Closing Thoughts for the Week

The composition of the market’s gains shows that risk-off sentiment continues to take hold. This is a trend that continues to build strength and investors should not ignore it. We’re approaching the point where all four signals might be risk-off by the time the calendar turns to December. That being said, the melt-up scenario is still in play with the most likely catalyst still being the Fed pivot.

The conditions remain for a continuation of the melt-up in stocks, but the probability of such an outcome took a hit this past week. One possible catalyst could have been the Fed reminding us that the rate hiking cycle isn’t over yet. One thing to watch here is the inversion of the Treasury yield curve. The data suggests a recession happening somewhere around Q4 2023 to Q1 2024.

I’ve been arguing that the melt-up scenario was a real possibility over the past 2-3 weeks. Last week’s October inflation report was that catalyst. This rally hasn’t been nearly as strong as the summer rally, but it’s got a potentially better catalyst to push it higher. Sentiment looks like it’s notably more positive here and the VIX just had its lowest close since late August.