Headline Risks Are Growing
Context matters:
ISRAEL AGREES TO DELAY GROUND INVASION OF GAZA: WSJ
INVASION DELAYED SO US CAN MOVE MISSILES TO THE REGION: WSJ
And that's why, for traders, the focus of 'bullish seasonality' is constantly tested by rapidly shifting and rising geopolitical risks.
Not to mention, we have a looming supply glut to be announced Oct 31st for which even the most die-hard bond bulls are hard-pressed to get in front of!
With rising concerns over deficits and earnings priced to perfection in market darlings, is it any wonder bears are making a strong showing?
That and option flows post VIX expiry and monthly OpEx Friday makes for a backdrop where macro triggers matter more.
So with the macro focus on escalations in war, deficits, issuance and yields, a growing chorus will sound on expectations that the Federal Reserve’s interest-rate hiking cycle will tip the economy into recession - as early as Q4 of this year and latest Q3 of next. When does market price that in?
For all of the reasons above, I'm still short from July 21st if that helps to showcase my analysis and resolve, but clients also know that I am VERY willing, ready and able to flip that WHEN/IF I see the turn in my intermarket analysis. I have seen none yet.
Yes, I can see the POTENTIAL of buying come mid-Nov - after FOMC, NFP and NVDA reports - IF war and/or recession risk is not pulled forward in panic.
Then and only then will we have the potential to base and move higher, potentially into year end - with lots of gaps above to fill on the hourly all the way to $4575 SPX!
But first, we need a capitulation low. and I have no signs of this reversal in my #intermarket-tells which I review with clients daily in my live trading room.
I will let clients know when it's safe.
Bullish Bent is Still Consensus
Bulls are still fixated on the prospects of a buyable dip as we are supposed to be in the very bullish seasonality part of the markets.Quants agree. Here is GS:
1. The aggregate L/S ratio is historically low.
2. Sentiment stretched for the bears.
4. Seasonality: Q4 was positive 9 out of the last 10 years.
5. Positioning, US long/short ratio, is basically running at 5 year lows.
In particular they are on the lookout for the large buying by CTAs in bonds which hasn't triggered yet.
To which I say: Bonds may catch a bid - more than an Ackman tweet - on rotation to panic/safety in a larger Middle East crisis, but big picture, bonds/US Treasuries on the long-end are still not safe.
I recorded a podcast last night with Jason Burrack from Wall St for Main St on this very topic.
In short, Tops are Processes; Bottoms are Events. We need INTERVENTION before bonds bottom in my opinion OR a government that gets its fiscal house in order.Are the Mag7 Still Magnificent?
Equities are bifurcated in that the concentration in mega cap tech still dominates the risk-off trade in the Magnificent 8 7 6 5 4, while devastation has occurred under the surface in ALL sectors save Energy - the last bastion of holdouts along with mega tech, gold, bitcoin and oil & gas companies. How long can that reasonably last?
My bet: Bulls will grow weary this earnings season given the growing macro concerns and slowing growth against a background of war.
AAPL already tipped over into trend reversal on its last earnings, along with TSLA. GOOGL tipped over today - I expected. I am not expecting strength from META or AMZN this weak.
I have to wait until Nov 21st for NVDA!!
In order to stay bullish, the following at a baseline need to take place:
Macro: Assumed and Real Global CB Liquidity/(read: Intervention) must continue.
Derivatives: Positive Gamma = VIX suppression. In between the Govt Interventions, all you really need to know is how options drive market direction and right now we are below a critical line: SPX 4353.
Fundamental: Wage Inflation increases purchasing power; steady demand delays recession. Do not confuse this with REAL “growth” as PMI and GDI stay flat. In a nutshell, companies will pass on higher prices and keep people employed until they can’t.
Technical: Big Picture, SPX needs stays >$4000 min, $3800 max THIS YEAR.
Intermarket: We already destroyed these levels posted months ago: "Bulls can run IF 10Y < 4.1%, DXY < $106, WTIC < $95"
Sentiment: Fed Pause is bare essential to support a levitating market. Hikes are not equity/bond bullish, and cuts remove the confidence needed to get the game in play.
Small Caps are Still Value Traps
September 20th I warned clients that IWM was a value trap.
That timing didn't suck. It was the last time it tapped the 200D before falling another 10%.
"Given the easy money of loose monetary policy since the Great Financial Crisis in 2008 - picking up much steam post Covid fiscal and monetary bailout of 2020 to present - it may not be such a surprise that there are A LOT of zombie companies (mostly in the Russell 2000) that have not declared bankruptcy. This chart of IWM:SPX shows the ratio has taken out 2008 lows. Simply incredible. No, that does not make small caps ‘cheap’ or great value, it makes them dangerous, especially against a backdrop of a rising rate regime and tightened credit/financial conditions.
Stock picking the best is more important than ever."
And so is knowing what you own.
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