Judicious cuts, oversold bounces, and a Santa rally?: A market meltdown recovery tale

• Stocks did 180 and closed higher on Friday.

• PCE a bit better – and that sent the algos’ into overdrive.

• Oil steady, gold down, Bonds mixed.

• It’s a holiday week – (next week too) so don’t overthink it.

• Try the Candied Pecans.

So, what happened to the weakness? What happened to the concern over slower rate cuts in the new year? What happened to stretched valuations? Stocks had a tough week – the S&P lost 2.5% for the week – the worst week since mid-November when the S&P gave up 2.2% - but did end up rallying hard on Friday – to help blunt some of those losses….

Dow added 500 pts or 1.2%, the S&P gained 64 pts or 1.1%, the Nasdaq gained 200 pts or 1%, the Russell added 20 pts or 1%, the Transports gaining 33 pts or 0.2%, while the Equal Weighted S&P surged by 100 pt or 1.4% - the clear outperformer and the one that details the broader participation in the market – understanding that this does make sense because it has been the underperformer of late – it was down over 7% in 3 weeks, coming into Friday morning – which means that many of the stocks in the index were down even more…..…….So, when investors and asset managers look to go shopping, they are going after the good names that are on sale for no other reason than angst and nervousness.

And here is another thought on the action – the Dow, the Russell, and the Equal Weighted S&P were all kissing or in ‘oversold’ territory (think RSI – Relative Strength Index) – so a bounce should not have been a surprise at all.

So, what happened? Well, the PCE happened – and it surprised nearly everyone…. PCE m/m came in weaker than the estimate at +0.1% down from +0.2% while Core PCE m/m also came in weaker at +0.1% down from +0.3%. Y/y reads coming it at +2.4% - estimate was +2.5% and Core y/y coming in at +2.8% vs. the estimate of +2.9%...and this was welcomed news…..taking stocks from negative in the pre-mkt to positive by end of day….It was a brilliant day, but be careful not to get caught up just yet….it is year end, many investors and traders are away from their desks and moves can be (and likely will be) more exaggerated – so while it felt good – after the beating it took, I remain ‘cautiously bullish’ which means I still expect to see the markets advance over the long term, but I am ‘cautious’ coming into the new year.

Look JJ pulled the rug out last week when he suggested that the number of rate cuts in 2025 were not going to be what the algo’s expected because the data remains strong, the labor market is not collapsing etc.…. …. recall the speed at which the tone changed on Wednesday…. markets went from being upbeat to downbeat fairly quickly…. The Dow and everyone else getting whacked as the algo’s went into overdrive – shooting first only to ask questions later. What Fridays’ data revealed (remembering it is only one data point) is that the economy is cooling BUT remains fairly robust…which to me still means that we should not be expecting triple or quadruple rate cuts……In fact - Chicago Fed President Austan Goolsbee – who is very dovish – did say that while we may get a shallower rate cutting path in 2025 – he is still expecting the FED’s policy rate to fall a ‘judicious amount’. Hmmmmm? What exactly does that mean? Well, the markets clearly think it means 3 or 4 cuts…while I do not.

A "judicious amount" refers to an amount that is carefully chosen and appropriate for the situation. It implies using good judgment to determine how much something is needed, avoiding extremes like too little or too much. So, for example – When I’m cooking – I’ll add a "judicious amount" of salt meaning just enough to enhance the flavor without overpowering the dish. – Which is exactly what so many of us want JJ to do…Cut just enough without ‘overpowering the economy.’

*Key words here are ‘carefully chosen & avoiding extremes. So, unless the bottom falls out – I just don’t see how we can get any more than the 2 cuts that JJ suggested – which btw would take interest rates to 3.75% - 4% - which I think falls into the ‘overpowering category’…. but hey, that’s me. Remember – I do not get a vote!

Look, not cutting rates as swiftly as some want is not bad news…. because the economy is strong, so NOT cutting rates is actually GOOD news….Investors should welcome the fact that rates could remain here – which means they have done a good job…..to me, cutting rates from here suggests that the economy is failing – which it is NOT. So, be careful what you wish for….

