Morning Note: Just Assessing Probabilities

This morning's rally in stocks should come as no surprise if you've been with me on the recent videos. Short-term technical patterns have been pointing to the potential for a strong oversold rally.

Here's yesterday's entry to our internal market log:

5/16/2022

My very short-term base case remains that odds favor an oversold rally that takes SPX back up to test 4,300. The prevailing pessimism (our fear/greed barometer jumped from +10 to +50 last month) makes it all the more likely.

As for catalysts, while I remain firmly in the structural inflation camp, I see low odds of sustaining the present 8.5% rate going forward. Easing supply chains, lessening demand and base effects are lining up to show lower CPI prints over the coming months. While there may not be enough there to stay the Fed’s hand over the next couple of meetings, I suspect the market will anticipate that very thing, and catch a bid accordingly. Also, political constraints on Xi virtually assure the abandoning of Covid-Zero within the next few weeks, coupled with a substantial stimulus campaign, which will aid in resolving supply chain issues and foster a bid for equities (Chinese and resource-based equities in particular), copper, oil, etc.

Yes, the China scenario is inflationary -- as well as, with respect to supply bottlenecks easing, deflationary -- however I believe there are sufficient headwinds that will effectively quell the rate of change going forward. But not to the point that should have anyone expecting a return to the Fed’s 2% target.

Ironically, while inflation’s rate of change is virtually destined to ease, a rally in equities will likely keep the Fed emboldened in their tightening efforts, particularly when it comes to shrinking the balance sheet. And that makes for what remains a very precarious longer-term setup for equities.

Our technical analysis has the S&P ultimately bottoming around 3450, barring a coinciding recession. In the event of recession, equities are likely to move notably lower before establishing a durable bottom…

Now, folks, to be very clear, it is not my intent herein to suggest that we have unusual prowess when it comes to anticipating short and long-term market moves. The equity market is dynamic and ever-changing and, trust me, is most adept at making utter fools of those with the hubris to suggest that they've figured it out. 

I.e., I would not be the least bit surprised if the present rally falls short of that 4300 mark (or blows right through it), or if it doesn't even make it to the end of today's session. As for that 3450 bottom target (assuming no recession occurring in the meantime), it's based purely on the patterns we've recognized in the weekly and monthly charts over the past few decades. Absolutely nothing guarantees that those patterns won't fail to materialize over the coming weeks... We're just assessing probabilities and conducting ourselves accordingly...

Bottom line: We're tasked with growing and protecting our clients' long-term monies, which requires that we formulate assumptions based on our analysis and understanding of fundamental and technical market setups, and, perhaps most importantly, of the global macro landscape. Pointing to potential counter trend moves and bottom and topping targets aids us in terms of where and when to allocate new monies, reduce positions, hedge and so on...

Asian equities rallied overnight, with 13 of the 16 markets we track closing higher.

Europe's up across the board so far this morning, all 19 bourses we follow are trading up as I type.

US stocks are bouncing to start the session: Dow up 313 points (0.97%), SP500 up 1.39%, SP500 Equal Weight up 1.28%, Nasdaq 100 up 2.13%, Nasdaq Comp up 2.26%, Russell 2000 up 1.90%.

The VIX sits at 26.69, down 3.98%.

Oil futures are up 0.59%, gold's down 0.11%, silver's up 0.40%, copper futures are up 1.53% and the ag complex (DBA) is down 0.04%.

The 10-year treasury is down (yield up) and the dollar is down 0.63%.

Among our 37 core positions (excluding cash and short-term bond ETF), 32 -- led by AMD, MP Materials, SOXX (semiconductors), carbon credits and Albemarle -- are in the green so far this morning. The losers so far are ag futures, consumer staples stocks, utilities stocks, treasury bonds and Verizon.


Can't quote this one enough, particularly when I make reference to global leaders and what they're apt to do and to not do:

"Preferences are optional and subject to constraints, whereas constraints are neither optional nor subject to preferences."  -- Papic, Marko. Geopolitical Alpha 

Have a great day!
Marty