On Seasonality, Analyst Calls, and Jackson Hole

If everyone is afraid of a weak September, wouldn't they be looking to sell in August and/or wait to buy after September?  There is a lot of talk about seasonal weakness in September/October these days.  It seems the pros are reluctant to get really long ahead of September.  Of course, you didn't hear much about that in late July when the SPX was hovering around 4600.  It just goes to show you how unimportant fundamentals are for short term/intermediate term moves in SPX.  Seasonality should be meaningless if the stock market was efficiently priced.  But its not, maybe it has to do with days getting shorter and less sunlight which makes people less optimistic.  Who knows for sure.  But past data has shown that the SPX performs the worst in September.  I wouldn't hold my breath hoping for that to happen this time around.  The market seems to have pulled forward that September weakness into August. 

Aside from seasonality, the focus these days seems to be on two things:  China and bond yields.  While Chinese stocks and Treasury bonds have performed poorly lately, I sense that people are much more pessimistic on Chinese stocks than they are on Treasury bonds.  It almost feels like spring of this year in natural gas.  Or spring 2020 in crude oil.  Once something goes down so much, people are naturally attracted to buying that dip, viewing it as a once in a liftetime opportunity.  For crude oil, it was, but the contango was so steep that most of those dip buyers didn't make any money, even when crude rebounded, because most of them got in too early and were getting eaten alive by the super contango when the ETFs would roll futures contracts.  Same went for natural gas.  This time, its Treasury bonds.  While there is no supercontango in Treasury bonds to worry about, the buy the dip mentality is similar.  

I find it interesting that most oil analysts are calling for $90-100 crude oil by year end, yet the biggest driver of crude oil prices, China, is viewed as having a very weak economy with lots of problems in the property sector.  Almost everyone I see on CNBC talk bullish about energy, as one of their favorite sectors.  It doesn't make much sense, unless there is some supply shortage that is going on.  If it is, its one that's being artifically created by Saudi oil cuts, which have a limit, because if they really try to squeeze oil prices higher, they will be getting push back from the US and China.  The last thing China wants to have are high commodity prices along with a weak economy. 

In fixed income, I see most analysts call for 3.5-3.75% 10 year yields by year end.  That analysis is incongruous with the higher calls for crude oil.  HIgher crude oil prices usually will lead to higher bond yields. And no, fixed income analysts are not always calling for lower yields.  In fact, it is usually the opposite, as from 2009 to 2019, they habitually called for higher bond yields, even in an ongoing bond bull market.  And they were almost always wrong. It does give me a pause when I consider buying this dip in Treasuries when I see so many looking to buy that dip, so many looking for lower yields into year end, even in a weak bond market.  Longer term, I agree with their bullishness, as these are decent levels to buy longer dated bonds, but it is not the great short/intermediate term opportunity that some view it as.  And while most are focusing on the long end as being the great buying opportunity, I think its the short to intermediate end of the yield curve which has better value.  In a weakening economy, the short to intermediate term yields go down the most, with long term yields going down the least.  

Suddenly, we are seeing all these articles on China as if the problems suddenly came out of nowhere.  China had the biggest real estate bubble known to mankind from 2000 to 2020!  The Chinese treat empty apartments with no interiors like they are blue chip stocks that should be kept forever.  And it is pervasive.  Almost all the rich in China got that way through real estate.  When that fever breaks, its not a 1 or 2 year downcycle.  It lasts for decades or until the PBOC and the CCP goes full bazooka and pulls out a giant inflationary stimulus package.  If that happens, the yuan has to be sacrificed to save the real estate market.  China can't maintain a strong yuan and a strong real estate market.  Its not a reserve currency like the US, which can get away with fiscal largesse with few repercussions.  If China engages in expansionary fiscal and monetary policy, the currency will be the release valve.  Xi is making the right move, and letting the bubble deflate, while Western economists, all of whom are Keynesians, are hoping for China to do another big stimulus, as they think more cowbell is the solution to all economic problems.  

We have the much awaited Jackson Hole meeting, which is getting extra attention because of the poor performance of Treasuries.  There are talks of a higher r*, which bond investors are afraid of.  It looks like its setting up a sell the rumor, buy the fact setup in bonds around Jackson Hole.  Powell is not the kind of guy who wants to shock and awe the markets.  Last year was an anomaly, because inflation was high.  Its not now.  So I doubt you see a big selloff on Friday.  However, I would much rather buy the dip in stocks than the dip in bonds.  SPX is still in a strong uptrend, and Treasuries are in a strong downtrend.  There is a huge difference between buying short term weakness in a strong market(SPX/Nasdaq) than in a weak market(USTs).  We are late in the selloff so if the bounce fails and it weakens later this week, I will start buying. 

When the SPX gapped down, and rallied into the Friday close, it must have ignited some of the repressed bullish feelings among investors.  I noticed over the past weekend, a very different tone, as people were now looking for a bounce this week, even if just briefly.   You saw a lot of buying in the high beta techs (TSLA, NVDA) on Monday, and Nasdaq outperforming on the day, while Russell 2000 lagged badly.  The Russell 2000 relative strength as a tell on future market direction is usually most effective after an extended rally.   You are looking to see the Russell go down while the SPX rises or goes sideways, as a sign of reduced risk appetite and future SPX weakness.  After a pullback, the Russell 2000 doesn't mean much, because you've already made the move.  The Russell 2000 relative performance is a better gauge of future direction after rallies, not selloffs.  So not much meaning at this point.

I don't see a big edge being short here, but I am still holding some SPX shorts and very little left of individual stock shorts that I'm stubbornly holding out for the price target that I initially looked for.  I'll look to close those out before J-Hole.  Looking at mutual fund and ETF flows, there has been minimal equities selling into this selloff.  We probably need one more move lower to shake out the weak hands and have a more sustainable bounce higher.  If we keep bouncing from here and last Friday was the low, I don't expect that move to have much momentum and it will likely stall out quickly.  Overall, its been a low energy selloff with muted volatility.  Surprised the VIX isn't below 16.  Its been a bit disappointing as a bear, since I had greater expectations of weakness this month.  But you take what you can get on the short side in a bull market.  The selloff probably has at most 1 week left.  So its near closing time for the bears.