SMU (2023-01-29): Battle Between FOMO Bulls and Bears

by 29 Jan, 2023Market Updates

Past Week’s News:

  • US: Leading indicators and GDP fell more than expected
  • US: GDP 2022: 2.1% (2021 5.9%)
  • US: PMI Service 46,60 (previous 44,70); Manufacturing 46,80 (previous 46,20); Composite 46,60 (previous 45,00)
  • US: Homebuilders 1.382M (expected 1.359M, previous 1.401M)
  • US: PCE-deflator 4.4 (vs. expected 4.4, previous 4.7)
  • Euro Area: PMI Service 50.70 (previous 49.80); Manufacturing 48,80 (previous 47,80); Composite 50,20 (previous 49,30)
  • Euro Area: Consumer Confidence -20.9 (vs previous -22)
  • UK: Service 48,00 (previous 49,90); Manufacturing 46,70 (previous 45,30); Composite 47,80 (previous 49,00)

    Market Sentiment:

    So far, 2023 has delivered a strong start for all major indices… the rally that initially started in October is still going strong and bulls are starting to aim for new ATHs. If we look at the Fear vs Greed, it has reached 88% (+11%-points since last week) and I believe that this is spiked by extra FOMO in the markets. However, the bears are still convinced that this is a bear market rally and are increasing their shorts (we see the net long of SP500 has decreased to 42.5% from 50% last week). As always, who is right and how long will this rally continue? 

    My opinion is that this is a bear market rally and that a healthy market should decrease to new lows due to the economic climate. As we see in the economic indicators, they are indicating that we either are or are about to enter, a recession. However, these past years have proven that the markets can stay irrational longer than expected, which means that I would not be surprised if this rally continues. I am aware that this is a classic “either-or option”, but I think that it proves the uncertainty in the market. But if I would make a bet, I would say that the upside is limited betting on new ATH is riskier than betting on the downside.

    Either way, the long EUR short USD position is increasing and the net long gold position has increased marginally.

    Indices have increased an average of 7.75% YTD and are about +/- 0 over the past 200 trading days.

     The VIX is once again decreasing and more or less at the 200LB low. We should expect an increase in VIX when the markets eventually turn, but as stated above, it is hard to assume when that will be.

     

     

    • This Week’s Fear vs Greed 88% 88%
    • Last Week’s Fear vs Greed 76% 76%
    • SP500 Net Long 42.5% 42.5%
    • Last Week’s SP500 Net Long 50% 50%
    • EUR/USD Net Long 41% 41%
    • Last Week’s EUR/USD Net Long 36% 36%
    • Gold Net Long 59% 59%
    • Last Week’s Gold Net Long 57% 57%

    Indices: 200LB & YTD

    Market Update: Indices

    Comment: Indices

    Most indices crossed their SMA200 a while ago, but now we can see that SP500, Nasdaq, and Nikkei225 have joined the club. This means that all major indices (that I follow) are trading above their SMA200. However, when it comes to where they trade in their boxplots, we see that it is still mixed. Some indices are trading around their means while others are far out in outlier land, which is a stretch given mean reversion theory.

    As stated above, 2023 has been strong for all indices, and the October rally is still going strong, however, if we zoom out to the 10-year graph, there is still plenty of downside until reaching the mean (which is my target for some kind of bottom or fair price before this recession is over).

    Also, I side note on indices, this weekend I updated a portfolio analysis of all the indices, simulating the optimal weight for increasing the risk-to-reward ratios (i.e., Most Efficient Portfolio). I am going to do the same for the rest of the assets in these Sunday market updated and later incorporate them in the analysis.

    Here is the LINK to that post.

     

    US Sectors & Industries

    Here, I have decided to reinstate the U.S. Sectors graph as a complement to the bar chart. This is to be able to spot any potential divergences and/or momentum building up. 

     As last week, we see that the sector increase is strong across all sectors (except the defensive ones). If we look at the 200LB period we see that the winners are energy (no surprise), Homebuilders, and Solar. The sectors that have decreased the most are previously strong sectors such as Clean Energy and Internet. 

    Given the economic climate and my hypothesis of new lows due to future recession, the sectors I think look interesting and that I would see as getting bets for the coming years are:

    (1) Consumer staple, which is defensive and stable. Looks like it is going to continue its upward trend with no major surprises.

    (2) Finance sectors such as banks, which since the financial crisis have prepared for future recessions and are well off to weather out the storm.

    (3) Energy, which is the main ingredient for the global expansion and adjustment from dependent un Russia. Also, it is a necessity for industries, so even though inflation and shortage in supply might increase the commodity prices, the industries that are dependent on energy, eg. oil, has to pay the price no matter what.  

    Market Update: Rates

    Comment: Rates

    Rates have consolidated a bit while waiting for new news from the central banks. Even though the market are anticipating a paus in the rate hikes, we should expect around 50-point increases form ECB and FED. Next week we get the FOMC’s rate decision.

    Market Update: FX

    Comment: FX

    The USD is not looking strong, and given that Yellen recently threatened that the US might default on its obligations if they are not able to raise the debt ceiling is not making things better. Even though the US will probably get OK to raise the debt ceiling, this still means an increase in the printing of USD to pay their debts, which is going to devalue the USD. But what is the alternative? The USD is still the world’s reserve currency and the flight to safety in case of market turbulence. But is that going to change over the coming decade and then will we have a combination of currencies or a new reserve, eg the Chinese Yuan? We will see, but for now, the USD is getting weaker compared to most of its pairs, and if/when the markets start to decrease, or we get a surprise in the communication from the FED, we should expect some movement in the USD, and likely on the upside.

     

    Market Update: Commodities

    Comment: Commodities

    Gold just like most metals has had a strong start in 2023 and continues to increase. However, the same cannot be said for NaturalGas, which has plummeted to levels not seen since the middle of 2020. Oil has started to move upwards and I think that oil is going to increase. Right now we have the Chinese New Year, and reports have come in with an increase in Chinese traveling and spending after opening up more and more. This, I believe, will increase the world’s production which is positive for commodities tied to travel and industry. 

    Wheat has been slow and come down since the spike that occurred when the war in Ukraine began. I think that the development here will depend on this spring’s harvest, and first, here we will see the effects on supply that the war has caused (depends on the amount Ukraine can produce and how the shortage of fertilizers is going to affect the harvest). 

     

    Summary:

    • Markets continue to rally, and this has become a battle between the FOMO bulls and bears. It is possible that it continues longer than reasonable, and should be traded with caution (both on the upside and downside). 
    • My 2023 bet for strong/stable sectors are (1) Consumer staples, (2) Banks, and (3) Energy.
    • Rates have consolidated and might pick up speed after next week’s FOMC rate decision.
    • USD is getting weaker compared to its trading pairs.
    • Metals are going strong, natural gas is going down, and oil might have hit a bottom and continues to build momentum.

     Next Week:

    • 30th Jan: Euro Area Consumer Confidence, 
    • 31st Jan: Euro Area: (prel) GDP
    • 1st Feb: US: FOMC Rate Decision; Euro Area: (prel) Core Inflation (HIKP) & Unemployment
    • 3rd Feb: US: Non-farm Payroll, Unemployment, ISM; China PMI