Four Qtr rally, investors bet on a pivot

• It is a new quarter and investors went on a shopping spree – stocks rallied by more than 3% – investors expecting a FED pivot.

• Oil rallied by 5% as the OPEC decision looms.

• Treasury yields fall as some are betting that the FED will pivot!

• US futures are up again today as the FED pivot story continues – are you seeing a pattern yet? 

• Try the Baby Pumpkins Stuffed with Pumpkin/butternut Squash Risotto.

BOOM!  It is the start of the 4th quarter 2022 and what a start it was….buyers taking control of the market – either that or sellers finally became exhausted – taking the pressure off…..Economic data yesterday morning showed some weakness….the ISM Manufacturing PMI fell to 50.9…just a hair above neutral and below what was expected….while the S&P Manufacturing PMI rose to 52 – slightly higher than the expectation….construction spending falling by -0.7%, new orders fell to 47.1 and total vehicle sales strong, but less than expected….the RBA (Reserve Bank of Australia) was supposed to raise rates by 0.5% and they chose to surprise the markets and raise by only 0.25%……which was interpreted as a ‘slight pivot’….because the expectation was for a 0.5% rate hike….

It was the start of a new quarter…. stocks had gotten smashed during the 3rd quarter and so, as we have discussed at length – there were bargains (think Bloomies) everywhere you looked.  Some of the biggest names and sectors that had gotten beaten up as PM’s and investors raised cash ahead of what is (was) expected to be a difficult time were the biggest beneficiaries….The rally started before the opening and continued after the bell rang – climbing higher and higher…by the end of the day – the Dow gained 765 pts or 2.6%, the S&P up 92 pts or 2.6%, the Nasdaq up 240 pts or 2.2%, the Russell up 45 pts or 2.6% while the Transports gained 405 pts or 3.3%.

The XLK (tech etf) rallied by 3.1%, XLC (communications) up by 2.8%, XLI (industrials) up by 3%, XLE (energy) up by 5% – but to be fair that’s all about the pending OPEC + decision due out tomorrow when the meet in Vienna – rumor has it that they are about to announce a 1 million barrel/day CUT in production to stop the bleed, to stop the price of oil from going lower…..XLV (healthcare) up 2.8%, XLB (basic materials) up 3.2%, XLF (financials) up 2.8%….the SPXL (S&P triple levered long) jumping by 7.2%, Semi-conductors – SOXX – which has gotten absolutely smashed (down 40% ytd) rallied strongly as well – rising 3.5%, Cyber-Security (CIBR) up 2.8%, Artificial Intelligence (BOTZ) up 3%, Fossil Fuel names like BTU and CRK up 5% and 4.5% respectively – taking those two names up 161% and 123% ytd – this as Europe braces for winter…and hello….we have been talking about these names for months. 

And as you would expect – the contra trades suffered…right?  The DOG down 2.6%, the PSQ down 2.4%, and the SH down 2.5% – the SPXS (S&P triple levered short) down 7.8%
All very exciting…. but you have to ask yourself is this just a ‘relief rally’ or is this the start of something new?  Has the picture completely changed between what investors were focused on last month and yesterday?  Last week showed us that the core PCE Deflator – the FED’s favored data point – rose… (which is not good) while yesterday ISM Manufacturing PMI fell (slightly) – and suddenly we reached peak inflation and that means the FED will pivot? The RBA raises by less than expected and that means that the FED will follow suit? Suddenly there is this sense that the one weaker macro data report supports a FED pivot – really?  So, the stronger S&P PMI means nothing?  Or the stronger PCE core deflator is useless?  OK…. I get it…. focus on the data point that supports your position (which makes sense) vs. suggesting that the markets were in well oversold territory and were ready for a boomerang rally….

It is the start of earnings season and while earnings have been positive so far – the estimates are coming under pressure as the global economy begins to show signs of stress and inflation continues to rob consumers forcing them to make tough choices…..At the beginning of the quarter – 3rd qtr. earnings estimates showed a 9% increase y/y – that estimate has been cut to 2% now…..a significant decline….which corresponds to the significant decline in stocks…..So now, it appears as if investors are already expecting a weaker quarter and if we get a weaker quarter then that could end up being positive for stocks….I guess it just comes down to defining  – what is ‘weaker’?  Have the estimates come down enough?  Well, we are about to find out.

OK – run with that and while I want this angst to be over as well, my gut says it’s just another ‘bear mkt rally’ in an ongoing downtrend……Kind of like that bear mkt rally that took the S&P up 18% off of the June lows before taking it back down 16% by Friday afternoon?  The trend is lower – The August high is below the March high which was below the January high, and the lows are lower….so the August low is below June low, which was below the May low, which was below the February low, which was below the January low…

Now if you draw that trendline from the January high to the August high –  it suggests that we could see a rally back to the 4100 ish range if all goes well…..and if we rallied there and failed that would be lower than the August high….continuing that ‘lower high’ trend and if the lower lows continue then that points to an S&P of 3400 ish….. Now we could also rally to 4100 and bust up and through – and if we did that – then it changes the narrative…… And while so much of the macro data could change as well – we have to wait……so sit back, but that does not mean there are not opportunities staring you in the face…which is why I keep saying – stick to the plan….

