Divergence

Now, make no mistake, I'm not complaining! I can't not like the results so far this week... That said, the under-the-surface dynamics are not remotely confirming what the headlines portend.

For example: The top panel is the S&P 500... The upward trend line captures the past 4 trading days, including today... The second panel measures the number of advancing stocks in the index vs the decliners through yesterday:

That's what's called a negative or "bearish" divergence.

As for today, so far, breadth isn't terrible, with roughly 65%/35% up vs down stocks, but still not all boats rising with the tide.

As for the sectors, once again, under the headline surface there are losses being taken in 5 of the 11 major sectors as I type:

Nothing to get too excited about, just what I view as a late-cycle dynamic to respect.

Crosscurrents!

This week's note offers important insight into what's developing at and below the surface... I.e., while our PWA Index shows real, and legitimate, signs of life, there remain underlying crosscurrents that to some extent muddy the overall go-forward macro setup.

As for the equity market, as I emphasized herein during the week, on the surface (the S&P 500) stocks ended up churning out a nice showing:

While, below the surface, not so much!

6 of the 11 sectors are finishing (as I type, 40 minutes before the close on Friday) in the red:

I.e., thanks to Amazon, and Alphabet -- moving the consumer discretionary and communication sectors up a ton -- the headline tape essentially misrepresents the overall message of the market for the week.

Said message being, the late-cycle is a period of heightened uncertainty and speculation, often characterized by aggressive rotations... This particular instance being exacerbated by a seriously-stressed geopolitical backdrop.

Here's this week's PWA Index scoring summary, followed by our latest important macro deep dive (clients, this is a must-read):

The Tape Is Lying To You; Day 2

Now, to be sure, there have been many days of late deserving of a post titled The Tape is Lying, it's just that yesterday's and so far today's unusually so.

As I type, 6:40am PDT, the Dow is clinging to a 90-point gain, while the S&P 500 and the Nasdaq 100 are up by 0.17% and 0.55% respectively, so the market's up, albeit slightly, right?

Well, actually, no... Or, not mostly, I should say.

While, thanks to Amazon, our consumer discretionary position is up a very nice 2.7%, and Microsoft is delivering a second day of gains, up 2% so far this morning, virtually everything else is either essentially flat, or down a little, or a lot... The latter among US sectors being, materials -2.4%, staples -0.81%, healthcare -1.17%, financials -0.26%, industrials -0.76%, tech -0.47%... Even small caps -0.,74%, gold -2%, silver -3.2%, metals miners -1.34% are taking a hit this morning as well.

So, again, while the headline tape reads green (although, as I continue to type, the Dow has given it up, and the S&P is hugging the flatline), the broader complex of risk assets reads red, pretty much across the board.

In a nutshell, today's market is searching for direction amid what would be late-cycle dynamics exacerbated by a geopolitical situation that itself is sorely in need of direction -- or, let's say, in need of a durable solution.

Of course there's lots going on under the surface, described succinctly in the following:

The Tape Is Lying To You -- Or, "World" Being the Key Word

 I opened Tuesday's morning note with the following:

"It's days like today where stock-watchers bemoan diversification... I.e., it's been my observation over the past 40+ years of doing what I do that folks tend to see their long-term portfolios as extensions of the US equity market."

Well if all I did this morning was look at the table below, I might say, dang, another day to bemoan for the diversified investor.

US sectors on the left, the percent move so far this morning on the right:

Here you have the (cap-weighted) S&P 500 up over 1%, yet, remarkably, 8 of the 11 sectors are actually in the red, and save for financials and utilities, by not-small amounts (hence the title of this post).  In fact the S&P 500 Equal Weight Index (all the same stocks, but equal treatment of each) is down 1% as I type.

And while our core strategy indeed has a healthy-enough allocation to tech -- by itself, certainly not enough to meaningfully offset the hits to, say, healthcare and staples, which also (healthcare in particular) represent healthy weightings in our core.

However, somehow, at least as I type, we're actually capturing roughly 90% of the rise in the cap-weighted S&P 500.

So how in the world can that be? Given that I've emphasized the uber-diversification of our current strategy?

Well, key word there being "world."  Remember, we call ourselves a top down global macro money manager (with theses developed around every single position [meaning we absolutely do not use a shotgun to determine our asset mix]), and, this morning, when we look outside the US we're seeing some pretty dramatic (in one-day terms) upside action.

