[Note:  This content is for educational and entertainment purposes only. Investment decisions should be made with the help of a professional.]

In my most recent “Markets” post (https://www.moviesmarketsandmore.com/the-boy-who-called-wolf-was-right-just-when-everyone-stopped-listening), I offered two different charts and trendlines as  key support levels. The second level (5-yr chart) held, and the resultant bounce from the 4100 level sparked the market’s greatest November rise in decades, driving indexes near to the old highs of a year ago (see 6-month chart below). There are at least three reasons for the “upward crash”:

1. Many sophisticated market players had bet on the market to go down and sold short (“buy low, sell high” but first borrow stock then sell it. They then buy later—-and preferably lower–to return the borrowed shares and pocket the difference). When the market began to bounce back up, these players began “buying back” their losing positions and caused a “short squeeze” where both bears and bulls were buying. My late friend Peter Hackstedde used to say “big moves happen when a lot of people are wrong.” This was was more like a “super squeeze” because the index went up ten percent in three weeks–while it had taken three months to drop to that point.
2. The new wisdom was focused on the actions of the Federal Reserve, our central bank. It goes back a few decades when someone coined the phrase “Don’t fight the Fed.” In other words, when The Fed begins lowering interest rates, you want to already own stocks.  So, trying to get ahead of the curve, investment firms took a bullish stance and large publicly-traded companies initiated large new share buybacks in anticipation of a Fed “pivot” from raising interest rates in order to cool inflation to lowering rates to stave off recession. This added to the buying.
3. FOMO is “Fear Of Missing Out.” Usually, this group of individual investors arrives at the party a little late: they may have sold earlier when the market was falling. But they see that the market is rising fast, assume it will continue, and want to get in on the gains. This group probably provided the last few percentage points to the rally.

Generally, short squeezes are temporary and impulsive individual investors have limited resources. That leaves us with the question: will this rally be sustainable?

The obsession with the Fed as omnipotent Atlas who lifts the market to the sky is misguided. Right now, everyone wants a “goldilocks” scenario that is referred to as a “soft landing” for the economy. In this case, the economy slows gradually as the Fed lowers rates back to a level that results in only 2% inflation and stocks can resume the upward climb.  Really?  What if we go into recession? What about the myriad existential risks I alluded to in the previous post? What if inflation is “sticky” due to higher wages and doesn’t get down to 2%–and thus the Fed can’t lower rates, or can’t lower them as far or fast as hoped?  What about the damage higher interest rates have already done to real estate or to the cost to service the national debt–which has jumped to $800 billion/year just to pay the interest? What about China’s economic slowdown? What about the two ongoing wars, the threats to our democratic system, and the daily climate-related crises?  Can the Fed save us from all of those?

–The market thinks so.

WRH