The Dollar index – DXY ending the day lower yesterday is lower again today and that is helping the overall mood….the index is trading at $111.23 – this is down from last week’s high of $114.78……there are a couple of ways to think about this…..One – it is pricing in a FED ‘pivot’ and Two – the index is just consolidating after the spike up over the past month……in either case – the falling dollar is helping the mood…..and the smart money is still betting that the FED will raise rates by 75 bps in November – but it is starting to weaken a bit…..which is helping the mood.

Oil – as discussed is up…. on the back of the Saudi, OPEC rumor of a production cut. This morning oil is up again…and is now trading at $84.40 – up from $76.60 last week – about to kiss resistance at $87.50.

Gold rallied by $40 yesterday – taking it up and through $1700/oz….as I suggested it would in yesterday’s note…. – this morning it is up another $16/oz at $1718…. It will hit resistance at $1736….so let us see what happens then….

This morning – US futures are pointing to another UP day…. Dow futures up 346 pts, the S&P up 56, the Nasdaq up 220 pts and the Russell is up 30 pts.  Eco data today includes Factory orders – exp of 0%, Ex transport of +0.2%, Durable Goods of -0.2% and the JOLTS report – Job Opening and Labor Turnover Survey….and that is expected to show 11 million job openings, down from 11.2 million last month. 

We will hear from 4 FED heads today…. NY’s Johnny Williams, Cleveland’s Loretta Mester, San Fran’s Mary Daly, and Lorie Logan who is the Dallas Fed President. 

European stocks are all up big….UK +2%, CAC 40 +3.4%, DAX +3.1%, Eurostoxx +3.5%, Spain +2.6% and Italy +2.7%.  Much of the mood due to yesterday’s Wall St rally. This morning the Eurozone reported that PPI across the region came in at 43.3…right in line.  The chaos created in the UK last week by PM Truss has calmed down but she might already be considered a lame duck after those antics….And Kwasi – I don’t think history will remember his name – but it is early in the game….and while CS sold off hard yesterday, it did manage to rally back but that is causing angst for management as they try to control the narrative….this story is not over yet by any stretch…but it is not at a Lehman hysteria either – at least not yet.   Stay tuned.

Treasury yields came in hard yesterday…..The 2 yr. treasury now yielding 4%, the 5 yr. is yielding 3.78% and the 10 yr. is yielding 3.5%  and those yields are down significantly….from where they were just last week and that too has helped to fuel the move higher…..Remember – last week – the 10 yr. was yielding 4.25%..

The S&P closed at 3678 up 93 pts…. bouncing off that new 2022 closing low at 3585…. Today appears to be another up day….as the Risk On mentality is alive and well.  Look – we are now in the final months of 2022…. PMs are certainly going to be going shopping for names that have been completely dislocated and while I think this rally will stall once earnings start, the mid-terms will only add another level of uncertainty…. until that is over….  A democratic win in both houses will embolden that party and then expect all kinds of new spending to be shoved down our throats, a split congress should help to stall that….and a GOP win in both houses will put Joey in the corner. 

Remember – the Fed has the next meeting on November 1st and 2nd….  In any event – I do expect the Christmas rally post the election – yr. end target around 4k ish….…. 2023 expectations will be modified post the election when it is clear what the outcome is. 
In any event – it is always best to stick to the plan…. even if that means just putting new money into cash as you wait for clarity….There is no need to think you are missing out…..if you are invested in a strong well diversified portfolio you benefited yesterday and will again today…..Be strategic when allocating new money to your long term portfolio….Overweight big, boring names that are good divvy payers, while we are in the storm…

Stuffed baby pumpkins stuffed with butternut squash risotto

So, Thanksgiving is only 7 weeks away…. but you should start thinking about it.
Get those little pumpkins – slice off the top, discard the seeds and save the tops.  Place a dab of butter in the center, place the top back on, drizzle with a bit of olive oil and roast in the oven at 400 degrees for about 25 – 30 mins…. you want them just a bit soft.

Remove and let cool – once they cool – use a spoon and carefully scrape out the inner flesh – careful not to pierce the shell.  Set aside.

Now make the Pumpkin Butternut Risotto.

You need Chicken broth, arborio rice, butternut squash, 1 ½ c of pumpkin puree (not pie filling), a large, diced onion, chopped fresh basil, fresh grated parmegiana cheese, olive oil and 3 tblspn of mascarpone cheese.

Preheat your over to 400 degrees.

In a large baking dish combine the rice, the cut-up butternut squash, the pumpkin puree, the diced onion, and the chicken broth.  Season with s&p, and mix Cover it tightly with tin foil and place in the middle rack.  Check it about every 10 mins to mix and then recover it.  It is done when all the broth is absorbed, and the rice is no longer hard. Should take about 40 mins.

Remove it from the oven, add a couple of handfuls of parmegiana cheese, the mascarpone, and the chopped basil…. Mix well. Now fill each pumpkin with the risotto and place the lid back on top…and set it on a large serving platter for the presentation…Your guests will love it.