Monday, October 17, 2022

Morning Note: Like What We See, Beyond...

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. 

Now, it's safe/accurate to say that the seeds of every bull/bear market are forever sown during the preceding bear/bull market... The trick, in the case of bear markets, is seeing the tiny green shoots as they begin to appear, and determining whether indeed greener pastures are on the verge of emerging, or if odds favor a false spring this go-round.

As for our present view, suffice to say that, as I've been stressing herein and on the videos, while we're entering what has been the best growing season for equities, and, make no mistake, a lot of manure (very negative sentiment [fertilizer]) has been spread all over the market -- making us somewhat sanguine amid some crazy volatility of late -- our overall assessment of conditions says odds still favor at least a bit more pain before this one's in the books... Whether (assuming the bottom isn't indeed already in) it defies the season and occurs between here and New Year's Eve, or sometime thereafter, of course remains to be seen.

Now, regardless of whether there's ultimately more pain to come (our base case), or equity market spring is indeed upon us, we're not remotely arrogant enough to pretend that we'll be able to catch the bottom on the nose and perfectly time the shift into early bull-market mode with the requisite adjustments to our overall allocation... What we are certain of, however, is that there is indeed a market spring in the offing (precisely when, again, we don't know), and that the go-forward global macro setup will be utterly rife with value opportunities.

I.e., we like what we see (in terms of investable opportunities) beyond whatever's left to play out in the present -- still very precarious -- bear market... Clients, you'll begin noticing slow/subtle allocation shifts in the weeks/months to come (oh, and by the way, the high-frequency action you've noticed in your portfolios of late is almost entirely around the hedging... Present dynamics, options pricing, etc., has us remaining shorter-term and fairly close to the money).

As for this morning, stocks were buoyed in the premarket as the abrupt turn in UK fiscal policy has global markets rallying, at least early on... And, as I've been illustrating on recent videos, the technical setup isn't horrible right here.

With regard to the huge intraday swings of late, well, as we've been pointing out:

"...intraday trading in short-dated equity options has surged, creating temporary pockets of significant directional impetus that don’t necessarily reflect the underlying views of “investors.”  --Bloomberg's Cameron Crise

Stay tuned... 

Asian equities were mixed overnight, with 8 of the 16 markets we track closing higher.

Europe's up big so far this morning, with all but 1 of the bourses we follow trading notably in the green as I type.

US stocks are up big as well to start the session: Dow by 537 points (1.81%), SP500 up 2.22%, SP500 Equal Weight up 1.97%, Nasdaq 100 up 2.78%, Nasdaq Comp up 2.68%, Russell 2000 up 2.46%.

The VIX sits at 31.56, down 1.44%.

Oil futures are up 1.11%, gold's up 1.29%, silver's up 3.09%, copper futures are up 0.77% and the ag complex (DBA) is up 0.05%.

The 10-year treasury is up (yield down) and the dollar is down 0.71%

Among our 34 core positions (excluding options hedges, cash and short-term bond ETF), 33 -- led by Nokia, Sweden equities, Albemarle, base metals miners and Dutch Bros -- are in the green so far this morning. The only loser at the open is our base metals futures ETF.

"Acts of nature come in many forms, such as epidemic diseases, floods, and droughts. Throughout history they have affected the well-being of countries and the course of their evolution even more than wars and depressions."

--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail 

Have a great day!


  1. Thanks Marty!
    Analyst like Mike Wilson from Morgan Stanley is suddenly bullish short term. It is amazing on how the sediment changes so fast. Despite that, things have not changed yet fundamentally. In fact, things are more uncertain now. For example, the escalation of the War in Ukraine is undergoing, China housing market is in deep trouble, Fed may be on track for 2 more 75 basis point increases with 5% increase by the end of the year, and earnings are low but still acceptable in people's opinions. Short term may be positive but in my opinion the rally will be short-lived.

  2. Today is actually the 7th bear market rally. I think the lower low has not priced in yet. It will be interested to see what is the lower low by the end of the year.

    1. A few things Sam... You've noticed here and on the videos that our view has become more constructive short-term as well... I keep pointing to seasonality, very bearish sentiment (you can attest to that based on your own feelings about the current market), and relative positive technicals... Those 3 factors make for a pretty positive short-term setup...

      While the ultimate low could occur this year, the three elements I mentioned above favor the bulls in Q4... In fact we've already hit our bear market target (3,500), but when we set it it was predicated upon no recession... Now we see odds favoring recession, but, for now, as I've expressed, we believe a mild one... While, therefore, it makes sense that the 3,500 doesn't hold, it very well could...

      Your points are all of course valid, now what I would recommend you do is formulate an argument opposing each...
      I.e., determine under what conditions those factors could turn for the better and, thus, not culminate in a severely deeper bear market... This should be done constantly as a method of objectively testing your theses... Without objectivity (never wedding yourself to an opinion, and always looking for disconfirming evidence), the odds of long-term success are nil...

      With regard to Russia, there's nothing I could offer up that would differ from scenarios you would consider, or already have considered, I'm certain.
      With regard to China, make no mistake, they absolutely have the wherewithal (regardless of what some experts might portend) to kick that property bubble can way down the road should they choose to... The reason it's a prominent concern today is because they've actually attempted measures to let the air out (feel some pain)... Going forward I question their resolve (all things considered) to go the distance... We will see/are seeing them prop the sector up as we go forward...

      With regard to earnings, while I made the case earlier on that the next bear market leg will be around earnings disappointments, note that I've been more constructive there of late as well... For a couple of reasons:

      1. Analysts opinions coming into this earnings season saw net revisions to the downside across every single sector... Typically stocks do well during seasons when expectations have been lowered going in...

      2. Earnings actually stand to do well when inflation is heating up... I.e., inflation's up partly as a result of companies passing through higher prices to their customers... When inflation exceeds wage growth (companies' highest input cost), like last month, you actually get increased profit margins (prices of goods sold rise faster than the cost of production)... That can make for earnings largely beating estimates, which can make for upside pops to stock prices...

      With regard to Mike Wilson, being willing to go against his broader thesis when it's called for makes him a good trader...

      Lastly, keep in mind what I suggested in paragraph one of today's note... that when the bear market's coming to a close, most folks won't believe it... They'll be pointing to weak fundamentals, etc. All the while the market is sniffing out a coming change in conditions long before it's obvious to the general public or to most investors... Not saying that we're there just yet (still not our base case), but we could be (always open to all possibilities)... we are beginning to check a number of our bottom, or pre-bottom, boxes...

      Always love and appreciate your input Sam... You're a smart, deep-thinker when it comes to markets... Good stuff!!

    2. Wow! Thanks for the thorough explanation. It is always hard to be the contrarian, especially when you are locked into a box or into your own zone. This is definitely some good stuff. I haven't been through too many Bear Markets like yourself and others. I find each trading day to be very interesting and great opportunity to learn. I do learn from the process that there is a reason behind each dollar that that is being earned or being lost, not just because of luck. Each dollar earn is always a blessing for sure. I always appreciate that you take the time to answer my questions or comments.