Monday, February 6, 2023

Morning Note: Still Skeptical

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:

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

Areas that remained neutral:
Fiscal Policy
Interest Rates
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 were mostly red overnight, with 10 of the 16 markets we track closed lower.

Europe's mostly red so far this morning as well, with 15 of the 19 bourses we follow trading down as I type.

US equity averages are down to start the session: Dow by 145 points (0.43%), SP500 down 0.64%, SP500 Equal Weight down 0.82%, Nasdaq 100 down 0.71%, Nasdaq Comp down 0.76%, Russell 2000 down 0.94%.

The VIX sits at 16.32, up 5.40%.

Oil futures are up 0.26%, gold's up 0.40%, silver's up 0.22%, copper futures are down 0.83% and the ag complex (DBA) is down 0.02%.

The 10-year treasury is down (yield up) and the dollar is up 0.63%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 7 -- led by Dutch Bros, Vietnam equities, defense stocks, gold and silver -- are in the green so far this morning. The losers being led lower by Brazil equities, Nokia, our emerging mkt ETF, MP Materials and Albemarle.

"How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or “orders” for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce consequences."

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

Have a great day!

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