BULLISH, but possible Weakening Economy , MidEast crisis
Posted 05 November 2023 - 05:53 PM
This is now: is the economy finally showing signs of weakening? Job market also? MidEast crisis still poses a threat to markets. WTI CRUDE below $80 today.
Small NET SHORT US position & partialky hedged with 1 ES LONG ; small LONG HK & CHINESE position. Highest NQ weekly profit in 2023. Better than expected from TLT CALLS, YEN & LONG STRANGLE trades.
My FF is a shallow pullback, rally, then sharp pullback to below ES 4200.
Posted 05 November 2023 - 05:54 PM
Nov. 05, 2023 4:39 PM ET
Fear & Greed Trader profile picture
The Savvy Investor
by Fear & Greed Trader
The Negatives outweigh the Positives 12-8 in the current market landscape.
In the near term, Earnings will drive sentiment, over the long term T.A.R.A (There are Reasonable Alrernatives) will have a HUGE impact.
Q4 seasonality historically favors a rally in stocks.
The 2-year/10-year spread is "normalizing". That could spell trouble for stocks in '24.
Q4 Update - The Pros And Cons
We closed out another losing month in October, making it three consecutive months where the S&P saw declines. Now it's time to revisit the PROs and CONS that are on the scene today. In this report, the Negatives outweigh the Positives 12-8 - with 2 issues that I consider Neutral.
1.) Bull Market
The last three months of trading in the market have been difficult for the BULLS. The major averages peaked in late July/early August and have been trending lower ever since. The Russell 2000, which has been the weakest of the three major indices since the 2022 lows, broke down even further and by my work is in its' own BEAR market. Admittedly it takes a positive view of the entire situation to place this in the PRO column. At best it's a VERY selective BULL market backdrop and that is where I plan to concentrate my efforts in Q4.
2.) Bearish Sentiment
Investor sentiment took forever to turn bullish this year. ironically it turned earlier this summer just in time for equities to peak and pull back in August and September. This typical contrarian indicator worked again. Now, it's back to bearish for investors. The Bespoke Investor Sentiment Composite is negative once again and CNN's Fear & Greed Index is registering "Fear" right now. Since the sentiment is contrarian, excess bearishness is considered Bullish.
3.) Q4 Seasonality
Seasonality was a 'Con' in my last PROs and CONs report, and unfortunately for the BULLS, it didn't disappoint. August and September weakness for equities held to form this year, but now seasonality moves back into the 'PRO' column as Q4 is typically the best time of year for stocks. As shown below in the snapshot from the Bespoke Seasonality Tool, the upcoming 3-month period has been the very best 3-month period of the year for stocks over the last ten years.
The 100th percentile for gains is certainly bullish.
4.) Peak Inflation
Core inflation has come down and is showing signs of stability. Supercore inflation is deflating slower but still making progress. While inflation isn't DEAD, the stock market by its price action after the last report believes the peak is definitely in and is ready to deal with current readings for a while longer.
5.) Jobs Steady
Initial jobless claims have steadied while employment growth has slowed. Prime-age employment remains just shy of a record-high share of the population. While job openings have declined (indicating weaker labor demand), the level remains very high compared to historical readings.
6.) Healthy Consumer
Consumers still have lots of cash on their balance sheets, even relative to much stronger consumer spending relative to pre-pandemic. While savings rates are low, consumer borrowing is well-covered by income and households can keep spending at a healthy (if slowly moderating) pace for some time. When consumers have jobs they will continue to spend. In addition, Corporations are not about to give up the employees they had a hard time acquiring after the pandemic. That keeps the labor situation "tight".
7.) Infrastructure Spend
A range of manufacturing industries are rapidly adding factory capacity in response to recent industrial policy (CHIPS, BIL, IRA). Construction on factories is running north of $200bn per year with hundreds of billions more in spending to come. At the same time, the housing market is still short of inventory and will be for years to come. Finally, infrastructure spending has accelerated sharply thanks to fiscal policy and is not showing any signs of slowing down. It's a double-edged sword. Good news for select sectors of the economy but it also keeps "Debt" and "Inflation" elevated.
