Thursday, August 11, 2022

Morning Note: Doesn't Pass the Smell Test

Last night's internal market log entry: 

The SP500 has seen an impressive ramp back to 4,200, on really strong breadth, no less. One might conclude that this is the makings of a new bull market. 

While we have to remain open to that possibility, we should be skeptical of the notion that a market that has been so dependent on the largesse of the US Fed has — under present circumstances — a clear green light to move full bore into sustainably greener pastures from here.

In this morning’s note I wrote:
“Given how the Fedheads responded to last week's jobs number, we look for them to issue the same critique of traders. Essentially, if traders think that the Fed is remotely thinking that they can ease off the brakes right here, they've another think coming…”
And, sure enough, here’s Kashkari today via Bloomberg:
“Minneapolis Fed President Neel Kashkari, who prior to the pandemic was the central bank’s most dovish policy maker, said Wednesday that he wants the Fed’s benchmark interest rate at 3.9% by the end of this year and at 4.4% by the end of 2023.

“I haven’t seen anything that changes that,” Kashkari said, responding to a question about a Labor Department report published earlier that showed consumer prices rose 8.5% from a year earlier in July. The print was slightly less than the 9.1% increase in the prior month that marked the highest inflation rate in four decades.”

Kashkari, alluding to market pricing of the Fed’s policy path, said it was not realistic to conclude that the Fed will start cutting rates early next year, when inflation is very likely still going to be well in excess of the 2% goal.

“I think a much more likely scenario is we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates,”
And here’s Evans, from the same source:
“Charles Evans, welcomed the news at a separate event Wednesday, but added that inflation remains “unacceptably high.” He said he expects “that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective.”

Evans said he expects the target range for the central bank’s benchmark rate -- now 2.25% to 2.5% -- to rise to 3.25% to 3.5% by the end of the year, and to 3.75% to 4% by the end of 2023.”
For the time being, particularly, among other things (such as current Fed policy), given the fact that the latest action has seen the absolute least quality stocks party like it’s stimulus-filled 2021, we should assume that indeed the market’s got the near-term wrong and, therefore, will, perhaps sooner than later suffer the consequences (options August expiry, for example, potentially opens a window for the market to fall out of come Sept/Oct). 

I.e., the character of the latest action just doesn’t pass the bear-market-bottom smell test (although it is consistent with the potential [positioning-driven] near-term path I've been pointing to in the video updates)

And while such bottoms could absolutely begin with massive short-covering rallies, shifts in sentiment, and serious hedging among options dealers, for certain those would be the dynamics underpinning your 2022 bear market head fakes.

Time will tell…

Asian equities bounced overnight, with 15 of the 16 markets we track closing higher.

Europe's mostly green as well so far this morning, with 14 of the 19 bourses we follow trading up as I type.

US stocks are extending yesterday's strong rally, to start the session: Dow up 200 points (0.60%), SP500 up 0.52%, SP500 Equal Weight up 0.81%, Nasdaq 100 up 0.44%, Nasdaq Comp up 0.48%, Russell 2000 up 1.06%.

The VIX sits at 19.83, up 0.46%.

Oil futures are up 2.05%, gold's up 0.03%, silver's down 0.80%, copper futures are up 1.03% and the ag complex (DBA) is up 0.56%.

The 10-year treasury is up (yield down) and the dollar is down 0.33%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 30 -- led by Dutch Bros, Disney, energy stocks, Albemarle and MP Materials -- are in the green so far this morning. Silver, treasury bonds, Nokia, healthcare and utility stocks are the losers so far this morning.

"Invariably, investors who disregard where they stand in cycles are bound to suffer serious consequences."
--Marks, Howard. Mastering the Market Cycle

Have a great day!

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