Monday, February 13, 2023

Morning Note: In a Nutshell

My side of an email conversation with an interested friend over the weekend will serve as this morning's note:

In a nutshell, our proprietary macro index currently scores in the red, which denotes high recession odds near-term... Although we expect it to be mild by historical comparison... And, among other indicators, our own Equity Market Conditions Index that we developed in August of '21 -- which tracks and scores 12 key inputs, ranging from the dollar, to credit market conditions, to the US equity market's (via SP500) short and long-term technical setups, to fiscal and monetary policy and geopolitical risk (which includes our own assessment of geopolitics, plus we've retained BCA Research [the oldest research firm and among the most respected] for their ongoing geopolitical analyses) -- while having improved notably over the past month, still scores a -17, which denotes a significantly less than ideal equity market setup.

The first leg of the bear market in stocks was all about valuations adjusting to rising interest rates... Our original target (3,500 on the S&P) from early last year was hit in October, and the market bounced right off of it and, thus far, hasn't looked back... 

Problem is, when we set that initial target, our data at the time, while weakening, was not to the point of calling recession (so I added the caveat back then that the target makes great sense, but only if we can avoid recession)... Once we hit the target, while we anticipated a bounce that would likely suck in a lot of investors -- particularly given the massive short interest in the market at the time (and again going into this year) -- we nevertheless had to lower our ultimate target, currently at 3,200 (always subject to revision as data come in).

I.e., corporate earnings have yet to fully discount the prospects for recession... This chart (our Leading Economic Indicator/Coincident Indicator ratio graph (1 of the 45 inputs to our macro index), featuring SP500 aggregate per share earnings (orange line) vividly illustrates the current risk (red shaded areas are past recessions):

All of the above was featured in our videos along the way...

There are more potentially consequential (good and bad) developments in the internals (and in the macro ) that we can discuss, but I'll leave you with the above for now.

Suffice to say that, while indeed we're open to the possibility that the next bull market is underway, the current overall risk/reward setup makes it too precarious to make big bets on it right here.

Now, I want to be very clear, while the above reflects our present view of where present probabilities point, we are in no way wedded to that thesis... In fact, we are forever in search of disconfirming evidence, and performing, let's call them, thought experiments, as to what would likely need to occur for a less-likely outcome -- say the S&P hitting 5,000 before hitting 3,200 -- to take place... Those thought experiments are important, as they instruct us in terms of where to focus our attention, and they help us remain clear-minded and objective as we navigate what are certain to be challenging waters during the remaining course of 2023.

Asian stocks leaned slightly red overnight, with 9 of the 16 markets we track closed lower.

Europe, on the other hand, is green nearly across the board so far this morning, with 17 of the 19 bourses we follow trading up as I type.

US equity averages are up to start the session: Dow by 113 points (0.33%), SP500 up 0.41%, SP500 Equal Weight up 0.29%, Nasdaq 100 up 0.69%, Nasdaq Comp up 0.57%, Russell 2000 up 0.19%.

The VIX sits at 21.18, down 3.12%.

Oil futures are down 0.69%, gold's down 0.46%, silver's down 0.06%, copper futures are up 0.70% and the ag complex (DBA) is up 0.25%.

The 10-year treasury is up (yield down) and the dollar is up 0.39%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 26 -- led by Dutch Bros, Brazil equities, MP Materials, tech stocks and treasury bonds -- are in the green so far this morning. The losers being led lower by uranium miners, energy stocks, Vietnam equities, Disney and base metals miners.

Have a great day!


  1. This is what Cleveland Fed said on Twitter:
    "Our #CPI indicator updates tomorrow. Our #inflation nowcasting model (updated daily!) predicts year-over-year CPI #inflation of 6.48% for January."
    I am as guilty as everyone else that if one is biased, result will be a shocker. It seems that the market doesn't listen or doesn't want to listen.
    We will find out tomorrow.

    1. In terms of market reaction, it'll likely have more to do with perceived short interest and whether or not the 0DTE options army thinks it can force yet another big intraday covering... Beware these violent ramp ups... There's a powerful short-term element there, could flip at some point