Sharks Drown When Not Swimming

CLUB/EDGE post with focus on NFP bet & "It's Time for a -2% Test"

Expected Friday's Headline: "Stocks Moon On NFP Weakness"

Non Farm Payrolls are Friday. Lots of debate on whether it will be market moving, and which way.

Joseph Wang @FedGuy12 bets:

Powell leaning in on labor supply increase via migration. This seems to make NFP prints very asymmetric - strong prints are going to be dismissed as increased supply, but a hint of weakness leads to early/more cuts. IMO everything going to surge the moment NFP weakens.

Let's unpack this. First, what am I expecting for NFP moving forward (not just this Friday), and is there any reason to bet against this narrative of "bad news is good news" for market bulls?

NFP Moving Forward

I am expecting that we could see lower NFP prints moving forward BUT higher wages.
The former would normally imply weakening economic growth and USD; the latter supportive of both growth & USD.

But here's the thing: I can see both coming in against a higher unemployment rate (on new job seekers).

So would this potential bearish impulse pull forward expected rate cuts and cause stocks to moon on expected weak economic growth, "Fed Put" & USD weakness?

Maybe, but it's getting harder for me to stay bullish with that backdrop.

SPX 5340 Or Bust, Revisited

I was so very much the "Everything Rally" gal - Nov "1999-esque" to Jan "1995 but broader", even recently basking in the glow of being long not wrong.

I even gave all the reasons why I saw a crash up scenario.

Then March 1st happened, and I had to pivot: Tail Wagging The Dog, Gold as a Tell, & CRASH UP on hold until after March

"I think today's spike in gold is a warning that gold smells the melt-up coming and is telling Nasdaq to slow the f*** down."

Today, April 3rd, Gold & Silver are straight up past month and Nasdaq has chopped violently sideways.

So is this the pause that refreshes?

Why can't I get excited about this idea?
Instead, why am I am quite nervous about my open Swing & Trend longs for clients?

Sharks Drown When Not Swimming

Maybe I'm just anxious about the upcoming earnings season. As I warned earlier this week, "Sell In May and Go Away" Could Time With NVDA Earnings May 22nd.

Maybe that's what the market needs - to remind complacent bulls that Fed cut expectations only work when we have a wall of worry to climb.

If we actually have a reason to worry - like earnings disappointment - then equity bulls could look down and get a case of vertigo.

A follower @WallSt_SunTzu summed up my feelings well:

sharks drown when not swimming. i.e. when a market has reached nosebleed levels, it will collapse under its own weight if it doesn't move higher.

I've got a chart for that!

GAAPSPX has a pretty convincing divergence where my indicator has a "lower high" (top panel) while SPX has moved higher.

Speaking Of Gold...

I think of Gold like I do yield curve control.
Above $2K (outer bounds limit), trouble is brewing.
Above $2150 - it's just trouble.

Futures in continuous contract gold pushing $2,300 now...

AS the US dollar & yields rose.

This is the perfect storm from:
1. Russia/China/Middle East conflict - real & expected.
2. Asia selling USD for physical gold - central banks & retail.
3. Trapped Fed & Treasury as US Govt prints & explodes debt with no intention to repay.

...So when is Gold done going up with Silver? According to Geoffrey:

"The United States can slam the Gold price with a trade surplus and a balanced budget."

And the dollar?

As soon as the US Gov is fiscally responsible and the trade is balanced, the USD should probably stop falling against Gold

Yeah, that's not anytime soon, and another reason I'm growing nervous about equity longs.

It's Time for a -2% Test

Let's sum this up.

From a macro perspective, Bob Elliot @BobEUnlimited makes the point succinctly that Craig has been presenting for several weeks:

Asset rally since Nov 1 was predicated on 6-7 Fed cuts in '24, inflation at Fed target, and falling long rates. Since the year started, these have mostly reversed. 
So what's the catalyst for higher stocks & lower spreads ahead?

From a micro perspective, funds are fully long - CTAs - 100th %-ile at $165B via GS - so as the chart shows: it only really matters if they sell!

So with that, WHEN we get a 2% down day we will have a REAL test because more than -2% $SPX drawdown and CTAs turn FORCED SELLERS.

That would trigger an options market to deteriorate, and then we have a 2-way market again.

I use to say: "We still need a macro trigger".

Maybe it's here, but the market doesn't see it yet.

All this debate about Powell/Inflation while Fed heads talking up/down cuts ... ignores how commodities (hard & soft, industrial & precious) are spiking higher on devaluation risk (USD & UST).

Now we throw in USDJPY at 152, Middle East escalations & suspense with Yellen in China.

Point is, I'm sure we can get growth bounces along the way, but the value rotation is firmly in control now.

And my experience has shown that:
IN LIEU OF ROTATION THERE WILL BE VOLATILITY.

So...
1st. Growth plays peter out then...
2nd. Value plays outperform then ...
3rd. Volatility reprices everything.

My "SPX $5340 or Bust" is likely bust.