Categories
Market Commentary

Talking Points: November 11, 2022

Talking Points: November 11, 2022

MARKET RALLY • FED PRESIDENTS • STOCK MARKET REWARDS

THIS WEEK

Better than expected October inflation numbers gave the stock and bond markets something to rally on.

By the numbers:

  • Headline CPI: +7.7% year-over-year, +.4% month-over-month.
  • Core CPI: +6.3% y-o-y, +.3% m-o-m.

Select category inflation:

  • Fuel oil: +68%; Gas Utilities: +20%; Transportation: +15%; Electricity: +14%; Groceries: +12%; Restaurants: +8.5%; Shelter: +7%

Market reaction was jubilant, but have the facts here changed?

  • Inflation of course remains elevated and, though goods inflation is declining (it’s still above 5%), services inflation continues to rise (see chart below).
  • Services inflation is stickier than goods inflation and it is less responsive to the Fed’s rate hikes. It is also closely tied to labor markets and wages…both of which show persistent strength.

Two Fed Presidents who are also on the Fed Funds rate hiking committee spoke yesterday (George and Mester). Both mentioned the importance of maintaining “tightening” financial conditions: this means higher interest rates and lower stock prices. Today’s market action, which has seen the ten-year yield fall 32 basis points in a single day and the S&P 500 gain 5.5%, flies in the face of the Fed’s desired outcome.

  • Cleveland Fed President Loretta Mester, yesterday (after release of CPI numbers): “Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while.

Recall what Chairman Jerome Powell said at Jackson Hole: “A single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

The stock market rewarded the year’s losers yesterday (growth stocks, post-IPOs, most-shorted names).

The internals are improving: over 80% of S&P 500 stocks are trading above their 50-day moving average and about 50% are above their 200-day moving average. 

  • We are closely watching these to determine whether this latest rally proves durable.
  • Tellingly, the number of stocks hitting new lows outpaced the number of stocks hitting new highs again yesterday for the 59th straight trade day.

KEY TAKEAWAYS

  • The trend is your friend but a single bear market gangbusters day does not yet make a trend.
  • Inflation is going the right direction but remains high and stubborn (see median CPI chart).
  • The Fed is standing firm; the rising interest rate headwinds aren’t shifting.
  • The software is monitoring prices closely to discover and allocate toward durable trends. 

MARKET CHARTS

EXHIBIT 1 - services inflation rising

Note that as goods inflation decelerates, services inflation (stickier, less responsive to interest rate hikes) continues to rise.

EXHIBIT 2 - median inflation still rises, pace slowing

The Cleveland Fed’s Median Inflation reading shows the price change that’s right in the middle of all other price changes. This number continues to set records (before this year the highest median inflation got was 4.8 in 1990 when Core CPI was 5.5). Underlying inflation remains strong.

EXHIBIT 3 - Breadth Improving

Here we see the percentage of stocks in the total stock market that are trading above their 200-day moving average. Currently at 42%, it’s higher than the summer rally but still below the late-March rally.

EXHIBIT 4 - decliners still outpace advancers

However, the number of stocks hitting new lows has outpaced the number of stocks hitting new highs for 59-straight trade days. Underlying weakness remains.

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: November 4, 2022

Talking Points: November 4, 2022

STOCK MARKET • S&P • FED UPDATE

THIS WEEK

As was expected, the Fed hiked short-term rates 75 basis points for the 4th time in a row yesterday.

The Fed Funds rate now ranges between 3.75 – 4%.

As was somehow not expected (based on the two week wishful thinking rally in stocks), Chairman Jerome Powell reiterated the stance he’s taken since they started hiking rates: hawkish and determined to defeat inflation no matter what happens to the economy or markets.

Powell acknowledged that monetary policy takes time to show up in the economy (lagging effects), though he also stressed that we are far from ending the fight against inflation. He stated loud and clear so that the stock market could hear:

  • “It is very premature to think about pausing.”
  • “We have a ways to go. I would want people to understand our committment to getting this done.”
  • “We have some ground left to cover…and cover it we will.”

Powell urged, in as clear terms as he could muster, the stock market to consider the reality of the moment:

Inflation remains stubbornly high.

  • Core PCE (their preferred measure) has risen for 2 straight months and sits at 5.1%.
  • Core CPI has also risen 2 straight months and sits at a very high 6.7%.

The economy is not slowing enough to cool inflation to the degree the Fed needs it to.

  • The ISM Manufacturing PMI index came in above expectations this month and remains at expansion levels (50.2).
  • The Atlanta Fed is estimating Q4 GDP to come in at 3.6%. An acceleration over Q3 thanks to real consumer spending continuing to rise.

The labor market remains very strong and is a key indicator the Fed is watching when it comes to inflation. As Powell stated in September, “We need to have softer labor market conditions.”

  • The JOLTS job openings report this week came in a full million more than expected!
  • As it stands this week, there are 1.9 job openings for every unemployed American. This is nowhere near a weak labor market.
  • October jobs numbers come in tomorrow. (ADP numbers came in 54k over expectations).

Large cap tech hurt most:

  • The S&P 500 is down about -22% from its peak (it bottomed at -25%). 
  • The Nasdaq is -35.2% away from peak though it is approaching a new bottom (it’s just 80 points away).
  • The Dow has been buffeted by its Financials, Healthcare, and Industrials components and is outperforming other major indexes. It’s down -12.5% from peak.

The Dow, like the S&P 500, has met with resistance at its 200-day moving average (see charts below).

MARKET CHARTS

EXHIBIT 1 - S&P 500 and Dow find resistance at 200-day moving average

EXHIBIT 2 - fast tightening cycles hurt equity performance

Fast tightening cycles, particularly those to combat inflation, lead to flat equity performance.

EXHIBIT 3 - why inflation? check money supply

Here we see the amount of M2 money supply (the green line). Notice the jump in 2020 thanks to the trillions in stimulus that went direct to consumers, businesses, and local governments.

The amount is starting to come down, but we are still far from the normal trend line (red dots).

EXHIBIT 4 - job vacancies to unemployed ratio remains elevated

This chart shows the ratio of job openings (vacancies) the the amount of unemployed in the economy. As you can see the number went up last month and sits at 1.8 jobs vacant/open to every unemployed American.

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: October 21, 2022

Talking Points: October 21, 2022

VOLATILITY • SLOWING ECONOMY • FED FUNDS RATE

THIS WEEK

This is a relatively quiet week data-wise for markets but that hasn’t stopped the incredible volatility we are seeing.

Invigorated by decent earnings beats and fresh evidence of a slowing economy (see the regional manufacturing indexes), stocks got off to a headstart on Monday as 99% of S&P 500 stocks advanced.

Evidence of a bottom having been put in?

  • Monday’s rally was led by this year’s worst performers (think ARKK components), so it was most likely a short-covering rally…and just more noise.

Speaking of noise, over half of the S&P 500’s moves this month have been over 1%, and of those days, all but two have been moves of great than 2.4% in either direction.

  • Such whipsawing, we think, is indicative not of a bullish breakout but of the profound uncertainties facing markets in the months ahead.
  • Inflation, interest rates, elections, Ukraine, UK turmoil, oil markets, earnings, recession. All of these throw a monkey wrench into any narrative to develop that would spark a catalyzing rally.

Earnings so far have helped burnish the market this week with Monday and Tuesday’s decent advances. Recall, though, that these earnings are backward-looking and that the economy is still running at a decent clip, all things considered.

  • As Al Scofield stated, we’re not even in the first quarter of this slowdown; we’ve not even left the tunnel and gotten onto the field.
  • Amazon CEO Jeff Bezos tweeted on Tuesday, “The probabilities in this economy tell you to batten down the hatches.”

Bond yields are reflecting the anticipated continued Fed rate hikes. The ten year has climbed up to 4.23%, its highest level since 2007. Persistently higher yields are not conducive to appreciating stock prices.

  • And among the different yield curves, the 3month/10year curve had avoided inversion all year…until this week. The curve finally inverted on Tuesday (it’s back in positive territory with the 10-year climbing higher these past two days.

Futures are putting the terminal Fed Funds rate (i.e., where they stop) at 5% next year (it’s between 3 and 3.25% now).

KEY TAKEAWAYS

  • Nothing but volatility all the way down as the market has little to trade on but ongoing uncertainty.
  • The tactical stance will be to preserve and protect in the face of ever more volatile markets. The software will be looking for durable trends should a firm bottom be put in. Catalysts are few and far between.

MARKET CHARTS

EXHIBIT 1 - bear rallies and subsequent falls

This chart puts a different spin on the Bear Market Rallies chart we’ve shared in the past in that it shows the % drops that occur after the market rallies. 

As you can see, the subsequent drops have exceeded or equalled the amount of the rally.

EXHIBIT 2 - Goldman's anticipated s&p levels w/soft & Hard landings.

The chances of a soft landing are looking less and less likely. Goldmans’ worst case (3150) is -34% from peak.

EXHIBIT 3 - ultra bearishness, no capitulation yet

BofA fund manager survey shows more bearishness in allocation to equities (navy line) than we saw during the Great Financial Crisis.

Note, though, that equity inflows remain positive.

EXHIBIT 4 - recession a near-certainty

At top, the Conference Board puts the probability of recession at 96%.

At bottom, Bloomberg Economics puts the probability of recession at 100%.

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: September 30, 2022

Talking Points: September 30, 2022

STOCK MARKET REVERSAL • VOLATILE MARKET HISTORY

THIS WEEK

The markets and the Fed now are in agreement on one thing: something will have to break in order to get inflation under control.

Today’s stock market reversal highlights this new parallel thinking:

  • The Fed is focused on the labor market and believes it must loosen (i.e., there needs to be higher unemployment) in order for prices finally to ease.
  • Weekly jobless claims came in today below expectations and have continued to fall steadily since July.

And so good economic news—more people have jobs—is bad market news because it means more rate hikes from the Fed.

The S&P 500 is set to fall to a new bottom today (it’s about -24% away from its peak).

  • The average drawdown for the S&P 500 around recessions is -30%.
  • The headline index has closed negative 56% of its trade days so far this year. Since 1957 this is the index’s second-most negatively-biased year. The most negative year (in terms of closing negative) was 1974 when 58% of trade days were negative.
  • Just 15% of S&P 500 companies are trading above their 200-day moving average; just 7% are trading above their 50-day moving average.

The Dow fell into a bear market for the first time since 2020. Both the Dow Industrials and Dow Transportation Averages are in bear markets. Long Treasuries are having their worst 1-year performance ever (they’re now down over -30% year-over-year). Including inflation to give us the real return, this is the worst performing year ever for the 60/40 portfolio. 

  • The 60/40 is down -20% ytd. With inflation it’s down -27%, worse than 1974’s terrible real return of -25%.

KEY TAKEAWAYS

Good economic news is bad news for markets.

Volatility will persist into the next quarter in response to economic data and the upcoming earnings season.

  • The VIX is climbing and is elevated, but is not yet at extreme levels.

October is historically the market’s most volatile month.

  • More market bottoms have been reached in October than in any other month.

The tactical stance will be to preserve and protect in the face of ever more volatile markets. The software will be looking for durable trends should a firm bottom be put in. Catalysts are few and far between.

MARKET CHARTS

EXHIBIT 1 - this drawdown has been historic

This chart from Gavekal Research shows the total market cap lost to this year’s bear markets in stocks and bonds. The total comes to -$57.8 trillion capitalization shaved off so far this year.

EXHIBIT 2 - Volatile October, friend to finding the bottom

TITLE

Suspendisse lobortis diam molestie enim facilisis, eget malesuada sapien vestibulum. Suspendisse at sapien augue. Morbi ex felis, commodo a dui sit amet, ullamcorper bibendum elit.

EXHIBIT 3 - End of bull market in bonds?

We’ve seen this year a definite break in 35-year decline in bond yields. There have been breaks over previous highs before, but this most recent breakout is significantly larger than those others.

EXHIBIT 4 - S&P Averages -30% drawdown around recessions

We’ve seen this year a definite break in 35-year decline in bond yields. There have been breaks over previous highs before, but this most recent breakout is significantly larger than those others.

EXHIBIT 5 - initial jobless claims

Needless to say, this is not what the Fed wants to see from the labor market in their quest to kill inflation.

Such data will reinforce the Fed’s stated decision to double-down and continue to attack inflation quickly and forcefully.

©2022 EdgeTech Analytics, LLC. All rights reserved.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: September 23, 2022

Talking Points: September 23, 2022

STOCK MARKET • S&P • FED UPDATE

THIS WEEK

The stock market is now confronting the unavoidable: entrenched inflation and a Fed Chairman ready and willing to be the next Paul Volcker.

In this unusual post-pandemic macro environment the Fed’s dual mandate—full employment and stable prices—are in direct conflict.

  • With the employment rate at just 3.7% the Fed has made the correct judgment call that defeating inflation should be their primary focus for the foreseeable future.
  • As Chairman Powell stated, a failure to tame inflation with current economic pain would only lead to far greater pain in the future.

And so stocks have seen extreme volatility and have sold off about -10% since the Jackson Hole speech.

Stocks sold off on yesterday’s 75 basis point hike and Powell’s hawkish comments in his afternoon press conference. Some choice quotes:

  • “It would be nice if there was a way to just wish it [inflation] away, but there isn’t.”
  • “We think we need to have softer labor market conditions.” I.e., the Fed is willing to tolerate higher unemployment.
  • “We have got to get inflation behind us. I wish there were a painless way to do that; there isn’t.”

The S&P has again fallen -20% from its peak and the Nasdaq has again fallen -30% from its peak. Both last saw these low levels in July before the summer bear market rally.

Just 15% of S&P 500 stocks are trading above their 50-day moving average; just 10% of Nasdaq 100 stocks are.

KEY TAKEAWAYS

The Fed seems to have given up hope of a “soft landing” and admit economic pain will likely be a necessity to bring inflation down.

Rates are going to continue higher until the Fed sees “compelling” evidence that inflation is moving in the right direction.

  • What consitutes “compelling” we can’t know, but this uncertainty ushers in volatility in anticipation of every inflation-related data release.
  • Also, the certainty of higher rates ensures the continued presence of a massive headwind for stock prices.

Such erratic markets facing certain, known headwinds makes for an extremely difficult trading environment. Tactical, defensive allocations to cash and cash-like instruments will be helpful in avoiding catching a knife that’s both falling and bouncing around.

MARKET CHARTS

EXHIBIT 1 - Fast rate-tightening cycles leads to disappointing returns

This chart from Ned Davis Research shows S&P 500 performance during different speed rate-tightening cycles.

Fast hiking/tightening leads to volatile, flat performance historically.

EXHIBIT 2 - how long to kill inflation?

Research from Bank of America shows that in advanced economies, once inflation breaks over 5%, it takes an average of 10 years for it to drop back down to 2%.

EXHIBIT 3 - biggest stocks still seeing high valuations

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: September 16, 2022

Talking Points: September 16, 2022

STOCK MARKET • S&P • FED UPDATE

THIS WEEK

The keyword for markets going forward is instability.

Following Tuesday’s unexpectedly higher CPI numbers, the market has been forced to abandon its hope for a quick end to inflation and a Fed pivot.

Instead markets must confront the following:

Inflation that is going to be higher for longer.

  • Most tellingly, the inflation measures most representative of entrenched inflation (Core CPI, Median and Trimmed Mean CPI, and Sticky CPI) are not showing any signs of slowing down (see charts below).
  • Outside of gasoline, food prices affect consumers most and food prices are not moderating. Food inflation was up +11.5% and grocery inflation is running at +13.5% year-over-year (highest since 1979).

A Federal Reserve that is laser-focused on defeating inflation.

  • The Fed is not going to pivot anytime soon.
  • As Chairman Powell stated at Jackson Hole, they are willing to take “forceful and rapid steps to moderate demand.”

Higher interest rates until prices moderate enough to satisfy the Fed.

  • More rate hikes are on the way as the terminal Fed Funds rate may need to be even higher in order to effectively curb demand (see chart below).

Slower demand means a slowing economy means reduced earnings.

  • A recession may be needed to stop stubborn inflation.
  • Investors must be prepared for such a recession/slowdown to show up in a company’s bottom lines.

This makes for an unstable, uncertain market.

  • There are few catalysts to buy when the market is staring down the barrel of the inevitable: a forced economic contraction that might, we hope, stabilize prices.

KEY TAKEAWAYS

Slowdown arriving soon? Atlanta Fed’s most recent estimate for Q3 GDP growth falls to 0.5%.

  • The certainties for this economy (higher rates, falling demand) make for an uncertain stock market.
  • Uncertainty for stocks means volatility.
  • Further whipsaws, bear market rallies, and high magnitude intra and interday moves are to be expected in the coming months.
  • We are seeing further defensive tactical allocations to cash and cash-like instruments as a way to approach this trendless market.

MARKET CHARTS

EXHIBIT 1 - Inflation and the fed funds rate

Here we see the rate of inflation (red line) and the effective Fed Funds Rate (blue line). Hiking the Fed Funds Rate is a key part of how the Fed is trying to bring inflation down.

You can see how low the rate remains even after the hikes so far this year. Does this imply the rate needs to be much higher to pull inflation down?

EXHIBIT 2 - fed isn’t budging from being “forceful and rapid” in their hikes

Sticky CPI: highest since ’82, no signs of slowing down.

Median CPI: highest ever recorded (index started in ’83), not slowing.

Core Core CPI: excludes food, energy and shelter, still above 6%.

EXHIBIT 3 - Stock returns and last inflationary regime

During our last bout of elevated inflation and rising interest rates stocks didn’t bottom until over two years after the peak in inflation. In between? Sideways movement with whipsaws and bear market rallies.

EXHIBIT 4 - bonds don't hedge equities in inflationary world

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only.

The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: August 26, 2022

Talking Points: August 26, 2022

STOCK PERFORMANCE • TODAY’S VOLATILITY • INFLATION

THE WEEK

Stocks having their worst single day performance since June on Chairman Jerome Powell reiterating what he’s been saying all year long: the Fed is dead set on fighting inflation and will not pull back on rate hikes until they see enough evidence that prices are coming down.

  • The Fed is intent on not repeating the mistakes of the 1970s where they prematurely loosened monetary conditions which led to inflation’s resurgence later in the decade.
  • Because of this, the market’s hoped-for “dovish pivot” seems unlikely at least through the end of this year.

Powell committed the Fed to “taking forceful and rapid steps” and to “keep at it until we are confident the job is done.” (emphasis added).

Today’s volatility is noise—recall that a market pricing in perfection makes it extremely fragile—but it does indicate a resetting of expectations to a more realistic bent.

  • Inflation is still much too high and tighter financial conditions will hurt the economy and company bottom lines.
  • Sideways and negative volatility through the market’s worst month, September, are to be expected in the run up to the next round of rate hikes on the 21st.

POSITIVES:

  1. University of Michigan Consumer Sentiment for August, while still low, beat expectations.
  2. Inflation expectations, which play a significant role in the life cycle of rising prices, decreased in August.
  3. Q2 GDP growth was revised upward; it’s still negative but not as deeply negative.
  4. PCE inflation, the Fed’s preferred measure, eased in July month-over-month and year-over-year.

NEGATIVES:

  1. S&P Composite business activity index came in at contraction levels for the month.
  2. Regional manufacturing indexes continue to show deep contractions  in activity.
  3. Trimmed Mean PCE inflation (this excludes all outlier prices) still advanced in July although the pace of the increase was mild.

KEY TAKEAWAYS

Sideways and negative volatility through September for equity markets.

  • The Nasdaq is still in a bear market (-23% away from its high) and the S&P is still -14% from its high.

We’re keeping an eye on the 10-year Treasury yield. 

  • The yield headed north of 3% with the Fed’s latest hawkishness and stock swoon. 
  • It peaked at 3.48% in June right around the stock market’s bottom.

The Fed is committed to smashing inflation and the market has to come to terms with the implications for the economy and balance sheets.

MARKET CHARTS

EXHIBIT 1 - Post 50% Recovery mark a bottom?

  • Of the 16 times the S&P 500 has dropped -20% and recovered 50% of those losses, it has never made a new low.

EXHIBIT 2 - Don’t want to see you in September

  • Post-Summer markets have historically underperformed (the average monthly performance is -.7%).
  • After September and October volatility, however, the market tends to rise throught the end of the year.

EXHIBIT 3 - Inflation easing, remains high

  • The Fed’s favorite measure of inflation, the Personal Consumption Expenditures (PCE) index excluding food and energy, continues to trend downward year-over-year. Note that it’s still at 4.6%, more than double the preferred rate of inflation.
  • The Trimmed Mean PCE number removes both positive and negative outliers and still shows prices increasing, albeit at a slower rate than we saw in June.

EXHIBIT 4 - Bear Market Perspectives

  • As you can see the 2000s bear markets went thousands of days without reaching new highs. We’re currently at 162 days.

©2022 EdgeTech Analytics, LLC. All rights reserved.

Important Disclosures: The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: August 19, 2022

Talking Points: August 19, 2022

INTERNAL MARKET MOMENTUM • LATEST MARKET RALLIES

KEY TAKEAWAYS

Internal market momentum cannot and should not be ignored.

Unlike the rallies earlier this year, this latest rally is showing broad participation and real momentum.

  • Over 90% of S&P 500 stocks are trading above their 50-day moving average. In contrast, during March’s growth rally only 74% of stocks were trading at those levels and that level was reached for only a single trade day. We’ve had over 90% now for 4 straight trade days.
  • The S&P 500 recovered over 50% of its losses last Friday (the “retracement” we discussed last week). Equity returns 2 and 3 months out following such recoveries have been positive in almost all cases. Not a guarantee but a decent signal of forward momentum.
  • Breadth has improved: the percentage of S&P 500 stocks hitting new 20-day highs reached over 55%. This is a bullish signal that’s only occurred 28 other times since the 1970s. The last time it happened recently was May 2020.
  • It is impossible to say whether this is another dead-cat bounce or a new bull breakout, though the momentum indicates further upside potential in the short term (see charts below).

The stock market is pricing in perfection: inflation gradually recedes, the Fed eventually pivots, and the economy lands softly.

  • Pricing for perfection means extreme fragility: any negative inflation data point has the potential to burst this bubble of optimism.

The Fed’s July meeting minutes revealed that they’re happy about July’s inflation moderating though they remain committed to stamping out inflation.

  • They will be data-dependent going forward and gave no hint of a pivot.
  • The Fed saw “little evidence to date that inflation pressures were subsiding.” More hikes coming.

Next Friday we get July’s Personal Consumption Expenditures data (the Fed’s preferred measure of inflation).

Bear Rally/Bull Breakout?

  • As you can see from this chart, the magnitude of this latest rally is not unusual for bear markets (2022 is the black line).
  • This rally, however, has had legitimate momentum and participation indicating further upside.

MARKET CHARTS

EXHIBIT 1 - S&P 500 stocks trading above 50-day moving average

  • This infrequently seen number is used as one of the signals for a potential bull market breakout.
  • Note the dates of other occurrences and performance of the stock market post the 90% trigger being met.

