So, let's call them land mines -- the events this week that markets will find themselves tiptoeing through.
Arguably, the potentially most explosive being the November Fed Policy Meeting come Tues/Wed... A .75% rate hike is 100% baked in - so no surprise there... Also, and most-importantly for traders, what markets have recently baked in is a softening of the tone in the post-meeting announcement, and, therefore, in J. Powell's presser.
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Now, before I share what I know will excite a number of our readers (you know who you are 😎), I have to warn you, while analogues can be useful in sizing up probabilities, just because patterns similar to today's have formed during markets past, it in no way means today's pattern will continue to play out in that same manner going forward.
So, as interesting/compelling as the following may seem, let's keep the above front and center in our minds.
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If we're reading between the Fed lines correctly, and they're indeed getting a bit nervous about cracks forming in credit markets, and, therefore, are looking for excuses to walk back their tough talk, this morning's data releases were a gift:
Data out of China last night, while better than forecast, certainly didn't inspire the post-Party Congress rally many, yours truly included (early on), anticipated... In fact, according to the headlines, Xi's successful cementing of authority supremacy by surrounding himself with loyalists, while not delivering a strong stimulus surprise, nor offering up any light at the end of the zero-covid policy tunnel, sent the communist nation's stocks reeling in last night's Asia session... While, simultaneously, it appeared, stealing the oomph from what was an impressive early-session rally in other Asian markets, and in US equity futures.
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The precariousness of the present setup continues to express itself... This morning has the runaway freight train that is the US dollar gaining speed as traders abandon the yen (contagious for the pound in particular this morning), and as treasury yields give way (higher) to what may be growing liquidity concerns.
And while our base case says odds favor yet lower lows as the present bear market plays itself out, it is indeed time to begin focusing our attention on how best to exploit what we see as emerging macro opportunities.
10/19/2022
We’re heading into Q3 earnings season and Q4 seasonality with net negative earnings revisions, high readings on our fear gauge, notably net-short positioning among speculators in US equity averages (save for the Nasdaq) and fund managers (per the BofA survey) sitting on the highest cash levels since 2001 -- with 49% of them “underweight stocks.”
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An overnight rally in equity futures -- aided by impressive earnings results from the likes of Netflix and United Airlines -- has since given way to a rise in the dollar, ostensibly inspired by still-high UK and Eurozone inflation prints, yet more dovish messaging out of the Bank of Japan, and a not-small spike in treasury yields.
For this morning's note we'll review some key highlights from our latest messaging:
A key input to our, for now, mild recession thesis remains the relative strength of the US consumer... Bank of America echoed this morning what we heard recently from JP Morgan; that the consumer sits on bank balances notably greater than pre-Covid levels... 2 to 5 times greater according to BofA:
I'd say it's generally the case that as we work our way through the latter stages of a given market cycle that many (if not most) folks either believe that (amid a bull market) stocks will deliver milk and honey as far as the eye can see, or (during a bear market) that market-armageddon is virtually upon us.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.
Another thoughtful, well-constructed comment by my friend Sam in response to yesterday's morning note solicited the following, which will serve as my narrative on yesterday's crazy action:
Stocks were rallying notably in the pre-market ahead of this morning's CPI number. But, as I suggested in yesterday's video (one to watch if you haven't yet), we did not expect a market-friendly read out of September's inflation numbers... The way certain components are measured, along with base effects, simply didn't offer much hope of a downside (upside for stocks) surprise.
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This is meaningful in the sense that when the market bottoms, it'll likely coincide with the likes of the following investment advisor sentiment reading (as of yesterday):
Per yesterday morning's note, stocks staged a turnaround during Monday's session (going from notably red to a little green) upon Fed Vice Chair Lael Brainard laying out the logical case that the tightening already implemented needed time to work its way through the economy, thus warranting caution... That, however, wasn't sufficient to sustain the positive tone, as stocks slipped back into the red by the close.
The setup for this week is, yet again, for volatility, now watch it be blah when it's all said and done 😎.
As for potential market-moving events, in terms of US data, today we get speeches from Fedheads Charles Evans and Lael Brainard, both lean dovish (i.e., if there's the potential for a market-friendly Fed message it'll likely come from one, or both, of these two)...
Gotta come at ya one more time today... And, please, do not construe this as a "take it to the bank" message.
Listening right now to the Market Huddle podcast, and I hear the featured guest (Paul Krake, founder of institutional research firm View From the Peak) make a statement that echoes what I've been suggesting of late about the present (very out of consensus) upside risk to stocks during Q4.
Here you go:
"Let's call it a 10-week window."
"We are 1 weak data point away from one of the greatest squeezes we have seen in years... If you get a weak inflation print next Wednesday*, S&P finishes the year at 4400**."
"Let's put it this way, we've got about 37 clients who we deal with at View From the Peak, every single one of them is either short, underweight, underexposed or underleveraged."
Host Kevin Muir chimes in:
"Yeah, I went to New York last week, I spoke to people, every single one of them, there was nobody, you're the first person I've met who is willing to say out loud that there might be some right tale risk***."
Then Paul goes on to describe how the market is geared to .75% rate hikes and continued rising inflation going forward... But that inflation has actually already peaked and if/when it gathers some downside speed, the reality of recession in Q1 2023, and easy monetary policy thereafter, is something markets will begin to sniff that out as weak data points emerge... And he then reminds of the hugely positive Q4 seasonality (a topic we've broached herein of late as well).
Now, to be clear, I'm not making a call on next week's CPI report, and our base case remains lower levels for the present bear market... I'm simply stating (as I have in recent videos) that, for example, a cooler than expected inflation reading will likely spark a not-small rally, coming off of these very weak sentiment readings, and into what is a historically very bullish season for stocks.
Stay tuned...
*Next Thursday actually...
**That's a 21% rally from here...
***Kevin doesn't read our blog...
A common theme/concern among market pros of late has been the prospects for corporate earnings destruction amid the presumably looming recession. This is a concern we've voiced ourselves herein the past few months.
In the opening I mentioned that our index came in at 8.89, meant to say "negative 8.89."
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So, new jobs came in at 263k against 255k expected. Manufacturing picked up 22k, unemployment 3.5% (from 3.7%), services picked up 244k (although retail actually lost 1,100 jobs). Average hourly earnings up 5.0% (as expected).
For short-term traders, tomorrow's jobs number is a big deal!!
While intuitively you'd think that a good jobs number would be good for stocks, well... not when the Fed is hellbent on slowing the economy in its efforts to cool inflation... I.e., a hot jobs number may make believers out of traders who -- the past few days anyway (even yesterday, while closing slightly lower, saw an impressive rally off of the day's lows) -- have essentially said "we dare you" in response to the following (yesterday) from the Fed:
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So, after an amazing two-day run, off of (per Saturday's video) severely oversold levels, now the test... No fewer than 7 Fedheads will be taking their respective podiums before the weekend.
In Saturday's video I made mention of "mum" being the word of late around China's economy-crippling zero-Covid policy.
Well, if we're looking for a visual that suggests maybe the policy is about to be abandoned, here it is:
In recent posts we've presented a case for a bear market rally, and even dared to hint at the notion (as opposed to the conviction) that a bottom may not be in the too distant (whether in terms of price or timing) offing.
Now, I need to be clear, market skies are anything but, well, clear, right here... However, and make no mistake, they indeed won't be as stocks begin to form their ultimate bottom this go round. On the contrary, they'll likely be exceedingly dark, precisely then.
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*Note, at 12:20, meant to say "best day in 2 years" not "20"
