Short-term, Wall Street is now very overbought (lower chart). Normally, that will be followed by a retreat. Markets (and economies) tend to move in waves, with small waves and bigger waves and sometimes giant, decades-long waves. But movements in the short waves can give us some guide to likely moves in the somewhat longer waves. For example, if the share market goes sideways from here, momentum will decrease, and it will move from being overbought to oversold without falling. Being oversold, the next likely move would be up. So that's something to watch for. We have seen one very tentative sign that we might be approaching a cyclical bottom: the last oversold downward spike in momentum didn't go as low as the previous one, often a sign of an impending cyclical turn, i.e., the beginning of a new bull market. However ....
[Continued below these charts .....]
The trouble is ..... the market isn't cheap. Look at the chart below, showing the dividend yield for the S&P500 and the 10-year bond yield. Before the Covid crash, the D/Y averaged 1.9%. Let's regard this as "normal" for the sake of the argument (it isn't normal, but it'll do for now) Then the Fed cut the Fed funds rate to zero, and embarked on a massive program of quantitative easing (QE) After plunging, so that the D/Y rose to 2.6%, the combination of massive fiscal stimulus and zero interest rates drove the market back up from an index level of 2237 to a peak of 4793, and the DY down from 2.6% to 1.2%.
So if we are returning to a pre-Covid "normal" state, the DY should be 1.9% instead of 1.6%, which means either dividends have to rise by 20%, or the market has to fall by that amount. Yet dividends are unlikely to rise. A recession (mild according to most analysts, but possibly severe, according to me) is on the way. Moreover, during the bull market from the Covid crash lows, fiscal and monetary policy were hugely supportive. But the opposite is true now. The Fed might have slowed the rate of increase in the Fed Funds rate, but it hasn't stopped lifting rates. And, despite claims of a spendthrift Democrat administration, fiscal policy is tightening. And that's before we get to soaring inflation and oil prices. Yes, they have prolly peaked for this cycle, but the Fed won't end its penchant for rising rates and tightening policy until they are certain inflation is heading towards their target. Even rising unemployment and falling payrolls may not deter them -- and we're not seeing anything like that yet. Payrolls are still rising by more than 200K per month. It's a good idea not to bet against the Fed.
Where am I positioned? I'm sitting on a lot of cash in my notional portfolio---which has however underperformed for the last few weeks! But I've been wrong before. And no doubt will be again. I'd be much more convinced that we're beginning a new bull market if the DY was back at 2.5%, in other words, if we'd had the final capitulation plunge, the last panic-stricken sell-off before markets rally. As we had during the Covid Crash.
The usual warnings apply: I could be wrong; these opinions are free and, like most free things, worth what you paid for them; forecasting the future is difficult; past performance isn't necessarily correlated with future performance; your personal circumstance may differ (e.g., you might only care about long-term performance); the share mkt might be looking through the recession to the airy uplands of recovery later in 2023 (seems a bit early to me, but ....) .
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