Looking for a Bottom (by Xerxes)

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Everyone and their mother has been chanting “Santa Claus Rally!” since Thanksgiving. I’ll first note that some here have posted that the true Santa Claus Rally is a specific time period AFTER Christmas through January 2 and is supposed to yield some insight into what the next year holds. So just hold on to your Santa sacks until then.

As for what I expect in the first quarter, everyone is looking for this market to bottom and go long. Hell, permabull Fundstrat Tom Lee has to be right some time if he is bullish the entire way down. But one big thing missing before we find a bottom in this market is the combination of “good news is bad/ bad news is worse” reactions. So far, we have had part 1 of that combination, just take a look initial reactions to today’s GDP numbers. But still missing is part 2. We have had this flip flop of expected reactions to most numbers, especially since October. Most reactions to bad numbers have been very optimistic which does not make for good bottom. In fact, it just lends to the murkiness of the short term moves, but overall the bigger move still looks like it is down. I think next earnings season will start to change the mentality a bit.

Last earnings season hurt investors, no question about it. Guidance was pretty terrible. Most investors are then hoping the low guidance “gets the bad news out of the way“, so to speak. But an important thing to remember is that while inflation is “peaking”, it hasn’t exactly turned around. Consumers are still paying higher prices, producers still paying higher prices, and effects still working its way through our economy. The next earnings season may actually bring that previous bad guidance to fruition. I actually expect lots of “not great but not bad” earnings, just with lots of window dressing and light talk to keep things “peachy”.

Back to my main point, to find a bottom we need to see some sort of capitulation and bulls “throwing in the towel.” The interpretation of broad market needs to get to a point where investors stop focusing on short term salve like a fed pivot and wonder “Am I going to make the same returns I have experienced for 10 years if I buy now?” And the answer will be “no“. And the way to recognize this is to have at least a few weeks of very pessimistic market reactions to pretty much any numbers, good or bad. When the market finally reflects the pessimism in the average investor, that will be the sign that it is time to start covering and building those long term portfolios.