The “November Rally” Is Over, Here’s Why

Stocks endured a modest pullback today as doubts emerged about the likelihood of a U.S. interest rate cut, with a critical monthly jobs report looming.

The S&P 500 saw a decline of 0.7%, while the Dow Jones Industrial Average dropped 0.3%, approximately 120 points. Leading the downturn, the Nasdaq Composite fell by 1.1%.

Last month, stocks rallied, resulting in five consecutive weekly gains, fueled by investor belief that the Federal Reserve might initiate rate cuts early next year. This optimism also influenced Treasury yields, which fell despite Federal Reserve Chair Jerome Powell’s resistance to ending rate hikes.

However, both stocks and bonds are now retreating on Wall Street, as an increasing number of analysts caution that the recent rally in these assets might be excessive. The 10-year Treasury yield rose by about 6 basis points, reaching 4.28%.

The upcoming November jobs report, set for release this Friday, could potentially dampen the rally’s momentum, especially if it challenges the prevailing view that the Fed has concluded its rate hikes. Fed Chair Powell & Co. really would like to see slowdown in the labor market if they’re going to hold off on further hikes.

And though stocks have been ripping higher, the anticipation of a Fed pivot has propelled Bitcoin prices upward as well, reaching above $42,000 earlier this morning. Other digital currencies have also seen gains amid expectations that the SEC might approve U.S. spot bitcoin ETFs in January. Much like with stocks, however, Bitcoin certainly appears overbought following a very impressive November run.

The question now is whether the “everything rally” will persist. At the end of October, Goldman’s flow-of-funds expert Scott Rubner outlined his reasons for predicting a stock market surge into year-end – a note we featured back when it was released. After witnessing significant equity gains and the best November ever, Rubner has revisited his forecasts, cautioning that the flow-of-funds dynamics driving the November rally have now depleted.

Rubner’s bearish outlook aligns with that of BofA’s Chief Investment Strategist Michael Hartnett – another top Wall Street analyst with a good track record over the last two years – who recently indicated that the buy-signal from October had ended, suggesting it might be time to start fading the rally.

Rubner advises adding portfolio hedges near the 4,600 level for Q1, anticipating potential volatility triggers next week, including the CPI release on the 12th, followed by the FOMC meeting on 12/13, and a significant December options expiration.

Interestingly, the S&P 500 reached the 4,600 level on Friday and has since been declining, matching both Rubner and Hartnett’s calls.

Rubner notes that recent inquiries from Goldman clients are predominantly bullish, a stark contrast to the end of October. He concludes that “everyone is in the pool,” indicating widespread bullish sentiment, which has been a very good contrarian indicator in the past. That’s doubly true following a “best [insert month here] ever” for the S&P.

Additionally, this week marks the last opportunity for corporations to engage in stock buybacks before the blackout window begins on December 11th, which should lead to a 35% drop in corporate execution volumes. This blackout period will last until January 19, 2024.

So, for traders looking for a sell signal, this is probably it. Megacap tech is getting crushed this morning despite the day’s moderate overall losses. These leading stocks enjoyed the majority of the November rally’s gains.

And, if stocks continue to fall, they’ll be the ones leading the way down. That’s already starting to happen after several terrible sessions for NVDA, which is down a whopping 10% since its November 20th peak. The rest of the market will eventually follow suit, and when it does, bulls might start to panic, causing the indexes to hit “air pockets” on the way down.


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