Déjà vu…all over again!

I wake up today to see another positive start on the markets. So…time to get back in? Is this rally real? I discussed a couple of points countering the potential for a market breakout last week. This doesn’t mean a breakout is impossible. It could happen. But, as noted in my blogs last week, the technicals do suggest some risk. Today, I’ll give you a few new things to contemplate regarding the current rally.

 Déjà vu, all over again

The S&P 500 it is testing an overhead supply/resistance level of 4100-4200 that has failed 5 times (one failed spike in August of last year) —since May 2022! That’s a year…think of that for a minute…

Now its testing that level again. The S&P 500 has been between 4100 and 4200 for three months in 2021, three months in 2022, and for nearly two months since December.

Demographics

A decade ago, the oldest boomers were around 70 years of age, and the youngest around 50 years old.  Today its 60-80 years of age. Why does this matter?

A bit of data, courtesy BearTraps:

Baby boomers have the highest net worth, averaging $1.6M per household.  That´s 12x Millennials – says Fed data. As of year-end 2022, total net worth is near $73T for Boomers.

Since Lehman´s failure, the Fed´s QE lovefest has been the best friend of the Boomers. All the fresh all-time highs were powered by central bank accommodation (low rates).

In a world without QE, Boomers are taking their ball and going home. It´s a very big ball, at $73 trillion!  Why, at the age of 70-80, would these investors want to place their money into risk assets? The past year has been an awakening of the risk that markets have always had. Boomers want to get even, and get out. This, in my opinion, one factor why the 4200 resistance level has been such a wall.  What would you do in your late 70s? Roll the dice with stocks one more time into a fresh banking crisis and debt ceiling showdown?

Breadth

Another comment by BearTraps – this time regarding the rotation into defensives:

Over the last year (13 months), the Dow Transports are underperforming recession resistance XLP Consumer Staples by close to 18%. At the same time, the Retailers XRT are underperforming by nearly 30%, and the Financials by 21%. Transports, Retail, and Financials all singing the same tune. Looking back over 60 years, you only see this kind of dramatic divergence before large economic drawdowns, NOT soft landings.

In my Bear-o-meter report last week, I noted breadth divergences. The broad markets – illustrated by the NYSE index (black line in the chart below), are signaling negative divergences ahead against the more tech-heavy SPX (red line). Bottom pane is comparative relative strength, which fell before the 2020 crash, and the 2022 bear. Now, we are starting to see comparative strength decline again – once again coinciding with a negative correlation (pane below the price chart). Not good. This narrow leadership needs to rectify itself if we are to see continued strength on the markets….

Junk bonds vs SPX

The chart below compares the SPX (red line) to high yield bonds (JNK-US, black line). The high yield bonds are struggling to break the last peak, while the SPX is breaking its 4100 peak. Why does this matter?

Again from BearTraps:

Since February, CCCs (in the USA) are significantly underperforming BBBs (842bps spread then to 957bps now). Think of U.S. Equities – they´re close to the February highs and the tertiary parts of credit are NOT confirming this move, look out. Since the dotcom bust, exiting of every recession, CCCs led us out of the storm, dramatic outperforming, NOT underperformance. CCCs are always your best, most reliable – risk-on indicator. They are your ultimate forward lens on the sustainability of U.S. equity rallies. If equities bounce without CCCs, BEWARE.

Conclusion

In the week ahead – volatility is likely. President Biden and House Speaker McCarthy meet Tuesday to discuss raising the nation’s borrowing limit. US inflation is updated Wednesday.  The probability of a high-drama budget crisis in the U.S. is high. Over the weekend, 43 U.S. Senators sent a letter to President Biden. Republicans have shown that they are united in both the House and the Senate. Again from BearTraps:

Negotiations in the next few weeks will likely run out of time and Biden and McCarthy will end up agreeing on a temporary extension of the ceiling until September. They will probably drag it out until the last days before the x-date in early June, which could mean some volatility in the next few weeks. 

ValueTrend remains cautious at this time. We continue to hold cash. Could the market break out and move into a bull? Sure! But – given the factors discussed in today, and in my last two blogs, we are hesitant to move back to equities with our cash just yet.