The furious market rally over the past 2.5 weeks has certainly been an eye opener. Yet, coming pullbacks not withstanding, the rally may actually just beginning with far reaching consequences as an even more eye opening set of mechanics is lurking beneath the surface.

Since Coiled Spring on October 29th and the subsequent discussions of Market Runway and Pain Trade the bullish pieces certainly appear to have fallen into place with the largest rally in over 2 years:

With tech having seen a major pattern breakout:

And $SPX also now breaking above the most recent down trend leaving the path to new highs conceptually fully intact:

While in Market Runway we outlined reasons for such a move there is a lot of criticism and skepticism of this view. And I get it, market performance has been so divergent.

One of the most commonly voiced concerns is that the market is carried by a few tech stocks while the broader market has not really participated and this is absolutely correct:

The performance gap between $NDX and small caps and equal weight couldn’t be more crass.

And this informs the view that the broader market is in much worse shape and that market strength is an illusion and held up by very thin market leadership. This is correct to say but it may lead to a very wrong conclusion and this is where perhaps the real eye opener lies.

Let me elaborate.

First off, the market action since the January 2022 market top has been nothing but dreadful as expressed in high/lows:

Save for 2 periods (at the beginning of 2023 and this summer) it’s been a sea of red, even during this big rally we have just seen. Doesn’t look so hot, but the positive divergence in October informed of a coming rally.

But nevertheless it’s been dreadful, for nearly 2 years. How dreadful? Let’s put this in a historic context by looking at the weekly chart further back in time:

There’s an eye opener right there. In terms of time this series of red reading is worse than during the financial crisis. Indeed you could argue the 2 flips to positive echo the ones we saw during the GFC during counter rallies.

But the financial crisis was worse you could argue with that big flush reading in 2008. Was it really? I suppose it depends on what time frame you’re looking at.

Check the quarterly chart:

No, 2022 was bad, very bad on high/lows. On the quarterly chart it was worse than during the GFC.

Which brings me to a much larger point: How unusual is it so have such an extensive set of red readings? Here’s the monthly chart going back 35 years (all the data I have):

what we just experienced over the past nearly 2 years is some of , if not the worst, on record only in time, but also in scope. Markets, more often than not, tend to see lengthy periods of positive readings which means that this stretch here is very much long in the tooth.

So if you’re bearish you have to believe that the worst period in history for consistent negative red readings will continue. You HAVE to believe it otherwise you are faced with the real prospect that we are about to enter another positive period which, if you look at all this in a cumulative context, appears to be a real possibility:

And if so, that then suggests this rally is just beginning.

And yea, the fab 7 have masked a lot of damage underneath and ironically perhaps this makes everyone miss the message completely, meaning the damage is already done underneath. Then the question becomes what if everything else catches up?

Bears have been hanging their hat on the miserable performance in small caps, but despite the big run up in yields this year, partially driven by the insatiable demand for debt by the US government, bears have not been able to break small caps, the economically most vulnerable sector:

Why not? Perhaps this is a question for bears to answer, but it sends a message especially now that small caps are suddenly rallying hard, +5% at some point today, and are breaking above their most recent downtrend:

Yes tech has been leading. What if everything else catches up per the high low charts above? In this case this rally may just be beginning.

Don’t get me wrong, there will be pullbacks and perhaps we backtest the recent breakouts of the downtrends, but unless something breaks of substance bulls are again in control and with the wind of history and these larger structural charts new highs may well be in the offing.

I know, it’s so counterintuitive on so many levels, but then it always seems to be:

What tends to happen when the 1 year yield has peaked in a cycle?
Recessions with severe consequences can follow, but even if a recession comes markets often have a runway to run first before that happens. Could be months, could be years.$SPX
Monthly chart: pic.twitter.com/mTn702G9eS

— Sven Henrich (@NorthmanTrader) November 2, 2023

Hence, from my perspective at least, key is to keep a close eye on how high/lows evolve in the weeks ahead and how markets react during any pullbacks following the most recent breakouts.

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