Keeping it Short
“I am not sorry if this kills any of your illusions about anything.”
—Listen Up Phillip
?
Just because you make a decision doesn’t mean you have to act today.
?
Key takeaway: Fear was introduced to the market over the last few trading sessions. However, the fact that Powell is now matching investor’s’ rate cut views may be a stabilizing factor once the “out of tech” rotation settles down. Because the S&P has broken below my “start to get defensive” threshold we are seeing a regime shift, and it is a motivation to focus on contingency plans, outlined below. A topping process can even lead to new index highs; hence I am adopting a negative, but measured stance.
Mirror Mirror on the Wall Dept: Jerome Powell is a consensus builder. Another way to say that is he reflects the majority view of the Federal Open Market Committee (FOMC) voters. This week he said something different, mirroring the shift that I pointed out that has occurred among FOMC members. The question is whether he changed his own mind, which we will find out at the May 1 press conference. Last week I wrote he could add to his nuanced tone change from the prior Friday when he veered off his normal course, mentioning that the risk of cutting too early would be “quite disruptive”. Three weeks ago I wrote:
“Powell must express that his base case has changed to one where he declares ‘inflation remains elevated, and there is no downward progress’ before the markets stop bounding upward”
He basically said that on Tuesday. But the market barely budged, perhaps because Powell’s acknowledgement mirrored the market’s expectation of one or two cuts at the end of 2024.
The world changed in three ways over the last few days
To my first point, a view of December Fed funds futures shows a 50-50 split around one or two cuts, lower than the certainty for three cuts which had been the FOMC party line:
A few things are notable about this distribution of expected cuts by year-end. There is a fairly even split (see red vertical line) between traders who assume one or no rate cuts (to the right of the line) versus those who expect two or more cuts. Significantly for equity market bulls, the fixed income world has not changed. It is not expecting any chance of a rate hike. In some ways Powell’s remark has removed market uncertainty, rather than added to it. A fragile equilibrium has been struck that will not dislodge unless there is a shift in expectations toward a 5.50% - 5.75% funds target (a rate hike).
Unfortunately, my other two points have certainly added to market uncertainty.
I am not a military strategist, but the problems introduced by Iran and Israel having broken precedent by lobbing bombs at one another puts the world at a new risk plateau. I do not think anyone knows whether the danger has passed or whether we are in unfamiliar territory. What is interesting is the VIX has not breached 20 and it shows a similar pattern to what occurred in March 2023 during the Silicon Valley Bank failure.
Similarly, crude oil was steady, closing the last three days of the week at 82.15, 82.10, and 82.22. One would think that if the big Middle East producers knew something about future conflict, they would have been major buyers.
Can we now put the hysterics behind us and get back to buying? Well, that brings us to the third point and the moral of the story. The regime shift that has occurred on a break of 5090 in the S&P 500 has started the clock on a major selloff from my perspective. The fact that the market is extremely oversold on some measures suggests a bounce at a minimum, and the nature of the bounce should determine how to manage the next critical few weeks and months.
The chart below shows the percent of stocks trading below their 20-day moving average hit an extreme that normally leads to a reversal higher:
As crude oil has stabilized over the last three days, the number of stocks above their respective 20-day moving average also rose. This illustrates the depth of the rotation outside of the dominant tech stocks: energy, financials, health care, industrials, materials, staples and utilities stocks all outperformed the S&P this week.
The question is how the bounce unfolds, and for that we need to take this one step at a time. My lean is that there will be a bounce that will spark hope, but do not be fooled, the world has changed. It may unfold in a manner similar to 2000 or 2007, two tops that gave the illusion of a market that weathered the storm. However, the conclusion was still the same, and things broke in a meaningful manner eventually.
?
Markets:
Equity Market: Vicious Rotation?
Weekly Trend: Bearish
The daily chart below is the ratio of mega cap tech relative to the S&P 500. There was an unusual and fast break of the wide trading bands that normally represent support, and also marked the significant bottom right before big tech began its big run in 2023:
领英推荐
This break is painful for anyone holding overweight positions in mega cap tech stocks and has begun the dialog once more about a renewed outperformance of value stocks versus growth that dominated a good part of the 2022 market landscape.
Looking at the big picture, the weekly chart of the S&P Value Index / S&P Growth Index shows that there is a lot of ground that needs to be covered to consider this a major trend reversal:
The next chart is a daily chart of the QQQ Nasdaq 100 ETF since the October 2023 low. It is at strong support, but any further drop could see another 2% selloff. That selloff becomes more likely on a gap down tomorrow.
Elephant in the Room
NVDA sits at a very key level. Exposure management for the entire equity market can be managed off the action in this stock. Any gap below 750 introduces more downside volatility, and any breakdown below 720 could introduce a panicked waterfall drop. I expect a bounce and then we can reassess.
Fixed Income: 2-year yields vs. Fed Funds
Weekly Trend: Bearish?
A cool $183 billion comes to auction this week between the 2- 5- and 7-year Treasury notes. The first tranche comes on Tuesday April 23 in the form of $69 billion in 2-year notes. The monthly chart below overlays the 2-year yield on the Fed Funds rate in black.
The resemblance to June 2007 makes me open to a rapid and quick rally in stocks, which sets up a rapid reversal to new lows that leads to one final high. Something similar happened in Q3 2000 as well so there is potential for a topping process that takes place over time. It is not my base case, although I am open to it.
Crude Oil: 88 Resistance not even tested
Weekly Trend: Neutral
Repeat from last week: The oil market is respecting resistance for now. I am assuming Israel’s response—absent of any U.S. support—will be contained to attacking Iranian satellites such as Hezbollah. That should be taken well by the crude market, although price action should be jittery. The risk of destabilizing equity markets exists, and comes with sustained price moves above the key resistance zone 87.80-88.50.
I was surprised by the direct attack, but outside of an overnight spike, the crude market acted as though nothing had happened, and in fact, reversed its daily trend lower. The daily chart below shows the reversal in my trend model (red bars) and remains below 83.25 daily resistance.
A weekly chart of gold relative to crude oil going back to 2019 shows that gold is outperforming crude currently, the opposite of what happened back in 1990 when Saddam Hussein attacked Kuwait.
Perhaps the relative calm in the VIX and crude oil are saying the only thing going on is a garden variety rotation out of tech stocks that caused a disproportionate impact on the general stock indices due to the massive weight of the mega cap tech stocks. But the ground has shifted, and we need to respect price action. If there are any dislocations I will give an intra-week update.
?
Peter Corey
PavePro Team
?
?
? Copyright 2024 Pave Investment Advisors, LLC (“Pave”). All Rights Reserved Pave is an SEC registered investment adviser. Such registration does not imply any level of expertise by the registrant. Pave provides services on a discretionary and non-discretionary basis. The enclosed material is for educational purposes only, any client subscribing to Pave’s advisory services will need to accept the Term of Service and execute, by accepting, the Investment Advisory Agreement in the Pave application. Investing is speculative and involves risk, including the possible loss of principal. The information contained herein is provided for discussion purposes only, is only a summary of key information, is not complete, and does not contain certain material information about Pave or any of Pave’s affiliates and is subject to change without notice. The distribution of the information contained herein in certain jurisdictions may be restricted, and Pave may not be available in all jurisdictions.?
Unless otherwise indicated, the information contained herein is believed to be accurate as of the date it was produced. No representation or warranty is made as to its continued accuracy after such date. This material is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any securities or investment advice. No offer or solicitation may be made prior to the delivery of an Investment Management Agreement, which will contain additional information about Pave, including disclosures relating to risk factors and conflicts of interest. Clients will also receive ADV Part 2A, 2B and Part III (Form CRS). You should review all the material provided about the advisor. In the event of any discrepancies between the information contained herein and the Investment Management Agreement, the Investment Management Agreement will control. You should make an independent investigation of the investment described herein, including consulting your tax, legal, accounting or other advisors about the matters discussed herein. Pave’s investment methodology may not be suitable for all investors. There can be no assurance that any investment objectives will be achieved. Investment losses may occur, and investors could lose some or all of their investment. No guarantee or representation is made that Pave’s investment methodology will be successful. Nothing herein is intended to imply that Pave’s investment methodology may be considered "conservative", "safe", "risk free" or "risk averse”. Economic, market and other conditions could also cause Pave to alter the investment methodology. Certain information contained in this material may constitute "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "target", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of Pave’s methodology may differ materially from those reflected or contemplated in such forward-looking statements. Pave believes that the information contained in this material to be reliable but does not warrant its accuracy or completeness.?