Morning Note: Beware the Never Before Happeneds

I've heard it said recently that there's never been a bear market rally that's lasted longer than the initial bear market decline (correcting my earlier statement)... Suggesting, therefore, that this isn't a bear market rally at all, that it's indeed a new sustainable bull market.

I also read that strings of consecutive up days for the Dow, the likes of which just ended late last week, have historically been met with positive returns over the ensuing 12 months, save for only one occurrence, in 1987.

And I'm certain there are a whole host of other never-happened-in-a-bear-market statistics that suggest indeed that the road ahead is clear and that we should all be backing up our trucks to the stock market and loading em up, right this minute!

Economic Update: Too soon for the Fed to declare victory over inflation (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Market Snapshot: Potential Problems For the Fed (& Mkts) the Second Half of the Year (video)

Per the possibility I mentioned in this morning’s commentary (recorded last evening), PCE inflation data came in soft this morning; supporting equity prices. The bulls need this one to hold — a repeat of yesterday’s fail would be near-term dicey. My guess is it will (hold), but we’ll see. 

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: IF

While present stock market levels, and recent action, seem bewildering to some, when we consider the soft-landing narrative that many are now embracing (along with the other points I've made herein of late), and the history of rallies closely preceding past recessions, in reality, it’s not all that puzzling how things -- non-fundamentally driven as they may be -- have played out since last October’s bottom.

Now, per BCA’s Doug Peta, IF a mild recession scenario ultimately plays out and we see a 15% hit to corporate earnings (a typical recession brings a ~25% hit), and were stocks to maintain their 20ish price-to-earnings ratio (p/e), the SP500 would experience a 15% decline… But of course a 20 p/e could be very fragile in a double-digit market selloff… I.e., a mere 15% hit to stock prices amid even a mild recession would be quite the optimistic scenario.

Market Snapshot: Toppy Sentiment, etc. (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Point, and the Problem With, #8

Last Tuesday's post, and the followup video shot Wednesday, didn't get quite the number of hits I think they should have, as I view that particular message as being uber-important right here.

So, if you missed them, no sweat, as yesterday inspired a #8 worth mentioning (last week I featured 7 reasons why stocks continue to hold up right here, followed by 7 counterpoints).

Here again from last week:

Thinking through the 2023 equity market phenomenon; what’s behind the rally?

1. The regional bank scare in March brought some $400 billion to bear by the Fed.
2. A belief that virtually anything AI simply can’t lose, regardless of the macro setup… Leading to historically weak breadth until recently.
3. Simply put, it’s difficult for a market to roll over while everyone’s positioned for it… I.e., sentiment was very bearish coming into the year.
4. A steadfast belief that this Fed – despite their tough rhetoric – simply won’t let anything break in, say, 2008, or tech-bubble, fashion… Point #1 bolsters that narrative.
5. That resoundingly bearish sentiment, and positioning, at the start of the year is getting rapidly unwound as panicky pros face the career risk that comes with missing their benchmarks.
6. Massive options speculation, and hedging, in a manner/direction that essentially pins stocks to certain, ever-rising (to this point), levels.
7. A growing consensus that the economy will indeed see inflation reach, and hold, the Fed’s 2% target without bringing on a market-crushing recession. I.e., a “soft landing.”

Problems with the above:

A Heavy Look, and Making Sense of the 2023 Stock Market (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Maybe Breadth Matters

Many a devoted buy-and-hold bull (the term "permabull" is just too derogatory for my taste) would tell you that breadth (when it’s bad) is worthless as an indicator... Well, for whatever reason, we nevertheless track it -- just like we did back in December 2021.

Here's a snippet from our December 22, 2021 blog post:

Morning Note: Jotting Down Some Thoughts On Equities, and a little Zen

Thinking through the 2023 equity market phenomenon; what’s behind the rally?

1. The regional bank scare in March brought some $400 billion to bear by the Fed.
2. A belief that virtually anything AI simply can’t lose, regardless of the macro setup… Leading to historically weak breadth until recently.
3. Simply put, it’s difficult for a market to roll over while everyone’s positioned for it… I.e., sentiment was very bearish coming into the year.
4. A steadfast belief that this Fed – despite their tough rhetoric – simply won’t let anything break in, say, 2008, or tech-bubble, fashion… Point #1 bolsters that narrative.
5. That resoundingly bearish sentiment, and positioning, at the start of the year is getting rapidly unwound as panicky pros face the career risk that comes with missing their benchmarks.
6. Massive options speculation, and hedging, in a manner/direction that essentially pins stocks to certain, ever-rising (to this point), levels.
7. A growing consensus that the economy will indeed see inflation reach, and hold, the Fed’s 2% target without bringing on a market-crushing recession. I.e., a “soft landing.”

Problems with the above:

Morning Note: Key Highlights, Your Weekly Sector, etc., Update, and what do lower prices mean?

Here are some key highlights from last week's messaging herein:

Last Thursday:

"Now, we indeed remain structural bulls on inflation... "Structural" being the operative word there.. For, as I've stressed multiple times (in videos especially), if/when recession hits, we inflationistas will get lambasted by those who think that, at the end of the day, nothing's really changed, and that inflation will settle right back into essential nothingness for many more decades to come... I.e., as the economy slows, so does inflation -- you can 100% bet on it!

Economic Update: Mixed (Consumers vs Their Employers) Sentiment & Short and Long-term Inflation Drivers (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Market Update: Rallies & Recessions (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: Never's A Long Time! -- And -- Working on a Mystery ♪♪

We'll keep this morning's note short and sweet, and illustrate exactly why yesterday's soft CPI number very much jibes with our go-forward base case, and why we continue to actively hedge against what remains not-small downside potential in equities before the current market cycle completely plays itself out.

SP500, NDQ100, AAPL, MSFT, NVDA, AMZN -- waiting for something to break or for the forecast to clear (video)

As you'll hear in this morning's video commentary (recorded yesterday evening), this morning's soft CPI print, and the market's reaction, was to be expected... Ironically, a soft CPI reading -- while (year-on-year) to no small degree the result of favorable base effects -- jibes with our overall near/intermediate-term macro thesis, which, at the end of the day (or, if you will, at the end of this market cycle) isn't necessarily great news for equity markets:

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Charts of the Day

This from Bespoke Investment Group's morning note comports with ours:

"Overnight Data: Japan’s machine tool orders are a timely piece of “hard” data on global capital expenditure activity. While not comprehensive, they are certainly indicative and as shown in the chart below, the current capex cycle is in full retreat. That’s consistent with a broad global slowdown in activity at the hands of central bank tightening over the last two years.

Morning Note: "More Than a Summer Lull" -- And -- "How Long Can the US Economy Hold Out?"

Sentix's monthly economic report is widely watched among global macro analysts, as:

"The Sentix economic index is the "first mover" among the monthly sentiment indicators on economic development. It is surveyed within two days at the beginning of the month among investors registered with Sentix and published shortly afterwards. Thus, it is always the first available among the leading indicators such as the ZEW economic expectations, the ifo business climate or the economic sentiment. As a rule, the Sentix Business Cycle Index has a leading character compared to the other indicators. With its help, the developments of the other indices can usually be estimated very well."

Morning Note: Bullish (long-term) on Emerging Markets, And Your Weekly Sector, etc., Update

The following from Louis Gave's excellent interview on last week's Top Traders Unplugged podcast very much comports with our longer-term thesis:

"What's interesting to me today is that we have one message from the equity markets, which is oh, the next bull market is from artificial intelligence, and we have a message from the bond markets that the next bull market is going to be in emerging markets.

Economic Update: Cars, Jobs, Business Sentiment and Bank Accts (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Stock Market Snapshot: Technicals, Jobs, Savings, Sentiment, Etc... (video)

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Attention Non-Client subscribers: Nothing in this video should be construed as investment advice. The examples expressed relate to portfolio management we perform on behalf of our clients, and, again, under no circumstances are they to be considered recommendations to the viewer.

Morning Note: The Flipping Point

The equity market's year-to-date strength (keeping in mind the uber-small number of stocks that explain the first-half phenomenon), in our view, can, to no small degree, be explained by some serious broad-based bearishness heading into the year... You see, it's hard for markets to fall apart when the whole world is positioned for it.

Presently, however, per the following from Investor Intelligence's latest weekly survey, advisor sentiment has shifted markedly since the start of the year:

Morning Note: Quite the Disconnect

This morning's release of the ISM June manufacturing survey, alas, jibes with our current economic thesis:

Here's from the report:

“The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing ground compared to the previous month, indicating a faster rate of contraction. The June composite index reading reflects companies continuing to manage outputs down as softness continues and optimism about the second half of 2023 weakens.

Equity Market Conditions Update

Here's the lead-in to our latest internal equity market conditions update, plus our commentary on the dollar's technical setup:

6/30/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -58.33 (-8.33 from 5/30/2023)

SP500 past 30 days, +6.47%:

SP500 Equal Weight past 30 days, +7.51%:

After a notable improvement reflected in our end-of-May report (+16.67 points), amid nevertheless negative overall conditions, the EMCI resumed its bearish trend, dropping 8.33 points by the end of June.

In our previous update we flagged the potential for equity market strength in June based on a then bearish-dollar (bullish stocks) setup, and a softer-sounding Fed (and favorable inflation base-effects)… I suspect those factors – plus massive FOMO among investors – were not-small with respect to June’s strong rally.

Here’s from last month’s report:

Charts of the Day

Stumbled across a couple of comments this morning that comport with, and illustrate, potentially key dynamics discussed herein of late.

Apparently 85% of the S&P 500's impressive first-half performance accrues to 7 stocks:

And we can not -- at this juncture -- attribute that performance to improving fundamentals: