I hope everyone's had a great weekend. It's time to dig into what's going on in the world around us, from the economy to the markets in this week's Navigating the Markets!
We got ISM Manufacturing PMI data on Friday. It was a bit of a mixed bag, with mostly softer data.
New orders continue to decline, albeit at a slower pace
Employment deterioration accelerated as more jobs in the industry were lost last month (we saw similar in jobless claims yesterday)
Prices were about flat month-over-month, nearly ceasing their recent decline
Backlogs accelerated their deterioration, showing further evidence of the manufacturing industry slowing both now and likely in the future
Core CPI continues to fall, now at the lowest level in two years. The Fed's tightening is working to slow inflation, but there is still more work to do here.
Initial jobless claims rose marginally, but remain rather subdued. I won't be particularly concerned about the labor market until we see jobless claims in excess of 300K and JOLTS job openings fall to a point where there are less than one job opening for each unemployed person seeking work.
2024 is a huge election year, with more of the global population with legislative and presidential elections than any other time in the last 220 years (and quite possibly ever).
Last month was the 7th best month for stock market performance since 1992, living up to the hype of November seasonality. We had an abundance of flows that helped to support a strong market, including share buybacks, inflows from investors and institutions, such as pensions and retirements, as well as powerful CTA buying, and a fair amount of supportive developments, such as lower inflation readings, falling rates, and the presumption that the Fed's hiking cycle is now over and cuts are coming as soon as the first half of next year.
Seen below is the peak in rates and the bottom in stocks. Rates, and other key correlations, still do play an important role in price discovery within a variety of asset classes. While those have shown some divergences, it's important to consider that inflection points often remain at similar junctures in time within both stocks and rates. Especially over the last two years.
November was also one of the best months for bonds ever, after one of the worst bear markets for bonds in history. This is another way of showing just how much the move in rates lower helped to buoy stocks higher, providing relief from a rather aggressive move higher in rates in the months leading up to November.
Another supportive element rates at a global scale is that we're seeing many economies slowing and central banks cutting rates in an attempt to stimulate growth.
This is largely being led by emerging markets central banks, with the expectation that developed markets may begin to cut next year.
For now, however, there seems to be opportunities within key emerging markets. I continue to think Mexico provides a strong opportunity for long swing trades and long-term investment.
Emerging market equities vs their US counterparts are also at 50-year ratio lows, which suggests that there must be opportunity out there in the right places. One must, however, be selective. Especially when considering that some emerging markets with greater China exposure may remain vulnerable unless and until the regime there is able to stimulate their economy.
Here's a fun one, ARKK and the Austrian century bond price are following a similar path. Whereas lower yields on very, very, very long duration mean higher prices for incredibly speculative stocks. Wouldn't you know it?
AAII bulls vs bears just registered the highest level of optimism that we've seen since April of 2021! We're now in a euphoric market regime. That doesn't mean prices have to turn lower immediately, but it does mean we're getting into the area of appreciable crowding risk within bullish sentiment, and that's likely to bleed into flows and positioning. In addition, bears are going extinct by this measure as retail bearish sentiment saw the largest drop since April of 2009.
Managed money sentiment also shot higher in bulls vs bears, getting back to levels we haven't seen since the summer rally. Suggesting that sentiment from multiple vantage points is becoming a bit more bubbly, though this measure is nowhere near its recent highs yet.
On the other side of the measures, however, is the Bank of America Bull and Bear indicator, which is giving us a "Neutral" indication.
Similarly, the BofA Sell Side indicator is still relatively bearish, only seeing its first increase since July during November.
Finally, the Goldman Sachs positioning-driven Sentiment Indicator has retreated from Stretched positioning back into neutral.
Overall, we're seeing initial signs that sentiment is becoming stretched, but not enough to confirm that we're in bubbly territory for a short-term top yet. Even if we did see such a reading in sentiment, we would still need to see price action confirm it with a shift in momentum.
Financial stocks saw the largest inflows since August of 2022 as the market seems to be pricing in the idea of the Fed pushing down the short end of the yield curve next year, and that the steepening that's likely to happen would be achieved through lower short-end rates rather than higher long-end rates, bringing banks with unrealized losses some reprieve and relief for equity holders in the same.
We saw significant fixed income inflows into money market accounts and high yield corporate debt, with sizable outflows out of TIPS as concerns about inflation diminish.
Bank of America clients continued to buy Japanese, growth and municipal bond ETFs, with outflows from TIPS, materials, and low volatility (safer) stocks. These flows feel a lot like a high sentiment risk on allocation regime, reflecting what we were seeing above, and supporting the idea that some measures of rising sentiment are indeed impacting flows.
Managed money continued to add to long positioning last week, bringing NAAIM to 81.38 from 77.95 the week prior. This is the highest reading since July 26th, just before we saw the market pull back. But that reading was also 101.82, much higher than where we are now (and implying that some long leverage was in play). We've still got a ways to go to see that level of stretched positioning. Nevertheless, this is one sign that upside could be somewhat limited from here unless there is a strong catalyst.
We saw some de-grossing last week as funds largely were covering shorts -- and we definitely took advantage of that as I identified a number of powerful short squeeze setups on our Discord, many of which paid off handsomely. This is the type of environment where those trades can work, because hedge funds are very crowded in single stock shorts. I will continue to look for these opportunities until there has been further de-grossing as I suspect there are more plays to come.
Funds at JP Morgan still have room to add to long positioning, whereas positioning isn't yet stretched, but they are certainly leaning long here.
Equity options traders are pretty giddy right now, as we closed the week with a 0.51 put-to-call ratio. That, along with single stock call skew increasing, tells me that a lot of traders are continuing to position for additional upside. This isn't an extreme measure quite yet, but it is definitely lopsided to the long side.
We have a rather significant amount of open call positioning at SPX 4600 which could provide some resistance going into next week, but it's important to remember that those supportive delta and theta decay flows are likely to buoy the markets here. So any rejection's downside could be somewhat limited. Particularly in the first and last hour of trading.
Important levels to watch (emboldened are most consequential)
Gamma Level: 5000.0
Key Level: 4800.0
Key Level: 4750.0
Gamma Level: 4700.0
Key Level: 4650.0
Key Level: 4625.0
Call Wall: 4600.0
Key Level: 4575.0
Vol Trigger: 4550.0
Gamma Flip: 4518
Gamma Level: 4500.0
Put Wall: 4400.0
With the gamma flip level less than 2% below price, it is important to consider that this positive gamma regime is somewhat precarious. A retracement below 4,518 would likely bring about more volatile hedging flows, where dealers sell dips and buy rips. For now, however, we're seeing the opposite and that should help to keep price action more stable provided we stay above the gamma flip.
Skew is somewhat elevated going into next week, suggesting that those same passive supportive flows should be relatively robust.
Last week was a rather choppy ride, with a shift in leadership to financials, real estate, travel, utilities, and components of software and away from the Magnificent 7, which were flat to down.
Coffee was a big winner last week, and it has been on breakout watch on the Discord since early November, with recent price action validating that breakout. It's likely to have more room higher from here, but may need to take a breather first.
Natural gas, palladium, and sugar led the way lower. Sugar may be a buying opportunity soon, but natural gas and palladium continue to look rather bad to me for now.
This week we get a number of key data points, particularly for the US labor market, such as JOLTS on Tuesday, ADP on Wednesday, Initial Jobless Claims and Challenger Job Cuts on Thursday, and finally the whopper with Employment Data Friday featuring NFP, the Unemployment Rate, Average Hourly Earnings and later, Michigan Consumer Sentiment.
There are no note or bond auctions next week from the US Treasury. Just bill auctions that I suspect will be well bid.
Earnings season is lightening up, but there are some interesting names reporting, such as SAIC (a company that I think is an overlooked opportunity in the defense sector). C3.ai is also reporting on Wednesday after hours. I wonder how much of a disaster it might be? We'll see, as anything could happen, but the company has been disappointing investors again lately.
As we close out 2023, December seasonality tends to be weak in the beginning and then we see a pop post-OpEx based on prior pre-election year trends. Some are already calling for all-time highs, which isn't impossible but I'm not sure it's terribly likely before 2023 ends.
Looking at the prior data, the stock market peaked on January 3rd, 2022. On average it takes about 736 days, or just over two years, to see a new high, but we've certainly seen shorter turnaround times in the 1980s.
For now I remain interested in some of the episodic short squeezes on shorter time frames, and strong trends on intermediate time frames, like long Mexico, long EWJ vs short FXI, and long coffee. I also think we still have some room for other currencies to continue to move higher against the dollar, which may help to give some commodities and emerging markets a boost as well.
Best of luck this week, and stay nimble out there!