Not a good sign for the bulls. The SPX is staying under 4300 for several days in a row. Its lingering down there. Setting up camp in low territory. It doesn’t change the outlook for the next few days, but it does change the outlook for the next few weeks. Even if the SPX has bottomed, its been a U bottom, not a V bottom. Big difference between the 2. A U bottom is not necessarily a bottom shaped like a U. Its a bottom that spends a lot of time trading close to the lows. U bottoms give you a lot of time to buy cheap. U bottoms spawn rallies that are choppy, with less upward thrust, and less likely to rally to new highs. They also often happen in bear markets.
V bottoms are the opposite, the rallies are longer lasting and cleaner, with minimal pullbacks on the way back to previous highs or new highs. V bottoms don’t give you much time to buy near the lows. V bottoms have been more common than U bottoms because the SPX has mostly been in a strong bull market since 2010.
Examples of U bottoms since 2010 are June 2011, June 2012, April 2018, March 2022, June/July 2022, September/October 2022, and December 2022. It is no coincidence that more than half of the U bottoms happened in 2022, after one of the biggest stock market bubbles in financial market history. U bottoms generally happen in chronically weak markets. Not temporarily weak markets.
As you can see in the charts above, the messier and longer it takes to recover from the lows, the rallies coming out are usually shorter, choppier, and have less upside than V bottom rallies that were common place in 2013, 2014, 2017, 2019-2021.
This kind of messy U bottom was not what I was expecting. After the strong rally in the summer, after a correction, I was looking for a V bottom, which obviously has not happened. While the hysteria over higher long bond yields is overblown here, its a much more valid reason to selloff than past vacuous reasons like Grexit, Brexit, upcoming elections, trade wars, etc. So you can’t totally brush it off as meaningless, like you could for so many of the news based corrections in the past.
There is some fundamentals behind this selloff, as higher yields definitely have negative consequences for earnings growth, as well as reducing both the supply and demand for credit. However, based on the trends in the commodity market (oil down over $10 in the past week), as well as apartment rents, the bond selloff is more a positioning story than a new fundamental weakness story. There are lots of bond holders who are deep underwater and feeling pressure to lighten exposure and cut losses. Politicians and the Fed basically ignoring the cries for help from the bond market are not helping the cause. So it appears that bond yields will have to stay elevated for the next several weeks, as I don't see the US economic data coming in weak enough to rescue the bond market on its own. Plus, I already see so many economists and investors bearish on the economy, its not going to be easy for economic data to really surprise to the downside.
Recent options market data is showing continued high levels of put volume relative to call volume. Even on the days that the market is flat to slightly higher (Wednesday and Thursday), you saw some very high put/call ratios. And with the VIX above 18 and realized vol at much lower levels, a few days bounce could really crush IV levels. That should in turn result in dealer hedging the IV drop by buying stocks and index futures.
You can get a technical rebound soon in the bond market, just based on how much attention and how fast long bond yields have gone up, and with the big move lower in crude oil over the past few days, which is a huge relief for bond investors. Bond yields have tended to lag crude oil prices with a few days lag. At least you have inflation that is not getting worse, so once you get through the forced sellers and weak hands, you probably can get a consolidation of the big move and range bound trade for the next several weeks. Even a range bound bond market should be enough to provide a decent bounce from stocks at these levels, but it won't be a powerful bounce that you can just ride for months. Bounces from here are probably 1-2 weeks in length. And then a pullback, and then back up again. It should be a choppy rebound. Still long and hanging on, but definitely not adding more, and staying away from bonds.
Posts
6 comments:
Is the israel attavk a big deal and does it cjange your views? Weakness in stocks and huge rally in treasuries??
Let me just add here. "In the end there will be wars, earthquakes and rumors of war." In the end. Anyone who has read the Bible sees the significance of what is going on. Hint: all the money in the world ain't going to save your a$$ now.
Israel attack doesn’t change my view at all. In fact, it makes me slightly more bullish because it will make speculators more afraid to short Treasuries in the coming weeks. I expect oil to give up all its overnight gains.
You don't think the fundamental idealogue countries like Iran, China, Russia, and NK don't see this as yet another opportunity to change the current power structure? Would't the North Koreans see all those paragliding Hamas and say to themselves "hey that sounds like a good idea, let me try that." Would the US become easily overloaded now considering there are 2 proxy wars it needs to fight and would it now open up the possibility for other opportunistic countries to take advantage of this situation?
Over thinking.
Markets are markets. Geopolitics are geopolitics. Don’t mix the two. They belong in 2 separate spheres that usually don’t affect each other. There are exceptions, but 95% of the time, geopolitics don’t matter, especially when its a war in a non important financial market.
Post a Comment