Monday, May 1, 2023

Morning Note: Equity Market Conditions Not Okay Right Here

While of course anything can happen in markets, the following speaks to why we continue to hedge portfolios.

Here's the intro to our latest Equity Market Conditions report:

4/30/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI):  -66.67 (-16.7 from 3/31/2023)

SP500 past 30 days +1.46%:

  • A rally during the last two trading days of April took the S&P 500 from a 1.26% deficit to a 1.46% gain on the month.
  • Despite March’s impressive (2nd half) rally, and April’s positive performance (thanks to a big two-day end of month rally), our EMCI declined another 17 points on the month – to its lowest reading since inception (8/2021)… Denoting further deterioration in equity market conditions – warranting a cautious portfolio allocation stance with regard to US equities. 
  • Sentiment (a contrarian indicator [fear bullish, greed bearish]) is presently our only positive input, and it reads just slightly net-fear.
  • While our technical assessment deteriorated – from neutral to negative – based on existing sell signals on the daily and monthly MACD, bearish momentum divergences amid a rising wedge pattern on the daily, and a still-bearish setup on the monthly Bollinger Bands chart, the last two-day rally in the SP500 was significant enough to, albeit barely, break above the 50% bear market retracement that has been stiff resistance to date. With enough followthrough, the latest rally could definitely repair what has been notable technical damage of late.
  • While interest rates have calmed a bit since last month, M2, the Fed Balance Sheet, the Treasury General Account, and the reverse repo facility all reflect a contraction in overall liquidity in the economy… That’s resoundingly bearish right here for equities!
  • Equity market breadth of late reflects anything but a healthy setup, to put it mildly!
  • All 5 of our valuation metrics increased since last month; i.e., stocks relative to earnings (current and cyclically-stated), to sales, to book value – and overall market cap to GDP – read historically expensive, particularly while in the midst of an ongoing bear market.
  • The dollar setup is still, on balance, technically (short-term) bullish (a potential headwind for equities, near-term).
  • Sector leadership (cyclicals underperforming -- defensives outperforming the SP500 over the past month) gibes with our view that recession odds are high over the foreseeable future.
  • Economic conditions, reflected in the PWA Index and the copper/gold ratio, denote strong odds of recession going forward.
  • The geopolitical setup remains precarious.
  • Credit Market Conditions remain problematic for the economy right here (PWA Financial Stress Index reads -55).


Inputs that showed improvement:

Inputs that deteriorated:
Interest Rates and overall liquidity (from neutral to negative)
SPX Technical Trends (from neutral to negative)
Equity Market Breadth (from neutral to negative)

Inputs that remained bullish:
Sentiment (net fear)

Inputs that remained bearish:
US Dollar
Fed Policy
Sector Leadership
Economic Conditions

Credit conditions (PWA Financial Stress Index)

Areas that remained neutral:
Fiscal Policy
EMCI since inception:

SP500 since EMCI inception:

Please be sure and take in our latest video updates (links: market, economy), in case you missed them. 

Asian stocks were mostly green overnight, with 11 of the 16 markets we track closing higher.

European markets are on holiday today.

US equity averages are mostly green to start the session: Dow up 83 points (0.24%), SP500 up 0.18%, SP500 Equal Weight up 0.23%, Nasdaq 100 down 0.02%, Nasdaq Comp up 0.02%, Russell 2000 up 0.68%.

As for last Friday's session, US equity averages finished strong: Dow up 272 points (0.80%), SP500 up 0.83%, SP500 Equal Weight up 1.08%, Nasdaq 100 up 0.65%, Nasdaq Comp up 0.69%, Russell 2000 up 1.01%.

This morning the VIX sits at 15.98, up 1.27%.

Oil futures are down 1.09%, gold's up 0.39%, silver's up 2.36%, copper futures are up 2.24% and the ag complex (DBA) is down 0.14%.

The 10-year treasury is down (yield up) and the dollar is up 0.06%.

Among our 37 core positions (excluding options hedges, cash and money market funds), 20 -- led by SLV (silver), DBB (base metals futures), PHO (water stocks), EWW (Mexico equities) and XLI (industrial stocks) -- are in the green so far this morning... The losers are being led lower by Amazon, TLT (long-term treasuries), MP Materials, Albemarle and EMB (emerging mkt bonds).

“It is perfectly obvious that the whole world is going to hell. The only possible chance that it might not is that we do not attempt to prevent it from doing so.”
― J. Robert Oppenheimer

Well, like I said in our latest economic update, same -- in terms of policymakers desperately attempting to prevent recessions (the normal business cycle) -- goes for the economy.

Have a great day!

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