It’s no secret I’ve been bearish on the economy and US stock market for over a year.

Given what transpired during the Covid-19 pandemic, ie, the massive monetary and fiscal stimulus poured into the economy by a panicked government, I felt we’d have to pay the piper at some point.

In some ways, we certainly have.

Massive bubbles in the bond market, crypto currencies, meme stocks, etc have been deflating since the middle of 2020, starting with US Treasuries.

The overall stock market finally started to roll over in late 2021, led by the Nasdaq and small stocks, and by the June 2022, we had seen significant declines.

That was also when we saw the peak inflation numbers of about 9% on the CPI, and when the Fed started its tightening cycle in earnest.

Since the market made those lows in June, we experienced a significant summer rally, a re-test of those lows in October, and a massive rally since that has taken the Dow Industrials to their highest levels since April.

As of late, the price action in the market has been nothing short of bullish.  It’s been rallying on good economic news and bad economic news.

Fewer stocks are making new 52 week lows, and more stocks are making 52 week highs.

Could it all come to a halt quickly?  Absolutely.

The Fed has its last meeting of 2022 on December 13-14 and we will have the last CPI reading of the year at 8:30 am ET on December 13.

The market is anticipating a 50 basis point rate hike, rather than 75 points as we’ve seen since the summer.

If indeed the Fed hikes by 75 basis points and comes out with a hawkish statement, that could send stocks lower.

One fly in the ointment that I see in the overall action of the stock market is that the rally is being led by the Dow Industrials, which declined less than the other major averages during the 2022 bear market.

While the Dow is trading at 7 month highs, the Nasdaq is still trading well below its 200 day EMA, and it was only on Friday that the 20 day EMA crossed above the 50 day EMA.

This is a story we’ve seen before during the 2000-2002 Bear Market that was led by the Nasdaq after the Dot.com bubble burst.

Starting in late 2001, just a couple weeks after 9/11, the Dow Industrials began a 25% rally that ended in March 2002.  This took the average to nearly nine month highs.

The Nasdaq rallied significantly as well, but had already been beaten down by 70% before the rally began.  It fell short of its 50 week EMA and began rolling over again in January 2002, two months ahead of the Dow Industrials.

From its January 2002 peak, the Nasdaq decline by about 40% until it bottomed in October 2002.

It is my guess that the Fed will pause for a bit after the rate hike next week to see how the economy reacts.  The first quarter can often be tough for economy if there is underlying weakness due to the hangover from holiday spending.

With all this in mind, the market is acting bullishly, but caution is warranted.  We’ll know in a few months whether a new bull market has begun, or if this was just a massive rally within an ongoing bear market.