NeoPhoto/iStock via Getty Images
NeoPhoto/iStock via Getty Images
[Please note that this article was first published on Macro Trading Factory ("MTF") a week ago, as part of our weekly macro/market review. Therefore, wherever there's a time-reference along this piece it relates to May 15th as a benchmark. Nonetheless, taking into consideration how the markets have performed over the past week, it feels as if this article is relevant today just as it has been a week ago, so perhaps this back-reference isn't needed at all... ]
Elan Luger, JPM's head of US trading:
China shutdown, inflation running wild, Ukraine continues to impact supply chains, animal spirits dead, Fed has lost control, QT is coming, recession is coming, performance is terrible, privates aren’t marked right...
Last Friday, the S&P 500 (SPX) climbed 2.4% but not before the index threatened (earlier in the day) to enter bear market territory.
SPX managed to escape the bear this time round but will it be able to escape the bear for much longer? We strongly doubt it.
Yet, even Friday's gain wasn't enough to keep the stock market from extending its consecutive weekly drop to 6 - the longest such streak in nearly 11 years.
Over these past few weeks, and in-spite of the main indices losing a lot of steam, we keep warning you that the level of risk is still (uncomfortably) high and that the level of reward is still (uncomfortably) too low, certainly not enough to overcome the elevated level of risk.
Since WWII, there have been 16 periods of six (or more) consecutive down weeks for the SPX.
Famous down years like 2000 and 2008 are obviously part of the list, but there are also other periods that saw significant longer-term returns following the negative streak they went through.
What's it going to be this time round?
We've been asked what we are looking at that may change our view, and we answered that more than a specific gauge/development, it's mostly time that we're looking for (to gain) before we may build more trust (again) with risk assets.
The Fed only started tightening... Putin is (apparently) nowhere near backing off... Inflation is still running hot and only (maybe, perhaps) about to peak... Biden's approval rate is tanking with Dems look set for a blow in Midterm elections... and China's most recent economic data is still pointing to an extremely low/slowing growth...
Therefore what we need most is time, so that:
How long can this take? It can take more time than anyone currently assumes/hopes, but we believe that within a couple of months (closer to Midterms) all the above-mentioned hangovers might be at a different/better position, allowing us to (maybe, perhaps) seeing a shift between risk and reward, in favor of the latter.
While it's time - an extremely technical aspect - we're mostly looking for, there are obviously many other (not time-bound) things we look at.
In this week's review, we would like to touch upon some of those things, allowing you to better understand why we believe risk is still overshadowing reward, even if we get bear market rallies along the way.
BofA's May US credit investor survey "shows indicators across positioning, spread outlook and technicals reaching some of the most bearish levels in history...[This] increases the risk of a sharp short-covering rally should the macro outlook surprise to the upside."
In the past, market bottoming usually occurred when less than 10% of S&P 500 member stocks traded above their 200-DMA.
At the moment, the figure is still greater than 30%.
One can claim that breadth is already bottoming when it comes to tech/growth stocks with the most relevant sectors - Tech (XLK), Consumer Discretionary (XLY) - already there (<200-DMA), however we wish to see more participation.
Let's say that 5-6 sectors <200-DMA would start making things way more interesting.
Side note: There's an astonishing >71% YTD performance spread between the best (Energy) and the worst (Consumer Discretionary) sectors.
In 2020, less than two years ago, this spread was almost as wide, except that back then it was >69% in favor of Consumer Discretionary.
Go two charts back and see how many stocks belonging to the most conservative sectors are trading above 200-DMA.
Putting Energy sector (XLE), a unique case, aside, you can see that nearly 90% of Utilities (XLU) and Consumer Staples (XLP) stocks are trading above their 200-DMA.
Demand for value stocks hasn't been as strong as it's now in years.
Another way to see the same development from a different prism is low volatility stocks - the ones that make the least/lowest waves on the pool.
Do we really want to get uber-bullish and call for a bottom when demand for low volatility stocks (SPLV) is so strong?
We've closed our short TNA, but we wrote that it doesn't mean small-caps (IWM) can't move down more (than the 1/3 they've already lost)
Believe it or not, but 2008 and 2020 saw more fear than 2022 is seeing thus far.
We "need" more fear to call a bottom.
[And, therefore, neither is inflation]
Food supply constraints are anything but abating.
Situations in Ukraine (exporting more than half of the world's sunflower oil) and South Africa (drought) add to uncertainty regarding soybean oil supply, putting more pressure on the already-mounting global food crisis.
Not enough pressure for you? How about India's new ban on wheat exports?
There's some stress, but no real, bottom-like, distress as of yet.
Simply put, given the recent spike in volatility, credit spreads are still too tight and need to widen further to reflect the level of fear within credit markets.
If you wish to look at the same coin from the flip-side of it, we can say that yields are rising, but not to the levels we wish them to.
