Monday, December 4, 2023

Morning Note: Equity Market Conditions Remain Challenged

Here's the intro to our internal monthly equity market conditions analysis, including our technical view of the current US dollar setup:

11/30/2023 PWA EQUITY MARKET CONDITIONS INDEX (EMCI): -41.67 (-16.67 from 10/31/2023)

SP500 Index November 2023, +8.92%:

SP500 Equal Weight Index November 2023, +8.87%:

November turned out to be the best month of 2023.
While the EMCI score was still net negative, it had risen an unusually large 33 points by the star of the month.
Three of the inputs that improved heading into November (the dollar, interest rates and Fed Policy) happened to be key drivers since the SP500 low in October of last year… 
Throw in a bullish technical setup and very weak sentiment (i.e., lots of fearful folks who are prone to becoming fear-of-missing-out folks), and you had the makings of a strong November rally, which I pointed out unambiguously in video commentaries at the time.

All that said, overall equity market conditions were (and remain) nevertheless negative, which indicates that the November rally is/was ultimately one to be faded for investors with a longer than 1-month orientation.

Seasonality, on the other hand, is strong right here, so it’s certainly not out of the question for stocks to continue rallying -- with these extended factors persisting -- for a few more weeks going forward.

The go-forward setup:
The setup heading into December differs markedly from the one heading into November… Key tailwinds for November – the dollar, interest rates, the technicals and sentiment – have completely flipped, now posing potentially stiff headwinds… But, again, this doesn’t necessarily mean that a correction begins right as December gets underway, or even during the course of the month for that matter, as, as stated above, seasonality is presently positive… It simply suggests that December does not enjoy the overall short-term bullish setup that ushered in November.

Inputs that showed improvement during November:
Sector Leadership (from neutral to positive)
Breadth (from negative to neutral)
Credit (stress) conditions (from negative to positive)

Inputs that deteriorated:
US Dollar (from positive to negative)
Interest Rates (technical setup) and overall liquidity (from neutral to negative)
SPX Technical Trends (from neutral to negative)
Sentiment (from positive to negative)

Inputs that remained bullish:

Inputs that remained bearish:
Economic Conditions

Inputs that remained neutral:
Fed Policy
Fiscal Policy

EMCI since inception:

SP500 since EMCI inception (one month lag):



1. US DOLLAR: -1 (-2)
Per the below, our view of the dollar heading into November was “near-term bearish,” which was resoundingly bullish for stocks, based on the prevailing character of equity market trading.

From last month’s analysis:

“As we enter November, the technicals now point to a near-term bearish profile:
Hence, we’re downgrading the dollar to negative heading into November, which reads near-term bullish for equities.” 
Clearly, per below (big November drawdown in the dollar), and per November’s stock market rally, that turned out to be the correct call:

US Dollar Index (DXY), November ‘23: 
Now, however, as we enter December, the technicals reflect a near-term bullish profile for the dollar (bearish influence on stocks):

Hence, we’re rerating the dollar to positive heading into December, which reads near-term bearish for equities.

Asian equities leaned slightly green overnight, with 9 of the 16 markets we track closing higher.

Europe leans slightly red so far this morning, with 10 of the 19 bourses we follow trading down as I type.

US equity averages are mostly lower to start the session: Dow down 60 points (0.16%), SP500 down 0.55%, SP500 Equal Weight up 0.06%, Nasdaq 100 down 1.17%, Nasdaq Comp down 1.09%, Russell 2000 up 0.67%.

As for Friday’s session, US equities closed higher: Dow by 0.8%, SP500 up 0.6%, SP500 Equal Weight up 1.5%, Nasdaq 100 up 0.3%, Nasdaq Comp up 0.6%, Russell 2000 up 3.0%.

This morning the VIX sits at 13.40.

Oil futures are down 1.30%, nat gas futures are down 5.08%, gold's down 1.12%, silver's down 1.88%, copper futures are down 1.65% and the ag complex (DBA) is up 0.07%.

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

Among our 32 core positions (excluding options hedges, cash and money market funds), 9 -- led by URNM (uranium miners), Johnson & Johnson, XLP (consumer staples stocks), XLV (healthcare stocks) and XLF (financial stocks) -- are in the green so far this morning... The losers are being led lower by SLV (silver), REMX (rare earth miners), XLK (tech stocks), XLC (communication stocks) and GLD (gold).

“The iron rule of nature is: You get what you reward for. If you want ants to come, you put sugar on the floor.” --Charlie Munger

Have a great day!

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