Nothing went off – no bells and no whistles – to signal the tremendous rally that we have been having for the better part of a month now. Sure, we were in the midst of earnings season, but the genuine surprises were few and far between. So, earnings couldn’t have triggered it. How about the Federal Reserve? Nope. Just not a factor. In fact, it’s eerie to see how little information or news prompts from the Fed we got during the two-step bottoming process: the peak in bond yields on Oct. 17 and the nadir in stocks on Oct. 28. But that’s the way it really works when you have a major move. It’s not supposed to happen. There’s nothing in the cards that says it will. In fact, it’s the opposite. What happens during these rallies is quite complex and, again, devolves to moments where the animal-spirit mechanics trump the realities of the bond market, breaking the critical linkage that has kept stocks down. First, the rally wasn’t supposed to occur because back in the earlier part of October, ahead of when rates peaked, we were gripped with a supply-and-demand problem. It seemed that Treasury was tone deaf about how to offer Treasurys. They just kept hitting us with auctions that, in themselves, overwhelmed demand. It didn’t help that so many funds were already long bonds and bleeding from their eyeballs. They were the worst asset class in the world, especially because inflation just seemed to not want to go down. Persistent inflation dogged us. Given so much of the conventional wisdom about the relationship between stocks and bonds couldn’t be bucked, the downside momentum couldn’t be bucked. It seemed that we would hit 6% in rates – something that one of the smartest men in the room, JPMorgan CEO Jamie Dimon, kept insisting would happen. But rates didn’t breach that level. In retrospect, there was a lot of misdirection and a lack of a belief. That’s when a top in yields tends to occur — when nobody thinks it’s possible. The earnings went better as the season went along, but they can’t explain the bottom at all. The Magnificent Seven were mixed. In mid-October, Tesla (TSLA) reported disappointing earnings and missed badly. Elon Musk blamed the shortfall on higher interest rates – descriptive, not prescient. Club holding Microsoft (MSFT) crushed it on Oct. 24 and gave credence to the artificial-intelligence revolution with a tease about a strong Copilot launch . But Alphabet (GOOGL) reported the same day and it was just awful, a real slowing in the key Google Cloud business which couldn’t be offset by anything. Amazon (AMZN) gave us something to cheer on Oct. 26. Apple (AAPL) didn’t report until after the bottom, and it was a widely panned quarter. Taken together, earnings hid any potential rally from any close observer. Even the macroeconomic data gave no hint of the rally to come until after the rally began in both bonds and stocks. But if you peel back the rally onion, there are two germane facts. The first came Nov. 1, when some Treasury bureaucrat, Josh Frost, announced the refunding schedule for 2024. We know that the Treasury’s debt is humongous, but how it is refunded is what matters. And it turns out that 2024 would be much lighter on the long end than expected. Then, on Nov. 3, the Labor Department announced that only 150,000 jobs were created – much lower than the market anticipated – and that confirmed the rally that had started on Oct. 28. Again, though, you could not have spotted any sea change from the data, simply because it happened well after that top in bond yields and well after the bottom in stocks. Meanwhile, the market’s oversold position told you that something was afoot. It reached levels almost equal to the bank crisis back in March. It was, in retrospect, the only indicator that got both right. It seemed that the whole market was leaning the wrong way when rates topped and almost doubled down when stocks bottomed. Tinder, masses of tinder – created out of textbooks that indicated the yield curve would still foretell a recession and the stocks being shorted do the worst in a recession. The bears clung to the hard-landing scenario right up to that employment report. They were in the wrong stocks at the wrong time. Since that critical moment, we’ve seen a bond-market rally of immense proportions – best since 1985 – that caught investors unawares. We’ve seen a stock rally that can’t seem to quit. And that brings me to the crux of what really happened here – something that we haven’t seen in almost 30 years. When the shorts are positioned dreadfully, and we get a hint of good news coming because the market is oversold, it’s when smart buyers come in, quietly, and start to pick up all sorts of stocks and invest in the S & P 500 . They sopped up the supply that was available, including short supply offered in abundance by hedge funds willing to press their bets that made so much money all year. They even ended up taking so much stock that they defined the bottom with their buying. So, when will this run end? Probably when the supply of stock comes to market through IPOs and we get a weak bond auction that causes the bond market to hiccup. That’s what would happen in the 1980s and 1990s. So now, you just got my best lesson about the great bottom of 2023. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Nothing went off – no bells and no whistles – to signal the tremendous rally that we have been having for the better part of a month now. Sure, we were in the midst of earnings season, but the genuine surprises were few and far between.
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