Yields on USD-denominated, CCC-rated, non-energy bonds have risen to the highest since May 2020 [Near the highest since 2016 if one strips out the COVID effect].
While spreads-widening accounts for much of that increase, yields are still far below peak levels seen in previous crisis times.
For those who (choose to) see a half-full glass (current reality), this means credit isn't yet sending alarm signals to other risk-asset markets.
For those who (choose to) see a half-empty glass (potential outcome), this means there's a lot more to go with the current credit selloff.
Fewer than 30% of the S&P 500's members have hit a one-year low, compared with nearly 50% in 2018 and 82% in 2008.
There's still a long way to go for 2022 to be as distressed as past crises were.
50% is probably the minimum threshold to "aspire" for from another aspect.
"Just" 39% of S&P 500's members are down 20%+ since the market peaked compared to 50% in the last three major selloffs (2011, 2015, 2018).
Interestingly, Energy (XLE), Financials (XLF), Consumer Staples (XLP), and Industrials (XLI) sectors are far from performing similarly this year, but they're all holding up much better than they usually do during market corrections.
No Fonzie/Ponzi this year (at least for now), but 2022 is all about "Sunday, Monday, Choppy Days."
So far this year (92 trading days), S&P 500 has had 20 days with >1% return and 27 days with <-1% return.
In other words, more than half of trading days in 2022 have had a move greater than 1%, either direction.
In-spite of what looks like an elevated volatility, VIX (VIX) has completely decoupled from the S&P 500.
This indicates we aren't at the “capitulation” point as of yet.
Consumer sentiment: Lowest in 11 years.
US buying conditions for durable goods: Weakest ever.
Goldman Sachs strategists (usually the most bullish house on the Street):
If so, we have not seen capitulation yet.
GS also lowered its price target for SPX at year-end to 4300. This is the bank's third reduction inside 2022. [And counting...]
Shanghai, which has been under lockdown for about 6 weeks (accidentally or not, perfectly coincides with the SPX's streak of down weeks), will start to reopen on Monday.
Recall that there was a significant drop in Shanghai’s port volumes in April, and as long as China isn't fully reopening - global GDP will take a toll.
If the reopening actually does happen (when it comes to China, nothing is paved in stone, you know), the extra demand for oil (from China) will come at the worst possible time just as Russian crude supply drops.
Russian oil output is expected to fall sharply later this year, when sanctions bite stronger and deeper, putting further pressure on supplies.
If the world's second-largest economy performs the same type of v-shaped demand recovery like the one we saw back in 2020, when China ended lockdown, that would be a double-whammy on oil prices as demand will move up just as supply will scale back.
If there's some sort of consolation, it's oil prices that are much higher today than they were in 2020, so (assuming high prices curb much of the demand) perhaps not such a big risk as it could be otherwise.
Decline in S&P 500's forward P/E is approaching 30%, in-line with the extreme multiple reduction we witnessed during the pandemic bear market back in March/April 2020.
For the first time since Q2/2020, S&P 500 forward P/E ratio fell below the 10-year average of ~17X.
Is 16.6x a "must buy" multiples? Surely not, due to the many other risks (aside of valuation) that are still very much alive.
Yet, for the first time in years we can't say that stocks are expensive.
While SPX forward P/E is below the 5-year and 10-year averages, it remains above the 20-year average.
Recall that the ratio was as low as 8.8x in 2008.
If history is any guide, the S&P 500 still has plenty of room to fall, if it so "wishes" for.
Despite earnings 2022 EPS growth forecast boosted to +8% from +5%, Goldman cut S&P 500 end-2022 target (as mentioned above) due to tightening risk and slower growth fears.
Technically speaking, the S&P 500 still has some (significant) room to fall further to reach the 200-WMA mark, a level that the benchmark index (nearly) touched, or broke below, during most all previous bear markets over the past 35 years.
A move to the 200-WMA line suggests S&P 500 falling all the way to ~3500.
Looking for a silver lining? You may find it in S&P Dow Jones analysis:
…a decline of 15% or more for the S&P 500 has been followed by positive returns in the ensuing 12 months in all but two occasions over the past 65 years, with an average gain just shy of 20%.
S&P Dow Jones
S&P Dow Jones
Have no doubt: It's not just Goldman that cut its (original) bullish forecasts.
It seems like all Wall Street analysts are lowering their targets, expressing a way more gloomy/cautious outlook these days.
Morgan Stanley has been the most bearish for a long time, and this hasn't changed. The rout in stocks isn't over just yet, according to Morgan Stanley strategists, who see scope for both US and European equities to correct further amid mounting concerns of slowing growth.
Strategist Michael Wilson, who has long been a skeptic of the decade-long bull run in US stocks, said in a note that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Federal Reserve tightening policy into slowing growth.
According to his base scenario of “fire and ice,” he expects the S&P 500 to slide in the near term before climbing to 3900 points next spring - which is still about 2.5% below current levels - on slowing earnings growth and elevated volatility.