As I have been saying – we have a new administration, we have new policies, less regulation that are about to come into play, so what’s the rush? JJ is right to favor a pause ahead of this unfolding drama in DC which is why I suggest that new money in your IRA/401K/Roth/Investment account etc.…. can be patient. You are invested, so you are participating…. Do not get FOMO’ized.

Bonds advanced just a bit – The TLT and TLH up 0.5% and 0.4% respectively. Again, think oversold (RSI). And this sent yields down just a bit…. The 10-yr yield is now 4.53% down from 4.56% and the 2 yr is yielding 4.31% down from 4.32%.

The VIX – fear index – retreated on all the excitement…. falling 24% on Friday – as stocks advanced…in fact – it’s the old Chicken & Egg argument – which came first? Did stocks advance because the VIX fell or did the VIX fall because stocks advanced? In any event – the decline took the VIX right to the short term trendline and this morning – it is up 3% at 18.95….

Oil is trading at $69.25 – sitting right atop the trendline…. a failure to hold here will most likely see oil test $66.50…. While success could see oil trade back to the $70.50 range. My gut says we go lower before we go higher.

Gold is down $15 – trading at $2630…- just below the intermediate term trendline…. – which leave us in the $2530/$2650 trading range with plenty of support at $2600. Recall – many street analysts expect gold to trade higher in 2025 – with Goldman Sachs calling for $3000/oz by this time next year which would represent nearly a 15% advance. I say – let’s see what the dollar does and let’s see what the administration does first. Holding gold is not an issue at all, but let’s see how this whole inflation/economy thing plays out. If inflation rears its ugly head, then investors will flock to gold as a hedge, but if inflation remains in control, but rates advance because of a strong economy, then gold will underperform…. So, sit tight.

US futures are down….…Dow futures are down 115 pts, S&P’s down 5, the Nasdaq up 35 while the Russell is off 10 pts. It is a holiday shortened week – Christmas is Wednesday, volumes will be muted, so moves will be exaggerated (think Friday’s strong advance). Next week is a holiday week as well…so enjoy yourself – enjoy your family…. Take a break – your portfolio – if well diversified – will be fine.

European markets are just a bit lower as well. Remember the Novo Nordisk commentary from Friday – when they were killing the stock because of that ‘failed’ weight loss drug news…. I said -

“NOVO Nordisk is getting crushed…down 22% after a disappointing late-stage trial result for a new experimental weight loss drug – CagriSema – get this – patients only lost 22.7% vs. the expectation of 25%! Do you think this is a bit of an overreaction?”

They took the stock down some $20 at $86.20 – taking it back to prices last seen in August 2023…when btw – they created a gap up – thing Wegovy - (Aug 7th – Aug 8th) - so this moves almost ‘fills that gap’ to which I cried UNCLE! Meaning it was a bit overdone….and this morning it is bouncing back – up 8% in Europe and quoted up $4 or 5% for the ADR here is the states.

The S&P ended the day up 64 pts at 5930 – after nearly filling the gap created on November 6th…. – We did not completely fill it, so I suspect that we will post the new year, which just means I remain cautious. While we will get some eco data – Building permits, and Housing Starts – do not expect either to influence the action…. It’s just more churn…going into end of year. The Official ‘Santa Claus’ rally period begins this week and ends on January 3rd. The question is – Is he coming or not? Will there be toys and gifts or lumps of coal? No matter how this ends next week – my sense is that it has been a good year for investors – so there is plenty to celebrate under the tree.

Candied pecans

Here is a quick and easy holiday recipe. It works well as a gift - you know put them in a mason jar and put a bow on it! Just like they do in those Lexus commercials. You can use them on a range of dishes, breakfast cereals, salads, desserts.

For this you need - 3 large egg whites, 1 cup white sugar, 1 tsp cinnamon, 4 cups pecan halves. 1/2 cup of melted butter.

Lightly whip the egg whites, add sugar, cinnamon, pecans, and blend. Pour the melted butter on the baking sheet, spread the pecan mix on top and spread out. Bake for about 30 minutes turning every 10 minutes at 350 degrees – careful not to burn.