The stock market is in the midst of an impressive and blistering rally. From the mid-June lows, the S&P 500 is up 14%, while the Nasdaq Composite is closing in on a 20% gain. Some of the factors behind this rally are extreme bearish positioning, better than expected economic data, marginally positive news on inflation, and odds of a ‘soft landing’ that have increased from implausible to ‘pretty unlikely’.
Yet, it’s also very likely that this market action is a bear market rally rather than a new bull market. The Fed remains hawkish and focused on bringing down inflation even at the cost of a recession or damage to the jobs market. From a bottom-up perspective, we are seeing the most shorted stocks rise the most, while quality stocks are not participating in the rally, an indication that institutions aren’t participating.
