Tuesday, June 6, 2023

Morning Note: Uncertainty Reigns Over Equity Market Conditions

Per the following intro (including the brief narratives for 2 of our 12 inputs) to our internal report on the overall equity market setup, while conditions improved over the past month, the overall setup ultimately reflects a notable degree of downside risk:
5/31/2023 PWA EQUITY MARKET CONDITIONS (EMCI) INDEX: -50 (+16.7 from 4/30/2023)

SP500 in May, +0.29%:

SP500 Equal Weight in May, -3.94%:

While our EMCI improved 17 points, to -50, conditions remain considerably uncertain for equities going forward.

Near-term neutral dollar and sanguine Fed policy: 

Nevertheless, a potentially-bearish technical pattern for the dollar (bullish for equities) along with a softer tone from the Fed (a no hike decision in June is highly probable) combines to perhaps justify continued sanguinity for the time being – considering how we view prevailing short-term trading biases.

Throw in favorable inflation base effects over the next two months and you have a narrative for stocks to perhaps remain buoyed over the next several weeks.

Bullishly bearish equity sentiment turning slightly bearishly bullish:

On an ultimately less-sanguine note, if the rally continues we anticipate capitulation (buying) among investors/traders who were bearish coming into the year… We’re seeing at least the beginnings of such in advisor sentiment readings, and (albeit to a lesser degree) in individual investor sentiment, along with evidence that a number of previously-bearish hedge funds have flipped bullish... Such factors, in effect, serve to thin the downside protection that excessive bearishness typically provides the market.

That said, non-commercial futures traders are still net-short SPX to an extent not seen since 2007… 

On balance, the above – along with other inputs to our fear/greed barometer – takes our sentiment metric from bullishly bearish to slightly bearishly bullish... In other words, our current read of overall sentiment goes from bullish to neutral equities, with the trend moving in a (contrarianly) bearish direction.

All in, per our individual component narratives below, the general equity market setup lends itself to significant downside risk going forward:

Inputs that showed improvement:
US Dollar (from negative to neutral)
Fed Policy (from negative to neutral)
Sector Leadership (from negative to neutral)

Inputs that deteriorated:
Sentiment (from positive to neutral)

Inputs that remained bullish:

Inputs that remained bearish:
Interest Rates and overall liquidity
Economic Conditions
Credit conditions

Inputs that remained neutral:
Fiscal Policy
SPX Technical Trends

EMCI since inception:

SP500 since EMCI inception:

1. US DOLLAR: 0 (+1)

Last month's bullish technical assessment played out precisely as the setup suggested it would, with a notable 2.63% advance in May for the US Dollar Index (DXY):

Our prevailing view of how equities are trading relative to the dollar had us scoring the bullish dollar chart setup as a negative (-1) contribution to overall equity market conditions… And while that didn’t play out with regard to the cap-weighted SP500 (+0.29% on the month), it did, resoundingly, with regard to the equal-weighted SP500 (-3.94%).

Technically-speaking, the dollar now looks toppy, having slowed into a bearish rising wedge pattern, confirmed by a flattening in the MACD and the RSI the last few trading days of the month:

Therefore, while a technical sell signal has not yet triggered (although threatening), we’re upping our dollar score to neutral at this juncture -- which is incrementally bullish for equities, in the short-run.

2. INTEREST RATES AND OVERALL LIQUIDITY: -1 (nc): TGA to be replenished, declining M2, and historically-high repo balance & rate elicits no change for June.

Asian stocks were mixed overnight, with 8 of the 16 markets we track closing lower.

Europe's green nearly across the board so far this morning, with 15 of the 19 bourses we follow trading up as I type.

US equity averages are up to start the session: Dow by 30 points (0.09%), SP500 up 0.24%, SP500 Equal Weight up 0.72%, Nasdaq 100 up 0.06%, Nasdaq Comp up 0.33%, Russell 2000 up 2.54%.

As for yesterday's session, US equity averages (save for Ndq100) closed lower: Dow down 0.6%, SP500 down 0.2%, SP500 Equal Weight down 0.33%, Nasdaq 100 up 0.1%, Nasdaq Comp down 0.1%, Russell 2000 down 1.3%.

This morning the VIX sits at 14.30, down 2.92%.

Oil futures are up 0.17%, gold's down 0.13%, silver's down 0.44%, copper futures are down 0.16% and the ag complex (DBA) is up 0.53%.

The 10-year treasury is down (yield up) and the dollar is up 0.21%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 25 -- led by Albemarle, MP Materials, VNM (Vietnam equities), XME (base metals miners) and AT&T -- are in the green so far this morning... The losers are being led lower by URNM (uranium miners), XLP (staples stocks), XLV (healthcare stocks), SLV (silver) and LEMB (local currency emerging mkt bonds).

“I can't tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.”
--Jesse Livermore

Have a great day!

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