Monday, January 31, 2022

Morning Note: The "Need to Understand" Credit and Money Creation, and Destruction...

In this weekend's video commentary we assessed the present technical setup for, among other things, the S&P 500 Index.

We looked at the current price relative to its 200-day moving average (a key technical level). Here's another look with me circling each daily close below that level since the bottom of the 08/09 bear market:

The red circles capture the times when the break of the 200-dma was followed by a re-test of that level (happening currently) that ultimately failed, leading to a double-digit decline. The green circles highlight the times when the dip turned out to be a nice buying opportunity. Since the bottom in 2009, other than the yet to be determined present, 5 of the visits below that key level delivered notable pain, 4 turned out to be non-events. 

During the stretch from 2009 to late-summer 2019, our assessment of general conditions had us sanguine during all of those dips. Today's overall setup, as we've discussed and illustrated, is vastly different than the one that prevailed during the longest bull market in history. I.e., There are a whole new set of opportunities and risks to navigate in the years to come.

Asian equities were mixed overnight, with a handful closed for the Lunar New Year.

Europe's green across the board this morning, with all 19 of the bourses we follow trading up as I type.

US major averages are mostly higher to start the week (with the Nasdaq coming strongly off of double-digit year-to-date lows): Dow down 10 points (-0.03%), SP500 up 0.56%, SP500 Equal Weight up 0.25%, Nasdaq 100 up 1.55%, Nasdaq Comp up 1.58%, Russell 2000 up 0.83%.

The VIX sits at 26.94, down 2.62%.

Oil futures are down 0.08%, gold's up 0.40%, silver's up 0.41%, copper futures are down 0.29% and the ag complex (DBA) is up 0.10%.

The 10-year treasury is down (yield up) and the dollar is down a notable 0.42%.

Among our 38 core positions (excluding cash and short-term bond ETF), 26 are up, 12 are down to start the session. AMD (chip maker), ALB (lithium miner), solar stocks, MP (rare earth miner), SOXX (chip makers) and South Korean equities (added Friday) lead the way so far this morning. The biggest decliners so far are AT&T, Verizon, base metals futures, Viacom CBS and oil services stocks. 

Despite the major US averages (save for the Dow) trading higher this morning, energy stocks, industrials, healthcare, financials and consumer staples are all down on the session (speaks, again, to US market breadth)*. 

Just started Russell Napier's latest book The Asian Financial Crisis 1995-98; excellent so far! Here are two telling snippets:   emphasis mine...
" few professional investors know how financial markets have behaved in the past when faced with some of the stimuli they expect them to be impacted by in the future. I’m not sure that it is an approach to understanding cause and effect that would be tolerated in other professions, but it is a very pervasive approach in investment."

" will need to understand a little, just enough, about how credit and money are created and destroyed. It was a failure to understand this and instead a focus on what most investors call ‘the fundamentals’ that led so many people to lose so much money in the Asian financial crisis."

Have a great day!

*PS: Per the mention in this weekend’s video commentary, the latest in industry regulations precludes us from publicly sharing the early morning move in our core allocation going forward. Although our interpretation of the rule doesn’t prohibit us from reporting on what’s moving within the sectors and regions we hold positions in.

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