(Bloomberg) — Behind the adrenaline rush of November’s stock market rally lies an eerie calm that portends more gains for stock investors, at least through the end of the year.
Most read on Bloomberg
The S&P 500 Volatility Index averaged 0.3% daily change in either direction last week, its smallest swings in six months, as the market lost some momentum toward the end of its second-best November since 1980. The Cboe Volatility Index, also known as the VIX, fell toward the lowest levels of the year on Friday, and stocks rose after Federal Reserve Chairman , Jerome Powell, gave his clearest signal yet that officials are done raising interest rates.
“The market can remedy overbought conditions either by lowering price action or over time, and so far the S&P has digested the big advance by slowing down over time,” said Frank Cappelleri, founder of CappThesis LLC. “The slowdown after such a strong first half of November must be considered constructive.”
For stock bulls, price action shows that risk appetite has not generated the kind of euphoria that often precedes routs. And it demonstrates how reluctant investors are to cash in with the broad equity benchmark, about 4% off a record high.
The S&P 500 index rose 0.8% last week, the smallest gain in its five-week winning streak. What happened? Simply put, a series of important sessions during the first half of November gave way to a relatively calm period, as the indicator spent 11 days without moving 1% in either direction, the end of a quietest month since July.
If history is to be believed, December is unlikely to bring massive sales. Since 1950, it’s the third best month of the year for the S&P 500, with an average gain of 1.4%, according to data compiled by The Stock Trader’s Almanac.
The tendency of portfolio managers to improve their funds’ positions towards the end of the year by purchasing outperforming stocks helps fuel this seasonality. Stocks also typically see strong gains during the period covering the last five sessions of December and the start of the new year.
However, many risks are currently on the table. Markets are positioned for a soft landing for the economy, but there is no guarantee that growth will remain resilient once the Fed’s tightening takes full effect. In a worrying sign, American industrial activity declined for the 13th consecutive month in November.
Another concern is that most of this year’s gains have been driven by one part of the market. This is the smallest group of drivers ever recorded for a rally exceeding 15%, according to data compiled by Société Générale. A favored measure of momentum also issues a warning sign: The benchmark index’s 14-day relative strength index has gone from beaten-down levels to overbought in less than a month.
That’s part of why Brian Frank, portfolio manager of the Frank Value Fund, is wary of the market moving forward.
“US stocks have gone from massively oversold to massively overbought in such a short period of time,” he said. “So November’s strong advance could end up stealing some of December’s historic strength.” In response, Frank buys shares of small- and mid-cap commodity companies known for their dividends.
Leaders buy
However, bulls are receiving reassuring signs from corporate executives, who bought more of their companies’ shares in November, pushing the buyer-to-seller ratio to its highest level in six months, according to data compiled by the Washington Service.
The options market also exudes a sense of confidence. The VIX futures curve – a tool often used as a guide for speculative positioning in the coming months – shows a lack of demand for crash protection. It is now lower than it was at the beginning of November on many deadlines.
While there may be little suspense surrounding the Fed’s Dec. 13 policy decision that the central bank should keep rates steady, there is still potential for turbulence due to economic projections released that day. and Powell’s press conference. The Fed chairman on Friday ruled out bets on a rate cut by mid-2024, but bond traders only doubled down on their bets on Fed easing next year.
“A dovish turn mitigates some of the tail risks of recession in the near term and longer term,” said Dennis Debusschere, founder and chief market strategist of 22V Research. “A more accommodative Fed is less likely to oppose the recent easing of financial conditions. This should benefit the riskier segments of the market.
Most read from Bloomberg Businessweek
©2023 Bloomberg LP