“We continue to believe that the US equity market is not priced for this slowdown in growth from current levels,” Wilson said in a note last Tuesday. “We expect equity volatility to remain elevated over the next 12 months.”
Others are less bearish, but surely not less cautious, especially if a recession is upon us:
Fidelity's Jurrien Timmer: If the S&P's correction has been a valuation reset driven by tightening liquidity conditions, then the stock market is just about back to fair value... If people believe that the market also has an earnings problem, "then this reset is not over."
RBC's Lori Calvasina: If the S&P 500's decline breaks through 3850, "we think the equity market will be telling us that it’s starting to price in a recession. If that happens the key number to keep in mind is 3200 which would represent a 32% drop from the January high"
Well, you already know what's our bottom line:
This is a very nice/telling chart that probably explains better than anything we can write the "why" behind it.
It's not a "Love Story" for us with risk assets as of yet.
Wishing everybody an enjoyable, loving, and successful trading (and non-trading) week!
Macro Trading Factory is a macro-driven service, led by The Macro Teller and RoseNose.
The service offers two portfolios: “Funds Macro Portfolio” and “Rose's Income Garden”; both aim to outperform the SPY on a risk-adjusted basis, in a relaxed manner.
Suitable for those who either have little time/knowledge/desire to manage a portfolio on their own, and/or wish to get exposed to the market in a simple, though more risk-oriented (less volatile), way.
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First and foremost, let's clarify two important points that you might currently find confusing:
1. "Macro Trading Factory" ("MTF") by "The Macro Teller" ("TMT") is the second service we offer after the "Wheel of FORTUNE" ("WoF") by "The Fortune Teller" ("TFT").
2. TFT and TMT are the same person. It's due to SA policy that we need to open two profiles in order to run two services, but rest assured we don't suffer from schizophrenia (as of yet)...
TMT is an account that represents a business which is mostly focuses on portfolio- and asset- management. The business is run by two principals that (among the two of them) hold BAs in Accounting & Economics, and Computer Sciences, as well as MBAs. One of the two is also a licensed CPA (although many years have gone by since he was practicing), and has/had been a licensed investment adviser in various countries, including the US (Series 7 & 66).
On a combined basis, the two principals lived and worked for at least three years in three other-different countries/continents, holding senior-managerial positions across various industries/activities:
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Currently, they run a business which is mainly focusing on active portfolio/fund/asset management as well as providing consulting/advisory services. The business, co-founded in 2011, is also occasionally getting involved in real estate and early-stage (start-up) investments.
The people who work in and for this business are an integral and essential part of the services that we offer on SA Marketplace platform: Wheel of Fortune, and Market Trading Factory. While TMT (or TFT for that matter) is the single "face" behind these services, it's important for readers/subscribers to know that what they get is not a "one-man-show" rather the end-result of an ongoing, relentless, team effort.
We strongly believe that successful investors must have/perform Discipline, Patience, and Consistency (or "DCP"). We adhere to those rigorously. The contributor RoseNose is both a contributing and promoting author for Macro Trading Factory.
On a more personal note...
We're advising and consulting to private individuals, mostly (U)HNWI that we had been serving through many years of working within the private banking, wealth management and asset management arenas. This activity focuses on the long run and it's mostly based on a Buy & Hold strategy.
Risk management is part of our DNA and while we normally take LONG-naked positions, we play defense too, by occasionally hedging our positions, in order to protect the downside.
We cover all asset-classes by mostly focusing on cash cows and high dividend paying "machines" that may generate high (total) returns: Interest-sensitive, income-generating, instruments, e.g. Bonds, REITs, BDCs, Preferred Shares, MLPs, etc. combined with a variety of high-risk, growth and value stocks.
We believe in, and invest for, the long run but we're very minded of the short run too. While it's possible to make a massive-quick "kill", here and there, good things usually come in small packages (and over time); so do returns. Therefore, we (hope but) don't expect our investments to double in value over a short period of time. We do, however, aim at outperforming the S&P 500, on a risk adjusted basis, and to deliver positive returns on an absolute basis, i.e. regardless of markets' returns and directions.
Note: "Aim" doesn't equate guarantee!!! We can't, and never will, promise a positive return!!! Everything that we do is on a "best effort" basis, without any assurance that the actual results would meet our good intentions.
Timing is Everything! While investors can't time the market, we believe that this applies only to the long term. In the short-term (a couple of months) one can and should pick the right moment and the right entry point, based on his subjective-personal preferences, risk aversion and goals. Long-term, strategy/macro, investment decisions can't be timed while short-term, implementation/micro, investment decision, can!
When it comes to investments and trading we believe that the most important virtues are healthy common sense, general wisdom, sufficient research, vast experience, strive for excellence, ongoing willingness to learn, minimum ego, maximum patience, ability to withstand (enormous) pressure/s, strict discipline and a lot of luck!...
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