Thursday, April 4, 2024

Key Highlights

 Key highlights from our latest messaging herein:


Stocks continued to advance over the past month, despite the notable headwinds outlined in our February report.

While sector leadership remains bullish – and breadth has improved notably – valuation, sentiment and the technicals, in particular, continue to reflect significant downside risk going forward.

Bottom line: Per the above, and the entirety of this report, current overall conditions leave us uninspired to add measurable equity market risk, or to hedge less, at this juncture.


I mentioned in a recent video commentary that we are probably spending more time of late assessing narratives that don't jibe with our present view of general conditions, versus those that do -- as open-mindedness and objectivity are absolute musts for us... Well, I'm definitely not doing that in this post when it comes to the present risk/reward setup for US stocks.

Those of you who've been taking in our latest messaging will find the following very familiar... I.e., Peter Boockvar shares our present concerns:
"I'm going to start with stock market sentiment, which I usually do on Thursday's after I see both the Investors Intelligence and AAII surveys, because the weekly Citi Panic/Euphoria index I see via Barron's on Saturday's has entered Euphoria and at .40 is the highest since mid January 2022 (and which spent almost the entire year in the Euphoria category in 2021 so tough to time). The importance of this survey according to Citi itself is while it is a "gauge of investor sentiment" like others, "It identifies 'Panic' and 'Euphoria' levels which are statistically driven buy and sell signals for the broader market. Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 80% probability of stock prices being lower one year later."

So, as markets are higher most of the time and Citi has statistical metrics that say there is "a better than 80% probability of stock prices being lower one year later" when Euphoria has been realized, we should all take note. As stated though, it was very euphoric all throughout 2021 and markets kept elevating (though the most speculative stuff peaked in February 2021) so no one can be sure of the timing of when this matters but for those of us managing other people's money and in the risk management business, we should take heed. Especially when we combine this with the more than 40 point spread in II between Bulls and Bears which rarely occurs."

Last Tuesday:

1. Fed Chair Powell is comfortable setting market expectations at 3 rate cuts this year -- in essence dismissing the latest inflation data -- no longer, for the moment, concerned with an early 80s repeat... I will, however, add that not all on his team are on board, as we'll likely hear from some select commentary this week.

2. The economic data are improving, particularly in the manufacturing space -- notably reducing the odds of near-term recession -- i.e., likely, at a minimum, pushing the start-date further out.

3. Equity market technicals, and sentiment, point to increasing odds of an equity market pullback sometime over the next few weeks.

4. Given reduced recession odds, and an on-balance accommodative Fed, all things equal, odds would favor a buying of any decent near-term dip in equities.

5. #4 notwithstanding, there is large leverage (in the derivatives space in particular) underpinning these levels, which means a cracking of certain levels to the downside could indeed spark something far more meaningful than simply a buyable dip... That said -- and, again, all things equal -- odds favor #4.

6. We nevertheless -- given certain elements of the overall setup (present macro dynamics, risks highlighted above, historically high valuations) -- need to accommodate (via liquidity, diversification, and hedging) for the fact that, in markets, all things are indeed not always equal.

Thursday 3/21:

Stocks, at historically high valuations, seemed a bit jittery heading into yesterday's Fed rate decision and Powell’s press conference... And, per the below, rightfully so.

YTD % change in the price of a gallon of gas:
of a barrel of oil:

of a plateful of food:

and a copper pipe:

Nevertheless, and while there's much I can ramble on about yesterday's Fed decision and message(s) from the presser, suffice to say that Chairman Powell made it clear that the Fed intends to cut rates this year come hell or high prices... And the equity market loved it!

Tuesday 3/19:

So, the "magnificent seven" stocks that pretty much explain 2023's rally now represent a greater market cap than every equity market on the planet, save for only the US's:

The odds of this ultimately not ending well are, well... let's just say they're too high for comfort!

As is -- as we've been pointing out of late -- sentiment right here:

Per our recent video updates, the technicals look heavy right here as well... That said, as we've learned over many cycles -- both intimately over the past 40 years, and through our studies of cycles past -- stocks can sustain fundamentally-suspect levels for extended periods of time... As Investors Intelligence explains below (emphasis mine): 
"The bull-bear spread expanded further to +46.4%, from 43.4% a week ago. That is above the difference of +45.9% in Jul-2021, for the widest spread since Apr-2020 when it hit +47.0. Spreads above 40% spread point to elevated risk. The wider the positive spread, the higher the risk, with the +35% to +45% clearly there. Smaller differences, such at +17.2% late Oct-23, as buying chances in a bull market. We also recall that tops usually form over weeks (and sometimes months) while bottoms can occur quickly. In a bear market, such as late 2022, there were nine weeks with more bears than bulls (a negative spread), including -19.1% early Oct-22. Negative differences signal diminished risk and allow for broad accumulation. Please remember, advisor sentiment was originally designed to call bottoms, and market top signals occur over months."
One more present-moment phenomenon that boggles (and troubles) the experienced mind:
"Stock market concentration is everywhere.

YTD, through Mar 18, the Russell 2000 (RTY) is down 0.52%. Two stocks, SuperMicro Computer, which is about to enter the S&P 500, and Microstrategy, accounted for 41.5 points of the RTY's YTD gain.

Exclude them and the "Russell 1998" is down 2.1% YTD"

--Jim Bianco
Apparently it is unprecedented for 2 stocks to have such influence on an index with this many members (2,000).

Suffice to say that these are not the sort of phenomena we tend to see at market bottoms... Quite the opposite, in fact!

Stay tuned...

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