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Capitulation & New Invigorated Market

U.S. stocks closed higher on Friday, 11th November 2022, following a monster move on Thursday. 

On Thursday, the U.S. Labor Department reported a 0.3% month-over-month rise in October’s core Consumer Price Index, compared to forecasts for 0.5%, marking the softest reading since September 2021 for core CPI.  

The headline CPI figure, which factors in volatile food and energy prices, climbed 7.7% from a year earlier vs. expectations of 8.0% and compared to an 8.2% rise seen in the previous month.  

The market saw this as a sign that the Fed would back off and be less aggressive.  

At the end of the session on Thursday, the Dow Jones Industrial Average and S&P 500 closed up 3.7% and 5.5%, respectively, while the tech-heavy Nasdaq Composite Index shot up 7.4%.  

The U.S. government bond yields also recorded their steepest one-day decline in more than a decade, with the rate on the 10-year Treasury falling 32 basis points to 3.82%.  

For the week, the Dow added 4.1%, the S&P 500 surged 5.9%, and the Nasdaq Composite was up a massive 8.1%.  

Here are the closing levels on Friday, 11th November 2022: 

 Last Change %Change 
Dow Jones 33,747.86. +32.49. +0.10% 
S&P 500 3,992.93.   +36.56. +0.92% 
Nasdaq Comp 11,323.33.   +209.18. +1.88% 
US 10Y 3.81%   
VIX  22.52 -1.01  -4.29% 

“Capitulation” is what I would describe as what happened last week. The shorts completely surrendered which gave way for bulls to take control and change the narrative. This is in spite of a collapse in a crypto exchange, which usually would bring negative sentiment into the market. 

But no, nothing was going to stand in the way of a new invigorated market.  

The inflation number was actually not that much better than the estimate, but it was enough to change the mindset of buyers that all will be well and that we have probably seen the bottom…. That is the hope.  

The short squeeze was massive, and unlike previous squeezes, there was no pullback or reversal. It was one way up driven also by the underweight of longs getting back into the market and of course FOMO. 

The follow-through on Friday is a good sign that this rally may have legs. 

I can honestly say that many did not expect this kind of reaction to one single data point, myself included. 

My heart wants to see this rally continue, but my head tells me that inflation is still 7.7% which is very far from the 2% target of the fed.  

Is the market strong enough to endure higher for longer interest rates?  

Corporate earnings will expose the truth and hopefully confirm this. 

Looking at the 2s 10s yield curve, it is telling us a recession is coming. 

The capitulation of longs is usually an indicator that a bottom is near. One wonders what a capitulation of shorts mean? 

For now, hope for the best but prepare for the worse. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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