Our Eurozone exposure, for example, is up 2.45%, our Asia-Pac aggregated position is up 3.6%, our Japanese equity exposure by itself is up 3.2%, South Africa, Brazil and Mexico respectively are up 2.4%, 1.5% and 1.9%, yada yada... Then there are the commodity-related exposures: Uranium miners are up 3.8%, diversified miners are up 2.75%, gold up 1.3%, silver (recently added it back) up 2.5%... Among our individual equity positions, the one that really jumps off the page is recent-addition Microsoft, up a whopping 15% as I type... Not to mention, Applied Materials (a bit smaller weighting than MSFT) up 13.5%... Although we're hedging Applied Materials (AMAT) with a put option that is effectively mitigating todays move by ~6%... By the way, the AMAT put itself is nevertheless still up 69.9% since we put it on.

Anyways, let's put today into its proper perspective... For one, my report above simply illustrates, live, the potential virtues of our current strategy, and our longer-term view of the world right here... And, alas, by the end of today's session, or even by the time you receive this note (scheduled to hit your inbox an hour from now), all this happy stuff could very well have turned on its head -- based on the wild intraday action we've witnessed of late!

In the meantime, here's the bigger picture stuff that matters.

Morning Note

Given this week's calendar one might surmise that this morning's notable selloff in equities reflects worries that the Fed will lean hawkish (though they won't raise rates today), and that key tech earnings after the bell perhaps won't live up to historically-high expectations.

Well, sure, no doubt those are doubts worth mulling, but, clearly, the culprit today is yesterday's surprise attacks delivered by Iran, alongside this morning's news that oil inventories took a massive hit the last week of July... Make no mistake, strategic reserves are virtually spent at this point -- oil's up 7% as I type!

We're having a private session this morning with the head of the geopolitical team we consult with, which will likely give us more texture/context to share later in the week.

In the meantime, here's your morning macro rundown*... Clients take note of the final section titled "How We're Positioned."

Morning Note

It's days like today where stock-watchers bemoan diversification... I.e., it's been my observation over the past 40+ years of doing what I do that folks tend to see their long-term portfolios as extensions of the US equity market.

For many, if not most, US investors, I do believe that's a reasonable impulse... But for today's PWA client, well, no... In our view, particularly late in the cycle (i.e., now), broad sector, regional and asset class diversification is the definition of responsible portfolio construction.

Now, of course that's not simply shot-gunning your money across everything that moves, we do have theses that we "work" every day across different time frames... Meaning, we'll have a near-term view that may inspire the hedging of -- or the leaning into -- a position that happens to jibe perfectly with our long-term thesis, yet we see high odds of meaningful short-term turbulence... Consequently, as you clients have noticed, we'll see days, or stretches of days/weeks, where our strategy deviates -- in either direction -- from the moves in the ever-watched US stock market.

Today could be viewed as one of those days, although even the US stock market itself is all over the place.

As I type the S&P 500 is, albeit slightly, red on the session while the Dow is up nearly 400 points... Yet the Nasdaq 100 is getting slammed, down 1.5% (the equivalent of 750 Dow points).

Commodities, including precious metals, are going the way of the Nasdaq, down notably (save for ag) nearly across the board.

Consequently, if your portfolio is the size that gets the full complement of our globally-diversified core allocation, it's basically flat as I type... So I guess you can say it's going the way of the stock market, but only if you're looking at the S&P 500.

There's lots to unpack this week in terms of data, earnings and central bank decisions, so expect to hear from me aplenty as it all unfolds.

In the meantime, here's your morning rundown*... Definitely click the link and take this one in, it's an important read for clients:

Your 'Important' Weekly Rundown

Per your weekly macro roundup below, markets are pricing up the odds of a Fed response to the latest upward pressures on inflation.

Fed funds futures are currently discounting a 100% chance of a hike at the September meeting, and a 76% chance of yet another one by year-end:

While, presumably, the read from CPI swaps reflects belief that near-term Fed tightening will work to subdue go-forward inflation.

2, 5 and 10-year spreads:

Or, one might argue that swaps are reading an oil curve that anticipates notably lower go-forward pricing, as now-depleted strategic petroleum reserves pressure a near-term ceasefire. 

Of course I can push back there as well, as there'll be notable future demand for oil as those reserves (and some, I suspect) will need to be replenished over the next 1-2 years... Add to that the current state of policy affairs (running a large fiscal deficit alongside what I expect will be an accommodative Fed), and you get very little relief by way of a slowing economy, and structurally higher go-forward inflation as a result.

As I type, weekend headlines are hinting: