smoke & mirrors

October 25, 20236 Comments

Today, I’ll address a couple of things such as the bond market, and some economic notes before we get into a question posted by a reader on my last blog. I wanted to expand on the concept of the S&P 500’s returns this year. Just how robust is the SPX?

“The market makes the news, the news does not make the markets”  Bob Farrell

Soft landing?

Question:  “Frankly, the Fed has won the battle of the American consumer — they are slowing down. And the question is what happens next.” Bank of America CEO, Brian Moynihan

Answer: “What comes next is the end of the “soft landing” and the natural transition to the “hard landing.”  David Rosenberg

Upside/downside potential in the 10 year treasury

Some thoughts on the risk reward potential for the 10 year US bond for the coming year. Calculations courtesy Rosenberg Research.

RISK: If the economy doesn’t soften and the Fed is forced to raise another +100 basis points from here over one year (most extreme case imaginable), this implies a total return of -2.6% after yield

REWARD: If the economy softens and the Fed eases -100 basis points over one year, this implies a total return of +12.7% after yield.

This appears attractive as a potential trade with those risk reward tradeoffs.  So what are the technical odds of those risk reward numbers? On the chart:

  • Massive support for the 10-year right now.
  • Beyond a minor move on Monday of this week, too early to say if that support is holding. It actually looks to have broken support on this monthly bar chart, but this may be a spike.
  • Simple momentum studies like ROC (bottom pane) suggest an oversold market that is diverging positively against price – implying a bounce sooner or later

Given the above – I’d say wait a bit longer, but the odds look good if price can move back above the support line.

Bank Credit

Recall my video about 2 months ago noting the decline in consumer discretionary spending. Discretionary Stocks Point Towards Weaker Economy – ValueTrend

Bank credit basically means the amount the banks can lend. Clearly, higher rates mean you qualify for lower loans if you are on a fixed income.

Question: If you think the market is in great shape and earnings will go up to justify a rising market – where will those earnings come from?

Answer: Here’s an updated bank credit chart (Rosenberg). Until rates fall, consumers can’t buy as much, and earnings growth will remain subdued. The consumer is tapped – see my very important stagflation video if you haven’t already.  Note the credit card delinquency chart I address in that video. Investing in Stagflation – ValueTrend

 

 

Magnificent seven less magnificent lately

Regular reader Paula noted the robustness of the SPX – asking me if I felt 4200 support will hold. As y’all know, I don’t predict, I do prepare. I just follow the markets lead – if it breaks, sell more stocks. If it holds, start to leg in. What I did mention in my reply to Paula was that the “Magnificent Seven” have done most of the lifting for the SPX this year. I compared them to a star hockey player on the team.  He/she better not get injured, lest the weaker members be unable to win the game.

Below is a swath of the six stocks (I didn’t repeat the 2 variations of Google) – daily chart back to May. Note that only Google shows any uptrend. I don’t think the SPX’s star team is looking so robust.

 

 

The SPX doesn’t look so wonderful when you apply an equal weighting to its components (vs. the 29% weighting the Mag. 7 in the cap weighted index). In fact, the equal wt. SPX is down about -3% on the year vs nearly +10% return on the cap weighted. SPX is not holding up well when you equalize its holdings.  

 

 

 

6 Comments

  • What do you make of the FED starting to auction long-duration bonds i.e. 10/20 years? I don’t know where to confirm this but I read they issued 10year for the first time in a while and now 20year. This as the FED is about to print huge amounts starting with the 100 billion aid they announced for Ukraine. As a lender, if you’re increasing duration at current rates, wouldn’t that mean you are expecting higher rates going forward? All the while many are suggesting we buy bonds to lock in these rates as they are expected to go down. Powell is on record saying rates are higher for longer. Actions speak louder than words as far as I am concerned. This reeks of market manipulation. They are telling us to do one thing while they’re doing the opposite. Just brainstorming here so please tell me I’m wrong.

    Regarding markets, I’m a contrarian and it seems to me that despite all the negative news companies/markets are showing amazing resilience and are in fact climbing the wall of worry. I’m thinking if we can make it through to Tuesday and put a potential “Black Monday” behind us we can start recovering. As we flirt with the 4200 resistance (it’s at 4200.94 as I write this) I think we may spike below it this week and based on you wanting to see it below for a week then nicely lines up with a recovery next week.

    It’s not a prediction just one scenario that based on my indicators seems to have a good chance. Yes, one of my indicators is my gut feeling I often ignore but often proves me right.

    Reply
    • George–thanks for that query re the bond auctions–I have not heard anything of that, and I do believe that the reliable research services I utilize on economic issues (BearTraps, Rosenberg Research) would have noted that. So I am a little wary. But – I will check into it – if its correct, then yes it would probably influence prices.
      Next–you have the right attitude. Wait for confirmation, per next week. Personally, I am on the fence without much gut or otherwise feedback…but will happily start buying in the next week++ if the market can pop back over 4200 (fell just below that at close). I will play it as it happens. Meanwhile, our cash position feels better every day.

      Reply
  • That same IEF chart on Yahoo finance looks much different. looks like it’s well under the 2015and 2018 levels on its monthly chart

    Reply
    • Yes, it has broken support. I didn’t take the dividend out.
      Either way, I am watching, not buying, for now. Would like to see it move up and stay in that direction first.

      Reply
    • Yup, that’s stocks for ya. If it doesn’t hold $77 I’ll likely be forced to sell.

      Reply

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