SMU (2023-02-26): Is the Dip Worth Buying?
Past Week’s News:
- US: FOMC More rate hikes (but 25 points to be expected)
- US: PMI Service 50.50 (previous 46.8); Manufacturing 47.80 (previous 46.9); Composite 50.20 (previous 46.8)
- US: Consumer Confidence 67.0 (previous 66.4)
- US: Core PCE deflator YoY 4.7 (previous 4.4)
- Euro Area: PMI Service 53.0 (previous 50.8); Manufacturing 48.8 (previous 48.8); Composite 52.3 (previous 50.3)
- Euro Area: Consumer Confidence (prel) -19.0 (previous -20.9)
- Japan: CPI 4.3 (previous 4.0)
Market Sentiment:
After a strong start in 2023, most indices have started to cool off. We can see that the Fear vs Greed has started to come down from high levels, and also that the Net Long for SP500 is increasing, which can be interpreted as retail investors buying the dip. The question, however, is if this is a dip worth buying, or if the markets have just started the journey downwards.
My answer to this is in two parts:
(1) It depends on further catalysts. At the moment, no “new” negative news could shock the market into fear, meaning that this dip is most likely just a cool-off. After it has come down a little further, prices will most likely continue to grind up, and then repeat until there is some negative surprise. Given this, I believe that this downturn is going to pivot (in 1-2 weeks) and then continue up.
(2) We are getting strong economic indicators and higher-than-expected US CPI. This gives the FED more room to increase hikes, which we can confirm from this week’s FOMC protocol. Therefore, a FED pivot might be further away than expected, resulting in FED continuing to increase rates by 25 points for a while. This is deceptive because the strong economic indicators we get now are lagging, meaning that the recent increase in rates has not yet been reflected in the economy. Therefore, we might soon (sometime in the coming 6 months) get some chock that the economy is worse off than expected. This might make the FED have to pivot and confess that the economy is not heading for a soft landing, which might be a catalyst for the markets to turn sour.
To summarize, I believe this recent downturn is limited, and will soon turn upward again. However, when a negative surprise comes, either from a worse-than-expected economy or some other catalyst, this will finally start a journey toward new lows.
- This Week’s Fear vs Greed 66%
- Last Week’s Fear vs Greed 80%
- SP500 Net Long 56%
- Last Week’s SP500 Net Long 45%
- EUR/USD Net Long 63%
- Last Week’s EUR/USD Net Long 48.5%
- Gold Net Long 77%
- Last Week’s Gold Net Long 66.5%
Indices: 200LB & YTD
Market Update: Indices
Comment: Indices
- Most indices have started to cool off and some more than others. SP500 and Nasdaq, which started their rally later than the others, are around their SMA200, and somewhere around here might start to recharge for a pivot on the upside.
- European indices have more room on the downside and here we might expect some flush downward. However, depending on if/when the SP500 and Nasdaq pivots for their upwards journey, the rest of the European indices are likely to follow.
- I do not believe this is the journey towards new lows, but rather a natural cool-off period that will soon continue to grind upwards (until there is some negative surprise or catalyst).
US Sectors & Industries
- As expected, the defensive 2022 winners are still the losers YTD, and will likely continue to be so until markets start the journey toward new lows.
Market Update: Rates
Comment: Rates
- Given higher than expected US CPI and a more hawkish FED (which are determined to continue with rate hikes (25 points are likely)), rates have continued upwards. This is likely to continue until the FED pivots, which might take a while given the recent stronger-than-expected economic indicators.
Market Update: FX
Comment: FX
- With US rates going up, the USD continues to strengthen against most currencies. The net long of EUR/USD has increased from 48.5% (last week) to 63% (now). This shows that retail investors expect the USD to weaken against the EUR. For me, this indicates that there is still some room on the upside, however, given the correlation between US rates and SP500/Nasdaq, the USD will continue to strengthen throughout the SP500 dip, and then when the SP500 and Nasdaq turn more positive, the USD will comedown (even though only temporary).
- SEK has had a strong start in 2023, given the weak performance of the past few years. This is likely given the change in the policy of the Swedish central bank, with a focus on increasing the Swedish currency.
Market Update: Commodities
Comment: Commodities
- Gold and the other metals are cooling off after a strong start in 2023. Retail investors’ net long gold exposure is currently at 77%, which is a rather big increase compared with last week’s 66.5%. As mentioned before, gold is caught in a range accumulating strength toward new highs (see 10-year graph). I think it should at least come down to its SMA200 in the 200LB graph, and if it breaks down, it should stabilize somewhere in the lower part of the box in the 200LB graph (range: 1700-1775), before going up again.
- Oil, wheat, and cotton continue with stabilizing their bottoms, and depending on what happens with the other markets this spring, they should break on the upside.
- Natural gas continues its downward journey and even though there is room on the downside (see 10-year graph), we might see a bottom soon and should expect an increase during this spring.
Summary:
- Markets have started to cool off and will probably continue this trend in the coming week. However, if there are no negative surprises, they should pivot soon and continue upwards.
- Rates are getting stronger given FED’s outlook, this makes the USD stronger against its trading pairs. This will continue as long as the markets are cooling up, and should turn at the same time as the markets start grinding up again.
- Gold and metals are cooling off. Oil, wheat, and cotton are accumulating in a bottom range and are charging to go up. Natural gas is continuing downwards, however, we should expect a bottom in the near future (in about a month give or take a few weeks), and then expect a bullish rally this spring.
Next Week:
| Day: | Country & Indicator |
| Monday | – |
| Tuesday | US: Consumer confidence |
| Wednesday | US: ISM (Manufacturing); Euro Area: PMI; China: PMI; |
| Thursday | Euro Area: HIKP (prel), Unemployment |
| Friday | US: ISM (Service) |