Trading Desk: Finally Looking Forward

We’ve gotten hardened to discount or even ignore bear market bounces. But this week’s move to the upside feels different . . . and if I’m reading the signs correctly, the time to hide out on the sidelines is running out fast.

What happened this week? For one thing, Jay Powell got another golden opportunity to talk the market down with threats of more aggressive rate hikes, just like he’s done again and again at Jackson Hole and elsewhere.

This time, he resisted the urge to talk about rates at all. And the market cheered in relief.

Then we saw inflation come in hot . . . but cooling somewhat after a year of draconian tightening. The numbers are moving in the right direction. As long as that’s the case, we can contemplate a moment on the horizon when the Fed will finally pause and survey the results of its work.

And in the meantime, earnings season has now officially started. Profit margins are holding up fairly well.

Any economic slowdown is not cutting deeply enough into corporate operations to motivate truly massive layoffs . . . yes, companies like Amazon (AMZN) and failing startups are letting a lot of people go, but others like Goldman Sachs (GS) are simply recognizing that payrolls got too bloated in the pandemic era.

Goldman’s own website still claims “nearly 40,000” employees. The actual number has swelled to 49,000 and nobody in charge bothered to update the page. Now up to 4,000 of those people will need to move on. End result: 12% more people working at the bank than before.

Either way, I find it difficult to believe that 2008-style layoffs are looming when so many employers worked so hard to get the people they need . . . and many still haven’t gotten capacity where they want it. It’s going to take a profit meltdown to make that happen.

As of today, profits aren’t melting down. We’re looking at a little year-over-year dip, far from a collapse extensive enough to trigger operating losses. Conditions aren’t great, but they aren’t bad.

When stocks are priced for great conditions and we get a quarter like this, it’s logical for the stocks to go down. But with stocks priced for the apocalypse, a quarter like this comes as a relief. Again, we cheer. And we buy selectively.

Is it any wonder that the “fear index” plunged to its lowest level since last January this week? Right now, the VIX is below where it was at the December bottom, when the world was contemplating a potential Santa rally . . . and well below where it bottomed out in the summer . . . and even below where it was in April, when few were taking the Fed seriously.

While I am not convinced that we’ve seen the last waves of fear, future VIX spikes will have a hard time reaching the intense levels that we had to digest in the past year. The highs have been declining from month to month.

That’s a healing trend. I wouldn’t mind one more burst of intense fear to give nervous investors a chance to capitulate, but there’s no law saying every weak hand needs to fold.

The last three years have tested a lot of assumptions about the way markets behave. We’re all learning. Technology and new trading patterns create unusual and even unique circumstances.

Keep your eyes open and you’ll see opportunities in the noise. We’ve been buying smaller and more aggressive stocks throughout the process . . . if this is the future, I’m looking forward to it.

And of course the markets are closed on Monday. I’ll be back in touch once we see the mood that follows this three-day weekend. Will traders return to Wall Street energized and enthusiastic? Or will fear take over again?

I’m thinking the fear factors are fading. We’re used to them. And we’ve survived worse economic conditions. Now we’ve reminded ourselves of that fact.