More market musings

November 22, 202216 Comments

Here’s another heap of my random market musings and research clips from sources outside of my own cranial vault. Today, we will look at the potential of the markets in the 1 month and 1 year horizons. Then we will examine the energy trade and copper. I hope they help with your own market and trading prognostications.

Short termed rally

Investors seized last week’s PPI inflation report as more evidence inflation pressures are easing.

Following the CPI and PPI reports, investors bought into the prospect of a shorter tightening cycle as falling prices decrease pressure on the Fed to keep raising rates. The lower terminal rate projections unleashed a wave of buying, with the S&P 500 gaining +10.5% since September 30th. That wave is certainly being helped by the Thanksgiving seasonal trade:

“Since 1950, the S&P 500 Index has gained an average of 0.65% during the week of the US Thanksgiving holiday with a frequency of success showing a rather upbeat 68%.  The Wednesday prior to the holiday and the Friday after tend to encompass the vast majority of this strength with gains over these two days averaging 0.33% and 0.29%, respectively, and a frequency of success for each of those days surpassing 72%.” – Jon Vialoux, EquityClock

While seasonality and technicals could continue to support a year-end equity market rally, the market is clearly trading on hope!


Potential for pain after the rally

Keep in mind: TINA is not in charge anymore. There is now an alternative to equities, and it’s highly attractive after this year’s spike in Treasury yields. See my recent blogs on the long bond play here and here. In addition, most analysts agree that equity risk premiums are still too tight given the current macro backdrop.

With a recession coming, do you think that earnings will rise to meet current equity premiums?

Finally, there’s that inflation thing going on. Do you really think the BOC and Fed can bring it down to 2%?

For those who beleive the market can hold its premium in a recession and that inflation will fall to 2%… I’ve got a special bottle of snake oil I’d love to sell you – its good for all ailments.

However, if you think it may end up landing closer to 4% like I do, there’s opportunity in hard assets. More on that later…

And now, for a brief bit of stress for buy n’ hold investors to consider. Here’s a chart with the SPX’s uber-long termed trendline showing some scary potential….

To be a little less alarming, I will re-post a chart of my potential targets for the SPX. Note that the first target of 3600 was hit and successfully held. Until that is broken, we must consider that level to be continued support.

Having said that, the market is at best consolidating — until the SPX breaks its last peak near 4300 and the 200 day SPX at just over 4060.

If the SPX breaks support, the support targets do imply a possible floor near 2500 – aka the trendline (big red arrow) in the scary chart above. Many layers before that, though. And, it appears that 3600 has held. So far….anyway.


Look out below: Morgan Stanley

“Our highest conviction view across the board is that 2023 bottom up consensus earnings are materially too high,” he wrote in a note this week. “On that score, we revise our 2023 EPS forecast another 8 per cent lower.” The market’s realization that profit growth will be much slower than expected will send the S&P 500 much lower – between 16 and 24 per cent from current levels by Morgan Stanley’s estimation – before recovering by year end.

If Mr. Wilson is right, 2023 could turn out to be a lucrative year for investors able to keep their cool during an early-year sell-off. Adding risk assets as forward earnings assumptions decline would allow for outsized returns in the latter half of the year.

Long-Term Bull Case for Oil vs Short Term Headwinds

Oil is taking it on the chin of late. As one reader noted, Saudi is opening up the taps to allow for more output. Meanwhile, Russian oil is being restricted. So – as one of the regular readers asked – what’s the reason for oils pullback?

There are several reasons for oil to be soft. For one, October and November have shown a tendency to be the weaker of the months for crude demand seasonally.

However, there are other factors peculiar to the times that exacerbate short-term softness in the oil patch. While most analysts remain optimistic that China will reopen, such reopening will be slow, and halting, with a dozen reversals between now and summer. Each reversal will be regarded as a shocking development by markets, though by this time one hopes each shock will be briefer than the last.

Technically, the daily chart shows a consolidation pattern between the high-$70’s and the low $90’s. Oil is below both of its important SMA’s (50 & 200). Its neartermed oversold. Probably due for a rally back to the $90 area at some point soon. Recall that I have noted that ValueTrend is NOT back into the energy trade, but we are anticipating the restocking of SPR’s, the Russian restrictions, and the eventual reopening of China as bullish. Meanwhile, I view it as a traders market until we see a move well over $93.

From Larry McDonald of Beartraps: “As far as any price cap on oil from G7, the G7 itself doesn’t fully know what it is doing, so it is hard for the rest of us to bring clarity to that which is essentially a muddle. Short term, Russian oil flows are strong before the December 5th EU crude embargo. Furthermore, as happens on occasions, though not with any predictable regularity, the quality of WTI has deteriorated somewhat in its recent vintages, blunting demand thereby. Soaring dirty tanker rates also dampen WTI demand. For longer-term investors, naturally, this is all welcome news as one builds multi-year investments. For short-term traders, the pattern should be desultory, with inexplicable rallies capped by equally inexplicable declines, all of which will be explained away after the fact. Long term it remains true that underinvestment and a growing population equals higher crude oil prices. That won’t change with the headlines”

Metals – copper

At ValueTrend, we are slowly, gingerly stepping into materials again, having sold out early 2022. Here’s the copper chart. It tried breaking out, and may be back into its consolidation pattern. If it can break out and hold, we will go in aggressively. Some of the factors that impact oil also impact copper and the metals. Particularly the reopening of China. And, a longer termed higher inflation rate.

