts. Reversion play to 20 day SMA.
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