8.) Earnings Estimates
During the 2022 bear market, rolling 12-month forward earnings estimates fell 6.5% from peak to trough. Since then, they have recovered almost the entire decline. Of course, analysts tend to lag the market, and estimates only started getting cut well after the 2022 bear market was underway. Still, underlying earnings are in good shape. Recent results have also started to turn more positive. The EPS beat rate fell from its historic post-COVID surge, but over the last few months has ramped back up again. A similar, more modest recovery in guidance raise rates is also taking place.
9.) AI Boom
The equity market thrives on "themes", and "AI" has been the market's theme in a big way for most of this year. There's a good chance this becomes a secular rather than cyclical wave. Over the long term that is bullish for equities. Every week there seems to be some new technology in the AI space introduced, and search interest for AI topics remains elevated and trending higher.
The only question is when will real money hit the bottom line.
1.) Market Breadth
Outside of the mega-caps in the S&P 500, it has been a flat year for the market. So even though the cap-weighted S&P 500 is still showing a 10%+ YTD gain, things aren't nearly as rosy underneath the surface. The median S&P 500 stock is flat, while the median stock in the small-cap Russell 2000 is solidly in the red at -7%. That doesn't look like the "new" BULL market backdrop that the majority says it is. As the week ended I now see ALL of the indices barely above their Long term trendlines. This equity "market " is living on the edge.
2.) Yield Curve
Main Street media always talk about the 2-year/10-year Treasury Yield curve. The Fed also watches another metric. The 3-month/10-year Treasury yield curve has now been inverted for a record 222 consecutive trading days. The curve reached its maximum point of inversion in early May at 183 basis points and has steepened to its current level of -75. Given that it has been nearly a year since the curve first inverted and the economy still appears to be steady, there's a growing consensus that the current signal has been a false alarm.
But don't dismiss the yield curve too quickly. As shown in the table below, historically, the average number of days between when the yield curve first inverts to the start of a recession is 589 days.
Yield curve (www.bespokepremium.com)
From the time the yield curve bottoms to the start of a recession, the average is 395 days. Based on these two figures, a recession in the second half of 2024 would fit right within the averages.
3.) Leading Indicators
The Leading Economic Indicators index published by the Conference Board takes a range of different economic and financial market data points into account and creates a single index that tends to deteriorate before recessions and recover before activity bottoms. As shown in the chart, the pace of decline for leading indicators this fast has always meant a recession. In other words, if we don't see a recession following this run of data, it will be an unprecedented result.
The Leading Indicators have fallen for 18 consecutive months. Only two other periods have seen longer streaks of decline: the mid-1970s recession and the global financial crisis.
4.) Policy Rate Isn't Restrictive
There is a consensus view that the FOMC is near its terminal rate or close to it. However, the message we heard this week from Chair Powell is NOTHING new. It's HIGHER for longer and investors better start believing that the longer part is going to be VERY long. Yet I hear analysts continue to forecast rate cuts next year. The dilemma the equity market is facing is twofold. Higher for Longer is scary and IF rates are indeed cut - then that means the economy is falling off a cliff. That too is pretty scary. The Fed is in a box and along with the market is facing a lose-lose situation."
Posted 05 November 2023 - 05:55 PM
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Edited by dTraderB, 05 November 2023 - 05:57 PM.
Posted 06 November 2023 - 08:51 AM
Monday morning yay, interesting to see futures higher as bond yields continue to rise this morning and apple continues lower. Options have completely shifted to excessive bullishness which has seemed to be the norm this year as it has been great for option selling both ways. Massive put premiums have literally crashed this past week with the rally while some calls are just reaching prices touched at the start of this cycle. I added to my shorts overnight bringing my average ndx short up to a nice even 15100, ES 4340.....There are gaps to get filled lower on stocks and one higher on bonds now but I think it will be the 4.33% level filled first in the end but it may not be that easy getting there so volatility is likely going to kick up this week I think as bonds churn between 4.50-5.00%. No matter what should be a fun week.
Posted 06 November 2023 - 01:07 PM
Ssshhhhh, board is so quiet, kinda like the flat market lol......
Posted 06 November 2023 - 03:01 PM
Ssshhhhh, board is so quiet, kinda like the flat market lol......