Tuesday, September 5, 2023

Morning Note: Equity Mkt Conditions Presently Unconstructive

Here's the intro to our latest Equity Market Conditions internal report, along with our detailed technical assessment of the dollar:

8/31/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -66.67 (-25.00 from 7/31/2023)

SP500 past 30 days, -1.77%:

SP500 Equal Weight Index past 30 days, -3.37%:

While stocks staged an impressive move over the final few days of August, the SP500 was unable to squeeze out positive results for the month… Breadth deteriorated notably, as evidenced by significantly worse results for the SP500 Equal Weight Index, as well as by the other metrics scored herein.

As we enter September, US equity market conditions have deteriorated vs the start of August; our overall score declining by 25 points (to -66.67) on the month.

As we anticipated, the dollar proved to be a headwind for stocks in August… Our current assessment (of the price trend) leans net bullish the dollar (bearish for stocks), however, the lack of signal presently coming from our momentum indicators has us upping our dollar assessment (in terms of its impact on the stock market) to neutral, for now.

In terms of the economic backdrop, the PWA (general conditions) Index continues to flash a recession signal, while the copper/gold ratio, after rallying in July, deteriorated notably in August… Thus, the economic component herein went from neutral to negative heading into September.

As for the signal from the rest of the EMCI components, suffice to say that the current setup for equities remains unconstructive.

Bottom line: Given what are historically-high US equity market valuations, what remains relatively tight monetary policy, generally high geopolitical risks, notably uncertain economic conditions (above average recession odds on a 6-12 month outlook), a sharp deterioration in market breadth, net bullish market sentiment, and, on-balance, tight credit market conditions, prudence precludes us from adding measurable risk to our current core allocation.

Inputs that showed improvement:

US Dollar (from negative to neutral)

Inputs that deteriorated:
Sector Leadership (from positive to neutral)
Economic Conditions (from neutral to negative)
Breadth (from neutral to negative)
Sentiment (from neutral to negative)

Inputs that remained bullish:

Inputs that remained bearish:
Interest Rates and overall liquidity
Fed Policy
Credit conditions

Inputs that remained neutral:
Fiscal Policy
SPX Technical Trends

EMCI since inception (8/31/2021):

SP500 since EMCI inception:


1. US DOLLAR: 0 (+1)

Last month’s bullish dollar (bearish stocks) technical setup played out as expected.

US Dollar Index (DXY), August ‘23:

The last day of August saw the dollar rebound aggressively off of 103 support, creating a bullish engulfing (daily) candle… Which occurred 3 days after breaking below a bearish rising wedge that developed off of a previous test (on 8/18) of that 103 level… 

While price, having convincingly held support, reads short-term bullish, momentum, via the MACD and RSI -- early MACD sell signal notwithstanding -- presently reads ambiguous… 

While, based on late last week's price action, it’s tempting to maintain our bullish short-term dollar stance, the essentially directionless momentum signals -- along with bullish-leaning short-term technical setups for the Euro and the Yen -- has us assigning the dollar a neutral score for now:

Stay tuned... 

Asian stocks struggled overnight, with 11 of the 16 markets we track closing lower.

Europe's leaning red as well so far this morning, with 11 of the 19 bourses we follow trading down as I type.

US equity averages are lower to start the session: Dow by 85 points (0.24%), SP500 down 0.36%, SP500 Equal Weight down 0.80%, Nasdaq 100 down 0.19%, Nasdaq Comp down 0.34%, Russell 2000 down 1.80%.

As for Friday’s session, US equity averages were mixed: Dow up 0.3%, SP500 up 0.2%, SP500 Equal Weight up 0.4%, Nasdaq 100 down 0.1%, Nasdaq Comp down 0.1%, Russell 2000 up 1.1%.

This morning the VIX sits at 14.33, up 9.47%.

Oil futures are up 1.15%, nat gas futures are down 6.22%, gold's down 0.56%, silver's down 0.99%, copper futures are down 0.42% and the ag complex (DBA) is up 0.57%.

The 10-year treasury is down (yield up) and the dollar is up 0.52%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 9 -- led by URNM (uranium miners), OIH (oil services companies), JNJ, VNM (Vietnam equities) and XLE (energy stocks) -- are in the green so far this morning... The losers are being led lower by PHO (water resources companies), SLV (silver), EWW (Mexico equities), XME (base metals miners) and XLB (materials stocks).

"It is not worthwhile to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible." —Mark Twain

Have a great day!

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