Thursday, May 25, 2023

Morning Note: Morning Breadth and Key Highlights

Before we take a look at some key highlights from our recent content herein, let's take a peek at overall breadth, as the stock market (the Nasdaq and the S&P cap-weighted indexes) rallies this morning.

The S&P 500 is up .60% as I type, while 60% of its members are actually declining as the session gets underway... As for the Nasdaq Comp, it's up a whopping 1.7%, while just over half of its constituents are in the red as well.... Essentially a reflection of last Thursday's second highlight below.

A few key highlights from our latest messaging:


While we'd love to join the crowd and call bear-market-over -- and it's certainly not all doom and gloom in the data right here -- we think investors are just a bit too sanguine given underlying trends.

Case in point:

Distress Pile Hits New Multiyear High

By Jeremy Hill

(Bloomberg) -- 

The pile of distressed debt grew by about $16.7 billion last week while US courts closed out their busiest first quarter since 2009, according to data compiled by Bloomberg.

  • The heap of dollar-denominated corporate bonds and loans in the Americas trading at distressed levels rose to $305.3 billion in the week ended Friday, a roughly 5.8% jump from $288.6 billion a week earlier, Bloomberg-compiled data show
    • The growth means the pile of distressed debt is larger than it has been at any time since Aug. 21 of 2020
  • Meanwhile, bankruptcy filings from the likes of Catalina Marketing Corp. and Lincoln Power LLC brought the tally of new, large insolvencies to 57 for the first three months of the year
    • That marks the busiest first quarter for US bankruptcy courts since 2009, which saw 103 filings during the period, according to data compiled by Bloomberg. 

Also Tuesday:

So, if there's no recession on the not-too-distant-horizon, I think one could legitimately call bear-market-over... Of course the challenge there would be the Fed getting inflation down to their promised 2% target, without, that is, tightening the screws to the point that would in all likelihood bring on recession.

Suffice to say that stocks (ironically, big tech in particular) are in a very tough spot right here... Despite the price action of late.

Last Thursday:

This from BCA Research emphasizes that "catch-22" we keep referring to herein:

"Economic growth will weaken in the coming months, yet monetary authorities worldwide will be reluctant to ease policy.
This state of affairs foreshadows a clash between markets and policymakers in the months ahead."
"...weak growth yet still high inflation. Due to the latter, the Fed will not cut rates until financial conditions tighten considerably and employment contracts. Such a stance from monetary authorities is bound to produce another bout of volatility in financial markets this year."

Again, makes for a very messy risk/reward setup right here! 

Also last Thursday:

...while we remain open to all possibilities, as I pointed out in yesterday's video commentary -- where we explored the immediate-term conditions that make for rallies the likes of yesterday's -- general conditions are presently inconsistent with what one would expect heading into a new bull market.

In fact, allow me to share a few more visuals to emphasize our point.

Here are all the major equity sectors from January to October 2003... I'm capturing the March bottom of the then bear market and taking it out 7 months... Just note the trend across all sectors:

Here's the same from January 2009 to October 2009, which also captures the then March bear market bottom and takes it out 7 months... Note the similar-to-the-previous-chart look:

And here's July of last year through yesterday, which captures the October pending bottom of the current bear market and takes it out 7 months... Compare the current look to the previous permanent bear market bottoms: 


Clearly, history has odds favoring a further cheapening of stocks before the current episode's all said and done.

In other words, and again, while anything's possible, and we need to remain openminded, at this juncture there's not a great deal of support for the notion that we've seen the worst of the present bear market.

And last Tuesday:

In our opinion, Bloomberg columnist and Queen's College Cambridge President Mohamad El-Erian made nothing but sense this morning... The following (bolded phrases in particular) should sound very familiar to clients and our regular readers/video watchers:

Emphasis mine... 

"The consumer is holding on better than most people expect, and the global economy around us is weakening... That's what we know, what we don't know is what is the right level for interest rates... And I would go one step further; what is the right inflation rate for this economy?"

"There's this collective view of the Fed, which is we will not cut rates, versus the market view that you will cut rates... Three things; 1. the economic situation is fluid, 2. compositional issues matter, if you look at the services side you get a completely different set of answers than on the goods side, and 3, the Fed has to anchor expectations; we have no view of what the strategic and secular view of the Fed is, and until we get that we're going to get more splintering, not less.

"You cannot crush the economy to get to 2%, because we are living in a world of deficient aggregate supply... And if you try, it will be counterproductive."

"I'm also talking about the inability to bounce back quickly...  So there's a dynamic here: If you try to run an economy at an inflation rate that is too low, given the amount of resource allocation that is going on, then you will crush it... Look, we have three issues standing there: We have a major energy transition that we have to navigate, we have the rewiring of the global economy that's happening -- not only for geopolitical reasons, but for companies looking for more resilience -- and then we have the function of the labor market... You put these three things together, if you try to get to 2% quickly, the costs far exceed the benefits."

 "And we haven't talked about financial stability; your dilemma turns into trilemma."

Stay tuned...

Asian stocks sold off overnight, with 1 of the 16 markets we track closing lower.

Europe's mostly red as well, with 14 of the 19 bourses we follow trading down so far this morning.

US equity averages are lower to start the session: Dow down 34 points (0.10%), SP500 up 0.57%, SP500 Equal Weight down 0.12%, Nasdaq 100 up 1.80%, Nasdaq Comp up 1.28%, Russell 2000 down 0.27%.

As for yesterday's session, US equity averages closed lower: Dow by 0.8%, SP500 down 0.7%, SP500 Equal Weight down 1.10%, Nasdaq 100 down 0.5%, Nasdaq Comp down 0.6%, Russell 2000 down 1.2%.

This morning the VIX sits at 19.36, down 3.34%.

Oil futures are down 3.07%, gold's down 0.36%, silver's down 0.09%, copper futures are up 0.65% and the ag complex (DBA) is down 0.44%.

The 10-year treasury is down (yield up) and the dollar is up 0.23%.

Among our 34 core positions (excluding options hedges, cash and money market funds), only 11 -- led by XLK (tech stocks), VNM (Vietnam), HACK (cyber security stocks), EWZ (Brazil equities) and XLI (industrial stocks).. The losers are being led lower by AT&T, Albemarle, OIH (oil services stocks), XLE (energy stocks) and EZA (South African equities).

"There is a time to go long, there is a time to go short, there is a time to go fishing" --Jesse Livermore 😎

Have a great day!

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