05/28/2022 PWA EQUITY MARKET CONDITIONS (EMCI) INDEX: -8.33
(from -58.33 on 4/29/2022)
SP500 fell markedly during the first 3 weeks of May. Bottoming on 5/20 (a number of our EMCI inputs were turning up roughly a week prior), then bounced hugely from there, catching back up to essentially the flatline thru 5/27 (the bulk of the move occurring 5/25-5/27).
Our EMCI jump from -58 to -8 is substantial; accurately reflecting notable improvement over the past few weeks. However, it still reads net bearish and demands continued caution going forward.
Last week's strong rally occurred amid highly-bearish sentiment, strong rebalancing flows, elevated short interest in certain corners of the market, accommodating gamma positioning, and a very bullish short-term technical setup. I.e., the transient nature of these factors make its sustainability, all things considered, questionable...
Areas that showed improvement:
US Dollar (positive from negative)
Interest Rates (neutral from negative)
Sector Leadership (neutral from negative)
Technical Trend (neutral from negative)
Breadth (positive from neutral)
Areas that remained positive:
Sentiment (net fear)
Areas that remained negative:
Credit Market Conditions
Areas that remained neutral:
The oversold rally we’ve been expecting occurred virtually right on time, and at precisely the level we identified on the chart. A confluence of bearish sentiment, a bullish short-term technical setup, portfolio rebalancing, supportive gamma positioning and elevated short interest made a strong snapback rally a relatively easy call to make.
The rally’s sustainability is in serious question, however… The ultimate stall spot (technically-speaking) could be around 4,300 on SPX.
China continues as a focal point… My view has been that Xi will abandon (in practice, not in rhetoric) his zero-covid policy in favor of boosting the economy ahead of his pending reappointment later this year…
However, I just listened to an interview with a geopolitical analyst whom I have serious respect for, and while he agrees that China becomes a net positive for its equity market, global equities and commodities in general, he sees it coming after Xi’s reappointment, not before…
I.e., he says “China gets worse before it gets better.”
He acknowledges the growing conflict within (Xi vs Premier Li) and predicts that Xi will work to lock in his loyalists ahead of reappointment, and will avoid a U-turn on present policies (zero-covid, deleveraging, regulatory draconianism, “accountability rules”, etc.), so as to not look wishy washy by switching forces ahead of reelection. As opposed to ramping up stimulus, abandoning failed policies, etc.
The analyst sees Xi adjusting his view after his election; prior to that would hurt his credibility. Therefore he predicts late August to early November to be when Xi changes his tact and pulls the lever on stimulus, etc… Which is, in his view, when commodities, etc., rally…
I.e., the analyst thinks it'd be too politically dangerous for Xi to abandon his positions prior to election.
While I appreciate the above thesis, I struggle with it.
In my view, if Xi doesn’t change tack sooner than later he’s going to be vying for reelection amid conditions potentially even worse than they are now (which are abysmal). Weighing the risks of looking wishy washy vs having a strengthening economy and a content populace heading into his political moment, I’d wager that he’ll pivot to the latter well ahead of his reelection…