2022-12-04 Sunday Market Update
Past Week’s News:
- US: Non-Farm Payroll 263K, higher than the consensus of 200K, but lower than the previous of 284K
- US: Unemployment came in at 3.7%, in line with expectations and the same level as the previous number
- US: ISM fell to 49 (previous 50.2)
- First contraction since May 2020
- Backlog orders shrinking 40 vs 45.3
- US: PCE deflator marginally increased to 6.0% (annual change) from 6.3% the previous month.
- US: Powell’s last speech before the silent period, was mostly hawkish but had some tone of dove… should expect closer to 50 points increases instead of 75 points
- EU Inflation Rate YoY: “Better” than expected, 10%, 10.4% (expected), and the previous number was 10.6%.
- First decrease in 18 months, but mostly driven by low energy prices
- EU Core Inflation is still at 5% (as expected)
- China: PMI decreasing (lower than expected), likely due to new covid measures (Service PMI: 48.40, Manufacturing PMI: 49.40, Composite PMI: 48.30)
Market Sentiment:
Rolling into the last month of the year, and leaving a strong November behind. The October rally continued and if you just look at the indices, it looks like there are optimistic times. However, if we look into the economic data, this tells a different story. More and more indicators are pointing to a decrease in economic activity. We have contracting ISM and PMI, high inflation, a China in protest, and still a war going on. Most of the market increase likely comes from the hope of lower inflation and a pivot from FED, however, just this week Powell said that they are going to keep on increasing the rates, although at a lower pace of 50 points instead of 75.
If we look at the net long positions of retail traders, these have not moved much… still around 40-45% net long, which means that 55-60% are net short… I think this is a clue to the increase in the market. Since most retail traders are short and expect the bear market rally to end, the markets are going to increase until these traders get burned and exit their trades. After that, the big players are going to short, and then let the market collapse. We will see, but we should not expect a downturn until retail traders start to exit their short positions.
Other than that, most indicators are the same as last week, with marginal adjustments.
The past 30 days (more or less all of November) ended with an average increase of 9%. Compared to the YTD development, we now have an average decrease of 12.88%, where Nasdaq and HangSeng have decreased the most.
Volume is around average and the VIX has decreased below 20 (last quote 19.06).
- This Week’s Fear vs Greed 73%
- Last Week’s Fear vs Greed 71%
- SP500 Net Long 43%
- Last Week’s SP500 Net Long 44%
- EUR/USD Net Long 40%
- Last Week’s EUR/USD Net Long 42%
- Gold Net Long 71%
- Last Week’s Gold Net Long 75%
Indices: 30 Days & YTD
Market Update: Indices
Comment: Indices
Most markets are stretched on the upside if we look at the past 30 days, so to get a better view we compare them on the YTD graph. Here we see that most prices are in or above their box, and trade above or around their mean and average. Here it is important to not get carried away… All indices are still in a negative trend, and even though we have got some signs like indices have been crossing their MA200, or increased 20% from the bottom and are therefore per definition in a bull market, the outlook has not changed. What one should look for here is to look for short entries when the markets trade above their means and stretch on the upside. For the markets to truly have turned and started a new bull trend, we would like two see at least more optimistic outlooks in the economy (a decrease from 10.6% inflation to 10.0% is not enough), and increased volume with the market increase. And for me, both of these are missing, and I believe that when this rally loses traction, we are going to see decreases, and possible new lows (depending on the situation and if/when central banks decide to intervene).
So when will this happen? I have in previous posts stated that this should be expected before Christmas… and while this is still my belief, we are now closing in on “Santa Rally Territory”, and that wonderful time of year when institutions have to decide if they should realize their gains/losses, and how to optimize taxes. Given this, and the current net short position of traders, this downturn depends on how long retail traders can endure losing on their short positions, and when they will through in the towel and try to chase new highs. So keep this in mind and I would rather wait until these signals are starting to show, instead of joining the retail short position and hoping the downturn starts earlier.
US Sectors & Industries
Above quick update regarding the US Sectors and Industries. Past 30 days, the biggest winners are still semiconductors and solar, while the losers are energy, consumer discretionaries, and software. The average 30 increase across sectors is 6.75% compared with 5% for the SP500 (OBS: Might be some overlaps between companies in sectors, and these sectors are not a 1:1 breakdown of the SP500).
YTD the biggest winner by far is energy, and the other sectors that have managed to stay positive are solar, utilities, healthcare, and consumer staples. The biggest YTD loser is the internet and clean energy.
If you are curious, check out the correlation matrix above. Decide on what you want to compare on the x-axis, and then check for reference on the Y-axis (or the other way around).
Market Update: Rates
Comment: Rates
Rates are still high but have started to come down since the YTD top. Some parts are the anticipated FED pivot (fueled by lower expected inflation) and a somewhat slower rate increase from FED (50 points instead of 75). FED is right now in a silent period until the meeting in the middle of December, so unless the market tanks before that, I would expect a slow decrease in rates given Powell’s latest statement.
Market Update: FX
Comment: FX
Just like markets go up and rates go down, the USD continues to weaken against other currencies… And just like with rates, I would not expect a dramatic increase here until we see some action from FED or a large decrease in the markets. So for me, I expect a weaker USD until the market downturn comes, and after that a stronger USD (due to the negative correlation).
Market Update: Commodities
Comment: Commodities
Commodities, however, and main metals, have been continuing their increase. As we saw in the net long position, most retail investors are long gold as insurance for the future downturn. But the biggest factor must be that the Chinese central bank has been buying tons of gold lately… This is a sign that gold is not dead, and for the speculative person, a clear indicator that China tries to strengthen the Yuan’s world role in hope of gaining reserve currency status in the future.
Weirdly, NaturalGas is going down due to the war, and it is getting colder in Europe… So here we should see a sharp increase as the winter goes on.
Another ridiculous thing is the decrease in wheat… It is below the levels before the war, and just like the war have not changed, so have not the fact that Ukraine is one of the biggest suppliers of wheat, while Russia on of the biggest supplier of artificial fertilizers… So if/when we realize there is going to be a food shortage this spring/summer, then wheat should be far above today’s level.
Summary:
- New month and November ended strong. The bear market rally continued and will probably continue until the last retail trader throws in the towel…
- Even though inflation is marginally going down, other indicators like SMI and PMI is showing sign of lower economic activity, and a coming recession.
- Rates and USD are weaker as the market gets stronger, anticipating a more friendly FED…
- Metals are going up, and we should expect wheat and NaturalGas to do the same as winter unfolds.
Next Week:
- 5th Dec. PMI for US, UK, China
- 6th Dec. US Consumer confidence
- 9th Dec. China CPI and PPI