Some thoughts on the short and long termed market view today. Enjoy!
Short termed outlook
BearTraps on why markets have risen so relentlessly
“Equities will continue to rip as the inflation story is dying, the economy doing decent (not too hot/cold = goldilocks), and positioning is still very bearish. The charts also look mostly bullish. Bonds are just going to follow equities until equities stop rallying.”
So when will the equity rip end?
According to my neartermed timing system (daily chart) – which combines a regression analysis indicator (Bollinger Bands), a super quick momentum oscillator (Stochastics) and a mid-termed momentum indicator (RSI)…things are getting closer to a neartermed correction. What will that be? I’ll offer some thoughts below.
Most vulnerable sector to correction…(drumroll, please)….
The NASDAQ is the main suspect. In fact any tech-heavy index is. I’m looking at you, SPX.
- Growth stocks react negatively to rate hikes. But…Rate hikes are over, right…? I mean, given the Fed hold-off on hikes this week, and and nice CPI numbers this week… “Fed’s Powell Suggested July Rate Rise Is Likely, Analysts Say. Officials didn’t raise rates this week but penciled in two more hikes this year.” (WSJ)
- Look at the technology ETF. When the sector is too much ahead of the 40 week (200 day) SMA (that is, more than 10% over), AND you get an overbought signal on MFI plus RSI simultaneously, well…… That’d be yer basic overbought chart, don’t ya know. Here we go again:
We can’t argue too much with a breakout on the SPX, and breadth is improving. However, there are still signs that the SPX is overbought – largely due to the tech weightings. Tied into that – lots of overly optimistic investors out there (sentiment indicators), which makes a less than ideal environment, particularly for the fast moving tech stocks if as when smart money decides to take a bit off the table. So, on balance, we are legging back in slowly – but – we are focusing entirely on value stocks and sectors – often trading near the bottom of trading ranges. We are avoiding technology entirely at this moment. Not to say we wont be buying it (see this blog on the AI stocks). But not now! We still hold cash, and will continue stepping in selectively and slowly.
Mid termed Market Outlook
Elon Musk on the Tesla Call.
“As I said in the last call, there’s going to be bumps along the way and we’ll probably have a pretty difficult recession this year (2023), probably. I hope not, but probably. And so, one can’t predict the short-term sort of stock value because when there’s a recession and people panic in the stock market, then prices of stocks — well, the value of stocks can drop sometimes to surprisingly low levels.”
My sentiment work suggests volatility soon to come
I’ve noted that the VIX has been hovering near 14 lately – which is a level that is typically unsustainable. In fact, such lows tend to lead into rather explosive reemergence of volatility as the market finds reason to move out of complacency. I’ve also noted (see my Bear-o-meter blog) that some indicators like the Smart/Dumb money indicator, and the Put/Call ratio, have toyed with the bounds of complacency. Again, these factors all suggest that things may change soon.
Seasonally, the VIX can be soft between April and June – as it has. But take a look at the VIX seasonal chart below for July and on. Yikes!
Now here’s a chart of VIX seasonality against the VIX’s actual moves this year – courtesy Sentimentrader. Its been pretty much in line with the seasonal pattern. Thus, we might expect that to change in a month….and higher volatility means lower stock pricing most of the time!
Scary thoughts From David Rosenberg (Rosenberg Research) comparing today to 1999-2000:
- “Extreme sector concentration in the stock market, principally technology.
- Valuations hitting nosebleed levels, especially in growth stocks.
- Coming off a crisis seemingly unscathed — Long-Term Capital
- Management then, regional banks this time around.
- A very tight labor market (similar to today) and perceptions that the business cycle had been repealed.
- Coming off a +175 basis point Fed tightening cycle from June 1999 to May 2000.
- A prolonged phase of yield curve inversion that was widely viewed as a relic from the past.
- Visions of an economic “soft landing” which was the market narrative right through to September 2001 — even though the recession began in March of that year.
- The Fed’s last rate hike was in May 2000, but the S&P 500 did not roll over until September 1st, 2000… there was another +4% left in the tank.
- The Fed paused for eight months and then commenced on a two- year 550 basis point cut in the Fed funds rate to 1%.
- We had the Internet mania back then, and we have the AI frenzy today. Both have enormous economic and productivity influences, but both also involved financial asset bubbles that popped in dramatic fashion.
- To be sure, growth stocks really took it on the chin during that bear market, sagging 60%. And while value stocks did outperform, in absolute terms they fell more than 30%. So, this view that value stocks will hold up once the growth stocks see a classic mean reversion in their multiples is not exactly something anyone should be expecting (unless relative performance matters for you).
- The smug complacency in 2000 looks eerily similar to what we have on our hands today. By the fall of 2000, when the stock market was about to roll over and the economy was seemingly resilient, everyone was asking back then the same question being posed today: “where’s the recession?” The answer is the same — have a bit of patience; it’s coming sooner than you think.
- When all was said and done, coming off that tech-led bear market and Fed-led recession, we had the total return index in equities plunging -43% and the total return in the 10-year T-note surging +23% (and nearly +30% for the long bond). That was the surprise trade for an investor class who believed at the time that the dotcom craze made the economy invulnerable to the power of higher interest rates, which always work their way through with long lags.
And that is the major point. We have come off the most pernicious Fed tightening cycle since 1981. The yield curve inversion in terms of duration, depth and dispersion is a 99% recession signal and the timing is always difficult, but the classic lags mean third or fourth quarter of this year.”
Longer termed outlook
See my commodity cycle video –