EXHIBIT 2 - From indiscriminate selling to indiscriminate buying a good sign

  • This chart looks at times when just 10% of the S&P 500’s stocks that were trading above their 50-day moving average went to over 90% trading above it in 3-month periods.
  • Going from indiscriminate selling to buying has been positive for forward stock performance in the past.

EXHIBIT 3 - Momentum Thrusts

  • Again, this is a market priced for perfection at some point in the future and is extremely vulnerable to external shocks or inflation data coming in higher than expected.
  • That being said, the momentum of this current rally indicates the potential for further positive returns going forward.

EXHIBIT 4 - Lots of cash on sidelines/not yet participating

  • The August BofA fund manager survey showed fund managers still heavily in cash and underweight stocks.

©2022 EdgeTech Analytics, LLC. All rights reserved.

Important Disclosures: The views expressed above reflect the views of EdgeTech Analytics, LLC and are for informational purposes only. These views are not intended to serve as a substitute for personalized investment advice. Past performance is no guarantee of future results and no investment strategy or methodology can guarantee profits or protect against losses.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Categories
Market Commentary

Talking Points: July 29, 2022

Talking Points: July 29, 2022

TECHNICAL RECESSION ARRIVES, FED HIKES RATE • MARKETS OPTIMISTIC, VOLUME LIGHT • SLOWDOWN OCCURING, IMMINENT

KEY TAKEAWAYS

The market has been optimistic about equities this month.

July has been the market’s calmest month volatility-wise, and it has been quiet in terms of active trading (volume).

In a week where we both entered a technical recession (2 consecutive quarters of economic contraction) and the Fed hiked interest rates another 0.75%, stocks shrugging these conditions off does not appear to us to be based on any valid, stable market narrative.

In a week where we both entered a technical recession (2 consecutive quarters of economic contraction) and the Fed hiked interest rates another 0.75%, stocks shrugging these conditions off does not appear to us to be based on any valid, stable market narrative.

The market is forward-looking and its current assessment of the second half—its sanguine view of the chances of a soft-landing (avoiding recession), the reduction in inflation, and the Fed’s dovishness—does not track with the data we’ve been observing this week.

Inflation remains high and the Fed has not minced words about devoting all of their attention to beating it regardless of whether or not this pushes us deeper into recession.

We are concentrating on the market filters in portfolios to help us determine the strength and durability of this latest rally.

We will also be deploying the bench to increase the number of assets, increase the number of check dates, and therefore increase the number of overall opportunities to reenter this market as lasting trends are uncovered.

This has been a frustrating stair-step rally with more ups than downs so far and with disappointing volume. Conviction, therefore, may be lacking.

Our tactical positions stand prepared to deploy should conviction strengthen and trends sustain upward momentum.

NYSE Total Volume - 20-day Moving Average

Back to January levels.

MARKET CHARTS

EXHIBIT 1 — U.S. Economy Enters Technical Recession

  • GDP growth contracted -0.9% in the second quarter; its second consecutive contraction.
  • The last time we had two quarters of contraction that wasn’t considered a recession was 1947.

EXHIBITS 2 & 3 — Consumer Spending & Sales Slowing

  • At left we see consumer spending contracting thanks to inflationary pressures such that it is contributing less to GDP.
  • At right we see “Real Final Sales” which is an excellent measure of demand that strips out exports and inventories from the GDP calculation. This shows that real final sales contracted last quarter for the first time since Covid; and before that the last time it contracted was the Great Financial Crisis.

EXHIBIT 4 — Unemployment Claims on Upswing

  • At left we see consumer spending contracting thanks to inflationary pressures such that it is contributing less to GDP.
  • At right we see “Real Final Sales” which is an excellent measure of demand that strips out exports and inventories from the GDP calculation. This shows that real final sales contracted last quarter for the first time since Covid; and before that the last time it contracted was the Great Financial Crisis.

©2022 EdgeTech Analytics, LLC. All rights reserved. For informational purposes only. This is not an offer to buy or sell any securities. No investment strategy is free from risk and there is no guarantee that any strategies mentioned herein will be profitable. Past performance is not indicative of future performance.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore