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Stocks finished the day slightly higher and provided no clear evidence of what would happen from there. There is not much to say at this point other than that we are stuck, and it could be due to a few different factors, but not one specific factor. There may not be much resolution before year-end; it would be nice if there were. I would certainly have a nicer weekend if that were the case.

We seem to be in a giant rising wedge, and it could be nearing a conclusion. At least it is getting closer to that conclusion, as noted by the rising uptrend. If the uptrend were to break and result in the index dropping sharply, it would be the most obvious conclusion. However, there is a possibility we do break the uptrend, and instead of dropping, we consolidate sideways. There is always an oddball chance that the wedge breaks and the index bursts higher. The likely scenario would be that the index breaks the uptrend and moves lower, while a move sideways is a strong possibility.  

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It is really hard for me to comprehend how the market can move higher from here. Valuations are stretched, and liquidity is heading lower. While rates are falling, it isn’t clear to me they are falling for good reasons. Additionally, rates falling can help support valuations, but the S&P 500 is currently trading around 20 times earnings with a 10-year at 3.8%, versus in 2021 when the PE was 21, and the 10-year was at 1.75%. So I guess the question becomes how much more multiple expansion can there be?

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Will earnings growth be enough to support a further move higher? Will the market be able to grow into the current valuations? I do not know. My general feeling is that liquidity has played a big role in this multiple expansion, and if liquidity is heading lower. Markets should be heading lower, and this valuation won’t be able to be maintained. The basis for the fact that liquidity is heading lower is that the reverse repo facility is being drained, eventually leading to reserve balances falling.

Unfortunately, I do not have all the answers, but I try my best and, more importantly, use my experiences and data to form opinions on where the markets are heading. Those experiences seemed to help me correctly look for the summer rally fading into the October low, as I expected they would. This move higher feels like something that is less understandable to me, at least this last leg of it, very euphoric. The Bulls seem to have too much confidence.

People always ask what would get you to change your view from bearish to bullish, and my answer always seems to be when the market allows me to. When the market is cheap and the sentiment is bad, it hasn’t happened yet. I very much would like to see the PE multiple contract or, at the very least, be able to look at 2025 and say this market is too cheap, but it just isn’t, and it especially isn’t with rates at these levels.

Most people only know me for being bearish, and I wouldn’t say I like that. I wouldn’t say I like that because, at heart, I am not; I am trying to build and run a long-term growth strategy. I’m looking for stocks that can grow for long periods. I never had an intention of writing a commentary; my initial goal was to run a strategy; the writing part came out of necessity to keep the lights on. But over time, experience has taught me that when you overpay for things, it really comes back to hurt, and experience has also taught me that there is nothing worse than owning a stock for five years and seeing it go nowhere.

I miss the days of 2017, 2018, and 2019; they were much more fun and certainly easier.

Looking back at 2021, it was a hard year because I was bearish and had good reasons to be. I was proven correct in 2022. This year has been increasingly hard, mostly because I am much more widely read and followed than in the past, which has a new layer of complexity that I am most certainly not used to. But I do seem to believe I will be proven right in 2024; many things keep pointing me in a lower direction, and I have to go with it until I see something different in my work.

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