What a relief to finally have a good relief rally in the stock market. Consider the following:
(1) The S&P 500 was up 6.4% this week, and 6.7% since it bottomed on Thursday, June 16 at 3666.77. It was down 23.6% back then from its January 3 record high. Now it is down 18.4% from that peak.
(2) The S&P 500's forward P/E has rebounded from 15.3 on June 16 to 16.3 today. We previously opined that 15.0 might be the downside as long as the economy doesn't fall into a recession, which we still assign 45% odds.
(3) Over the past week, in our QuickTakes, we've observed that sentiment indicators were so bearish that they were bullish. For example, the Bull/Bear Ratio fell to the lowest reading since the bottom of the previous bear market in March 2009!
(4) On a fundamental basis, we've noted that commodity prices are showing signs of peaking, suggesting that inflation may be doing the same. Bond market indicators have also turned more bullish recently. And industry analysts continue to raise their earnings estimates despite widespread skepticism about their optimism.
(5) The relief rally may have some staying power if the next batch of economic indicators shows that the economy is slowing but not falling into a recession, while inflationary pressures are moderating. For now, we see the 3666 level as a possible bear-market bottom. On the other hand, the near-term upside might be limited since investors might get altitude sickness again if the valuation multiple gets back above 17.0 while the Fed remains on course to hike the federal funds rate some more.
