Morning Note: A Still-Difficult Equity Market Setup

Here's the intro to our latest (internal) equity market conditions report:

9/30/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -58.33 (+8.34 from 8/31/2023)

SP500 Index September 2023 Result, -4.87%:

SP500 Equal Weight Index September 2023 Result, -5.26%:

Consistent with EMCI’s latest scoring, September proved to be the worst month of 2023 for US equities.

The go-forward setup: 

Despite the 8-point month-on-month EMCI improvement, the US equity market enters October amid what remains a notably precarious overall backdrop. 

Said improvement came entirely, and ironically, from a shift in sentiment (a contrarian indicator) from bullish to notably bearish. 

While, per last month’s commentary, we were tempted to maintain our bullish rating on the dollar, we then downgraded our technical rating of DXY to neutral based on the ambiguous looks of the MACD and the RSI. Nevertheless, that 8/31 bullish engulfing candle we pointed out in last month’s report did indeed set the stage for a sharp early-month rally, that, after 8 days of consolidation, resumed its march higher through 9/27.

In terms of the economic backdrop, the PWA (general conditions) Index continues to flash a recession signal (deeper, in fact, by 9 points vs last month), while the copper/gold ratio, on the other hand, saw a late-month rally, as copper firmed (likely influenced by better data out of China), and gold gave way to increasingly-hawkish US central bank commentary. 

As for the signal from the rest of the EMCI inputs, suffice to say that, while October may indeed see a snapback rally (should, for example, now-bearish sentiment see yet another fomo-fueled shift to bullishness -- on which we'll say odds presently favor), the current setup for equities remains difficult – to put it mildly.

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 3-12 month outlook), a sharp deterioration in market breadth, and, on-balance, tight credit market conditions, prudence precludes us from adding measurable risk to our current core allocation.

Inputs that showed improvement:

Sentiment (from negative to positive)

Inputs that deteriorated:

SPX Technical Trends (from neutral to negative)

Inputs that remained bullish:

None

Inputs that remained bearish:

Economic Conditions 

Breadth 

Interest Rates and overall liquidity

Fed Policy

Valuation

Geopolitics

Credit conditions

Inputs that remained neutral:

US Dollar

Sector Leadership 

Fiscal Policy

EMCI since inception:

 

SP500 since EMCI inception:

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Asian stocks traded down overnight, with 8 of the 16 (3 shuttered for a holiday week) markets we track closing lower.

Europe's mostly red so far this morning as well, with 13 of the 19 bourses we follow trading down as I type.

US equity averages are mixed (although broadly lower -- 3 to 1 decliners over advancers and all but 2 sectors notably down) to start the session: Dow down 168 points (0.50%), SP500 down 0.31%, SP500 Equal Weight down 1.02%, Nasdaq 100 up 0.37%, Nasdaq Comp up 0.29%, Russell 2000 down 1.14%.

As for Friday’s session, US equity averages were mixed: Dow down 0.5%, SP500 down 0.3%, SP500 Equal Weight down 0.3%, Nasdaq 100 up 0.1%, Nasdaq Comp up 0.1%, Russell 2000 down 0.5%.

This morning the VIX sits at 17.87, up 2.00%.

Oil futures are down 2.09%, nat gas futures are down 2.77%, gold's down 1.13%, silver's down 4.28%, copper futures are down 2.47% and the ag complex (DBA) is u9 1.03%.

The 10-year treasury is down (yield up) and the dollar is up 0.68%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 5 -- DBA (ag futures), XLK (tech stocks), XLC (communications stocks), VNM (Vietnam equities) and HACK (cyber security stocks) -- are in the green so far this morning... The losers are being led lower by Range Resources, SLV (silver), URNM (uranium miners), OIH (oil services companies) and XME (base metals miners).

"...my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities."

--Jesse Livermore

Have a great day!
Marty