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  • kennethkohwk

The Rubber Band is Stretched...

The Smart Money / Dumb Money is at intermediate snapback extremes.

The SPX Put/Call ratio is the highest since 2014. Traders are really bearish.

The Manufacturers' New Orders for Durable Goods is a leading economic indicator.

When it starts to turn down, it usually signals a recession.

Although it seems that most everyone is expecting this to collapse, it hasn't yet done so, although it can be argued that tightening monetary policy might eventually collapse this...

... but it hasn't happened yet.

The % y/y changes tend to be correlated to the stock market performance.

There is a dislocation between the MNODG and the stock market y/y change.

Put another way, the stock market has been dropping as though we are in a recession although we haven't felt the full effects of it yet.

if we take the spread between the two, we find we are at elevated levels seen Dec 1994, March 2003 and Nov 2008.

Here are the historical spots in the S&P500 during the month when the spread hit that extreme.

Even though Nov 2008 wasn't the ultimate bottom (that happened in Mar 2009), it still lead to a pop in the market that lasted 6 weeks that took the SPX from 800 at lows to almost 950 at highs, some 17%+ gains before collapsing due to the credit crisis.

To note, of course in all three comparisions, the macro situation is different, so it's difficult to make a one to one comparision. In Mar 2003, the USD and the 10-year yield was in the process of weakening. In Nov 2008, the USD was rising, but not at the levels of today. Also, the 10-year was conslidating / weakening due to loosening monetary policy.

At the moment, both our 10-yr yield is climbing, and the USD is climbing to highs. Inflation is not abated yet. It's seems too easy to assume an eventual recession.

NOTE: The macro data are all monthly data points so there is a certain "lag" to them from month to month. The spread data doesn't guarentee what will happen in the short term, but gives us an idea of the dislocation of economic expectation and what is happening at the moment that implies the probablity of how good a deal you might be getting by investing in such a fearful climate.

Put another way, if you are dollar cost averaging in the market, you should be continuing to average in now because you are getting a great short term deal.

Some green shoots?

However, the relative strength of the Russell 2000 (small cap) has been stablizing and improving against the larger index. This divergence implies a hidden strength in the market that is slowly building.

The VIX probably isn't as high as I would like it to be to indicate a major flushout, but at least it is up there with the short term bottoms.

The AAII Bull/Bear spread is already at levels rivaling the 2019 and 2020 lows.

Conclusions: in terms of money on the sidelines and the amount of fear out there, the rubber band is stretched quite tight, and any significant good news (like an unexpected drop in the CPI) may start a strong intermediate snap back rally. However, it should be said that unlike Mar 2003 and Nov 2008, we are in a situation that both the USD and 10-year are rising at the same time, and this is not good for the stock market. It makes it harder for companies to borrow money for growth and investors have to be more demanding when they discount stocks to get their net present values. So long as inflation remains unabated, the FED seems determined to destroy demand with tightening... potentially leading to a harder landing.

Tomorrow's CPI is likely going to be quite key.

If it is lower than expected, we might get a rally to year end. If not, it's possible for markets to drift lower.

I think it is entirely possible for the broad markets to drift lower, but if it does, it would seem we are closer to the end of the bear market than from the start (in terms of downside, not time).

Even more significant is that this key news is occuring just as we are at strong long term support. Hence, whichever way the price goes, it may be decisive soon.

Take care everyone!


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