Morning Note: Key Highlights

Here are some key highlights from our recent messaging herein:

Yesterday:

The Bank of Japan could, like in December, shock the world if/when they ease up on their aggressive monetary easing... Actually, it's, frankly, a will and a when, in terms of a policy shift... Suffice to say that a lot of Japanese capital sits outside Japan; repatriation of that capital would likely be disruptive:

Per the following BCA Research chart, this time is different... The Fed continues to raise its benchmark rate (green line), amid what, per industry sentiment, is a recession in the manufacturing space...

Suffice to say, the setup right here for equity prices remains precarious: 

Monday:

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)...

Last Thursday:

It seems there's this popular notion that with employment as strong as it presently is, the odds of recession anytime soon have to be near zero.

Makes sense, right? Well, let's have a look (red shaded areas = past recessions) -- and note, when we're talking economics, while levels are to be considered, in our view it's direction and rate of change that really matter.

Unemployment Rate: 

Oof!! There's been the tiniest of lag between past spikes in unemployment and the onset of recession... And, counterintuitively, it seems the lower the base we start from, the sooner recession begins.

Weekly Jobless Claims (data only go back to 1967): 

Total job openings (data back to Dec 2000): 

While not every apparent peak, or trough, means imminent recession, history strongly says to be on your toes when the employment data begin to turn.

Last Tuesday:

Two public officials will be called on to address the implications of last week's shocking (shockingly strong) jobs number.

Ironically, the January employment data will be resoundingly celebrated by one, while the other will likely hem and haw all around it, characterizing it as one data point amid otherwise weakening data, and, while not entirely dismissing it, will, well, likely, dismiss its potential for moving the needle on rate hikes going forward.

The former being the President during tonight's State of the Union Address, the latter being the Fed Chair this morning in an interview at The Economic Club of Washington.

Last Monday:

Our monthly review of the 12 indicators that comprise our Equity Market Conditions Index (EMCI) paints a somewhat improving -- but still bearish -- backdrop for the US equity market.

Here's the intro to our internal January report:

1/31/2023 PWA EQUITY MARKET CONDITIONS (EMCI) INDEX: -16.67 (+16.6 from 12/31/2022)

SP500 past 30 days +6.60%: 

EMCI improved 17 points in January, denoting a net improvement -- although remaining net-bearish -- in equity market conditions... Essentially, in terms of the overall score, getting us right back to where we were on January 1.

Cyclical-sector leadership, less-hawkish Fed guidance, a generally better technical setup, and generally improving credit conditions served to slightly offset less-attractive broader-market valuations, a deteriorating geopolitical backdrop, and slightly less-bearish (less equity-bullish) sentiment.

Inputs that showed improvement:
Sector Leadership (from negative to positive)
SPX Technical Trends (from neutral to positive)
Fed Policy (from negative to neutral)
Credit conditions (PWA Financial Stress Index) (from negative to neutral)

Inputs that deteriorated:
Valuation (from neutral to negative)
Geopolitics (from neutral to negative)
Sentiment (PWA Fear/Greed Barometer) (from positive to neutral)

Inputs that remained bullish:
none

Inputs that remained bearish:
US Dollar (near-term setup)
Economic Conditions

Areas that remained neutral:
Fiscal Policy
Interest Rates
Breadth

EMCI since inception: 

SP500 since EMCI inception: 

Our present base case, which incorporates the above with the rest of our research -- both proprietary and that which we leverage from premium sources -- has us skeptical with regard to the sustainability of January's impressive global equity market rally... Although we remain open to all possibilities.

Asian stocks struggled overnight, with 13 of the 16 markets we track closed lower.

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

US equity averages are down to start the session: Dow by 174 points (0.51%), SP500 down 0.64%, SP500 Equal Weight down 0.68%, Nasdaq 100 down 0.68%, Nasdaq Comp down 0.57%, Russell 2000 down 0.91%.

The VIX sits at 18.72, down 1.00%.

Oil futures are down 1.34%, gold's down 1.09%, silver's down 1.47%, copper futures are down 2.19% and the ag complex (DBA) is down 0.59%.

The 10-year treasury is up (yield down) and the dollar is up 0.80%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), only 3 -- Dutch Bros, MP Materials and Nokia -- are in the green so far this morning. The losers being led lower by energy stocks, AMD, metals miners, base metals futures and Asia-Pac equities.

"... the big money was not in the individual fluctuations but in the main movements; that is, not in reading the tape, but in sizing up the entire market and its trend."

--Jesse Livermore

Have a great day!
Marty