If the seasonal trends play out, then copper, and the metals should move from December to May.


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  • I really, really, appreciate reading your thoughts, analysis and humor every time you post a new musing.

    I keep telling my wife we need to give your office a call to setup an appointment.

    Thank you for taking the time to do all this, much appreciated!

    • Thanks ML–shoot me an email by hitting the “contact us” tab and we can arrange a call!

  • I’m a RR (Random Reader!) 🙂

    Thank you so much for sharing your experience with us all!

  • will the “Santa Claus rally” bring SPX above the 200 day MA? That would be interesting!

    • There’s a likelihood the 200 day SMA will be broken before the Santa rally at year end. The real test is the last peak near 4300. I give that less than 50% chance of breaking, but you never say never!

  • Hi
    Thanks for your great charts. ive been keeping my oil stocks. It seems even though the commodity is doing poorly, the producers are all above their 200d and in an uptrend. thoughts?

    • Yes the producers are still outperforming the broad markets YTD and they are ou8tperforming the commodity. We have one position we have held, reduced most earlier in the year and sold one of the 2 remaining oil producers a month or so ago. But we don’t mind holding a bit. A year out, I think oil and producers are higher. I plan on legging in as the technical rules I use indicate–see my online course.

    • Yes, we are still a third in cash, but will continue to step in as technicals indicate. We were just under 40% cash a couple weeks ago. The 200 day is my next signal to leg some more in. If you take my Online Course, you will recognize that my rules act methodologically. It means I never catch the bottom or top, but I do get in for the belly of moves (or get out, like this year) –so I follow my rules. So–support at 3600 held–moved one leg in. Break of 200 day SMA–will move another leg in. If 4300 is taken out–will move final leg in. The beauty of this is that if things turn down (as I imagine they will, aka my lack of confidence of a 4300 break), then I am still not fully exposed. Mind you, if the market does break 4300 I underperform from the bottom. Realizing of course that I sold much closer to 4700 in the early spring.
      If you get the VT update newsletter, we are detailing this outlook –its coming out in a day or so–subscribe here

    • Not sure what you are asking Brian. I will do my Bear-o-meter reading in a week or so (early Dec) which contains Smart/Dumb as a component. FTX…I have done lots of commentary on currencies–do a search in the blog tool or look at the video history. Teachers pension plan?

  • Hi Keith,
    I enjoyed reading your musings as well as the comments.
    I was surprised to learn that the Ontario Teachers Pension Plan had invested so much into Crypto currency in the form of FTX. $95 Million or that was what was reported on BNN. But then I learned that as apart of their something like $246 Billion dollar portfolio, they have a Venture Capital fund that makes investments into riskier ventures. It was announced that OTPP wrote the FTX investment off to zero.

    I tend to agree with Morgan Stanley’s view that consensus earnings are too high and equities are going to have to fall to bring their value in line. The million dollar question is when? Will 3600 hold or will we see the S&P fall to 2500 or even lower as your guest on your video clip predicts will happen? Yikes! Time will tell.

    The Saudi’s were quick to contradict the reporting from the Washington Post that they were adding oil supply, which would bring down the price of oil to help Biden restock the oil reserves at that $70 price target. Was this fake news by Washington? Still, as you say, we are still in a soft period for the price of oil. Once again, WTI is below $80/b.
    I expect that when investors factor in that EPS of equities is too high, and the markets sell off, the oil producers will sell off too in a sell everything scenario.

    The White House is banking on Russian oil to still be flowing to India/China despite the price cap, so they are banking on the implementation of the price cap December 5th to bring the price of oil down. Interesting. Maybe they will be right? Time will tell.

    Lots of musings for sure.
    Larry McDonald’s concluding statement sums up the view on oil. Lots of noise in the near term, but the long term view remains intact unless of course we miraculously have a sudden shift to some new technology that disrupts the oil industry all together, which I don’t expect anytime soon. LOL

    Thanks Keith!

    • Thanks Wendy–I misunderstood what reader Brian was referring to when he said FTX–which is the common USD vs. world ticker. Ha! You are smarter than me to have gotten that. Just goes to show ya that you have to be clear whenever we write something for fear of misinterpretation!
      Anyhow–great comments.

  • love reading your reports.feeling a little uneasy here with asking for advise since I am not a value trend client and am not seeking an investment question as per say or maybe I am but here goes at 78years old and having witnessed the last down fall on the stock markets and now seing interest rates going up I am thinking seriously of investing a 100k in an annuity therefore not having to worry about market fluctuations.Your thoughts on this would be welcomed.Yours truly Ross M

    • Ross– I can’t give individual advice to non clients. Sorry
      An alternative is to have ValueTrend manage your money. We are all about risk control. Limit your risk–keep your money!
      Hit the contact button on the site and we can have a discussion


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