Thursday, January 11, 2024

Morning Note: CPI, And What's Different As The New Year Gets Underway

Like I said in yesterday's video, the prevailing character of trading would have the market rallying on a cool inflation print, while, conversely, tanking on a hot one.

Well, the December CPI is out, and the read that presumably counts, "core" CPI, which ignores food and energy costs, cooled a tick, at 3.9% for the past year, while matching November with a month-on-month print of 0.3%.

The headline read, which captures food and energy, actually ticked up to 3.4% (from 3.1% in November) year-on-year, and to 0.3% (from 0.1%) month-on-month.

As for the stock market, no big deal -- at least initially.

SP500 futures have bounced around between up 0.3% in the premarket to down 0.3%, sitting at down 0.2% as I type (a half hour before the open):

Nasdaq 100 futures have gone from an initial pop of 0.6% to now just under the flat line -0.06%:

Russell 2000 (small caps) futures are having a somewhat rougher go of it, at the moment down 0.58%:

We'll pour through the details in our weekly economic update tomorrow.

As I've expressed aplenty of late, the setup -- particularly in terms of sentiment -- heading into this year is notably different than that heading into last year... I.e., the prevailing view of stock market conditions has turned on its head.

The following noisy graph captures the bullish (green) and bearish (red) reads from the weekly American Association of Individual Investors (AAII) sentiment survey.

Note my annotations heading into each of the past two years, plus the present:

As I stated above, individual investor sentiment is essentially opposite of what it was a year ago... I.e., exceedingly bullish now, exceedingly bearish then... And, per the far left, this year's setup resembles that of early 2022's.

Now let's take a look at how stocks (SP500, bottom panel) performed over that stretch:

As for all the noise in that last chart, if you look closely you'll notice that the 2022 rallies (amid a lower trend) each came shortly following peaks in bearish sentiment... While the ensuing selloffs came off of peaking bullish sentiment... And, for the most part, the same (rallies off red, selloffs or a notable pause off of green) occurred during the 2023 melt up.

Of course there's more to market sentiment than just the read from individual investors... We, therefore, a number of years ago created our own "Fear/Greed Barometer."  With it we track AAII sentiment, Investors Intelligence’s Advisor Sentiment Survey, the SP500 volatility index (VIX), SPY (SP500 tracking ETF) short interest, QQQ (Nasdaq100) short interest, SP500 futures traders positioning, Nasdaq 100 futures traders positioning, and the NYSE Equity Put/Call Ratio.

In December 2021 our barometer scored firmly in net-greed territory (-27.27)... Then the opposite in December 2022 -- i.e., net-fear (+22.22)... Presently it's back to net-greed, big time (-50.00).

Per the above graphs, this is what you'd call a contrary indicator... That is, bearish when folks are greedy, bullish when they're fearful. 

In the words of Warren Buffett:   emphasis mine...
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."
Among our barometer's inputs I have found the survey results to be the most telling.

Here's from the latest Investor Intelligence Advisor Survey:  emphasis mine...
"The bull-bear spread narrowed to +36.7%, from +39.9% a week ago. That is the sixth straight difference in the caution/initial danger zone above 30%, but the 40% action level was just missed. The wider the positive spread, the higher the risk, with the +35% to +45% clearly there. Last week we also had the difference at a 2½ year high, just above the late Jul-23 spread of +38.5%. In the other direction, late 2022 had nine weeks with more bears than bulls (a negative spread), including -19.1% early Oct-22. Negative differences signal diminished risk and allow for accumulation. Late Oct-23 the difference was 17.2%, the smallest since Mar-23, when it fell to just +10.9%. That suggested lowered risk for longs."
Here's us charting adviser sentiment at key recent turning points on that SP500 chart:

Yes, I know, I've been pounding the table big-time on sentiment of late -- the above explains why.

Now, all that said, there is a very key sentiment reading having to do with interest rates that is in no way shape or form the same today as it was heading into 2022... And that's what's expected out of the Fed.

On 12/31/2021, fed funds futures were pricing in 3 rate hikes over the ensuing 12 months:

While literally 6 cuts were priced in heading into this year:

No wonder stocks -- well, big cap tech stocks -- partied so hard last year!

Thing is, however, the aggressive pricing in of rate cuts, alas, jibes with our recession indicator... And it's recession -- and the corporate earnings hit that would come with it -- that would be the catalyst for one more leg down in stocks before the next cycle kicks in.

White = fed funds rate, yellow = SP500, red-shaded areas = recessions:

Stay tuned...

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

Same for Europe so far this morning, with 10 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow up 30 points (0.08%), SP500 up 0.23%, SP500 Equal Weight down 0.13%, Nasdaq 100 up 0.47%, Nasdaq Comp up 0.46%, Russell 2000 down 0.22%.

As for yesterday’s session, US equities closed higher: Dow by 0.5%, SP500 up 0.6%, SP500 Equal Weight up 0.2%, Nasdaq 100 up 0.7%, Nasdaq Comp up 0.8%, Russell 2000 up 0.2%.

This morning the VIX sits at 12.54.

Oil futures are up 2.07%, nat gas futures are down 1.22%, gold's up 0.22%, silver's up 0.12%, copper futures are up 0.19% and the ag complex (DBA) is up 0.39%.

The 10-year treasury is up (yield down) and the dollar is up 0.19%.

Among our 32 core positions (excluding options hedges, cash and money market funds), 22 -- led by REMX (rare earth miners), VWO (emerging mkt equities), DBA (ag futures), XLK (tech stocks) and EMB (emerging mkt bonds) -- are in the green so far this morning... The losers are being led lower by Dutch Bros, AT&T, Range Resources, XLRE (REITs) and XLF (financial stocks).

"You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in 2007, we just didn't know it was uncertain. It was uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn't know it."
--Warren Buffett

Have a great day!

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