Tuesday, October 31, 2023

Morning Note: Key Highlights and The Ills of Intervention

Key highlights from our latest messaging:

...according to the technicals, odds favor a near-term rally in equities, according to the fundamentals, continued caution is very warranted.
Last Tuesday:
As for equities, I see decent odds of a near-term bounce that’ll recapture some of the hit stocks have taken since their late-July high… Some argue for upside from here based on favorable seasonality and perhaps anticipation of a strong retail season… That’s not my take.

My take is that, again, equities may indeed rally in the near-term, but that’s if/when further evidence emerges that the economy is weakening toward recession over the coming months… I.e., in that instance, stocks will likely get bought, as investors/traders seem to believe that it’s all about the Fed, and that weak data will have them thinking that the Fed will ease up measurably on monetary policy.

Conversely, should the economy actually show real strength into year-end, I’m thinking stocks may actually struggle, as such a scenario supports inflation and, therefore, supports the notion that, as Powell put it last Friday, monetary policy is not too tight right here.
Last Monday:
If you've been tracking our weekly results updates you've noticed, of late, a growing shade of red... As we've maintained since the October '22 bottom, macro dynamics have remained such that a next leg down carries odds too high to ignore.

Now, many on Wall Street have taken the stance that the bear market is over and done, and that a new bull market is just getting underway.

Well, okay, but I struggle with calling a new bull market when, for example, the S&P 500 Equal Weight Index is down 12% from its this-July peak, and sits a mere 8% above the last October low, while still down 17% since the all time high back in January of 2022.
Tuesday 10/17:
...despite the reality that such a potentially massive long-term sea change was never likely to make for epic overnight success, where they nevertheless could, CEOs hitched their wagons to AI, and in some instances (as intended) rocketed their stock prices to the proverbial moon... And, in the process, had an, albeit concentrated, not-small impact on a couple of cap-weighted equity indexes.

The potential problem being obvious; should the Wall Street Journal have it right, reality could see those same high-orbit stocks (and the indices they're concentrated in) finding their way back to earth in, at the extreme, dotcom-bubble fashion.

No prediction here, just risk assessment.

Monday 10/16:

So, Q4 of the year is known for its friendliness toward the stock market... And, from a sentiment and Fed-speak standpoint, one could argue that -- geopolitical turmoil aside -- the 2023 Q4 setup isn't all that bad... I certainly don't think that Q3 earnings results, by themselves, will pose a challenge to the near-term bullish narrative.

That said, the risk to that sanguine view could be those all-important go-forward corporate outlooks... While today's CEO has been reduced to little more than shepherd of his/her company's stock price, if only for credibility's sake, corporate execs nevertheless need to tread softly (and cautiously) if and when they truly anticipate turbulent times ahead.

My point being, after all the high-fiving on Q3's results, the market will be looking to sniff out any hint of apprehension in the go-forward outlooks... Ultimately (sooner or later [not necessarily right here, mind you]), with real recession risk on the horizon, there'll likely come an inflection point where the market no longer treats bad news as good news, as it comes to realize that bad earnings news is indeed bad price news that'll have to play itself out, despite the Fed's best efforts... Time will tell.

Asian stocks leaned red overnight, with 10 of the 16 markets we track closing lower.

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

US equity averages are mixed to start the session: Dow down 4 points (0.01%), SP500 down 0.05%, SP500 Equal Weight up 0.26%, Nasdaq 100 down 0.17%, Nasdaq Comp down 0.21%, Russell 2000 up 0.44%.

As for yesterday’s session, US equities traded higher: Dow up 1.2%, SP500 up 1.2%, SP500 Equal Weight up 0.8%, Nasdaq 100 up 1.1%, Nasdaq Comp up 1.2%, Russell 2000 up 0.6%.

This morning the VIX sits at 19.35.

Oil futures are up 0.95%, nat gas futures are up 5.61%, gold's up 0.45%, silver's down 0.05%, copper futures are down 0.22% and the ag complex (DBA) is up 0.32%.

The 10-year treasury is up (yield down) and the dollar is down 0.31%.

Among our 31 core positions (excluding options hedges, cash and money market funds), 19 -- led by URNM (uranium miners), Range Resources, PHO (water service stocks), AT&T and EWZ (Brazil equities) -- are in the green so far this morning... The losers are being led lower by VNM (Vietnam equities), Dutch Bros, VWO (emerging mkt equities), EWW (Mexico equities) and DBB (base metals futures).

In a discussion 
yesterday about all things markets and economics with an astute friend/client, he pointed to the folly of intervention aimed at circumventing the natural business cycle:
"You take the small ones so you don't get hit by the big ones." 
--Greg Gregson

In other words, when policymakers effort to quash every (regardless of magnitude) conceivable economic stressor, the essential periodic cleansing of excesses does not play out... Culminating in an unavoidable purging that inflicts far more pain than would've otherwise occurred, had they let business-cycle-nature do its necessary thing.

In terms of investing, he also captured the necessity of being patient, while playing defense (enduring small hits), amid general conditions that simply do not jibe with the prevailing market action.

Have a great day!

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