My View Of Wall Street – Bulle Or Bear, Does it matter? (NYSEARCA:SPY)

“Your mind is like a parachute: If it isn’t open, it doesn’t work.”

– Buzz Aldrin

There are many aspects of navigating the financial markets that offer little to no value to an investor. Perhaps there is no bigger one than arguing about whether it’s a BULL or BEAR market. For one thing, these are arbitrary designations with no agreed-upon definition. This is especially true when we find ourselves in a situation where both BULLS and BEARS can make an excellent case to support their views. A 20% move in either direction is commonly said to mark a change from one to the other, but, again, that is rather arbitrary and doesn’t factor in the time element.

Was the COVID Crash a “BEAR market” when it lasted approximately two months? Have the past 10 months been a “BULL market”? Since January ’21, the S&P is down ~7%. While the median stock is still down considerably from highs made almost two years ago as well. When I look at the charts, I see a sideways and perhaps a major topping pattern in place. The point is that at the end of the day, it does not matter what analysts call this scene. Besides, such descriptors tell us more about what the market has done rather than what it will do.

Here is why “timing” the market is so difficult. It is only with the benefit of historical context that we can go back and mark off the important highs and lows that distinguish between the two no matter the market environment. In my view, the only chance one has at that is to think differently and view the markets in terms of risk vs. reward. This approach doesn’t just apply to short-term traders either; risk and reward can be estimated across all different time horizons so it’s even applicable to investors.

I prefer to use a specific set of rules to define a trend and I reference it at the beginning of every MACRO article I publish for my service. That trend line defines the PRIMARY trend at the end of each month. Once established a PRIMARY trend usually lasts for a while – but like everything else in the investing world, nothing is cast in stone. There is always a little room for interpretation. Especially when the price action is vacillating just above or below that trend line. However, it has been a tried and TRUE indicator which has called 2000, 2008, 2020, and 2022 BEAR markets and their “reversals”.

Despite the signs and indicators that assist in setting strategy, there will be instances when risk vs. return decisions conflict across different time horizons. One person’s great Risk/Reward setup may not even register on another’s radar, while another may have an opposite risk vs. return view. Even among individuals, opinions on different time horizons can sometimes come into conflict. For instance, I have expressed concerns about the bigger-picture market setup. In other words, I do not feel it represents a wonderful risk vs. reward since I feel risks are now more elevated to achieve any potential rewards. Even so, there are occasions when the shorter time horizons are set up in ways that justify taking more chances. Here again, I discuss this divergence over and over in my MACRO updates. I’ll share a few items in my latest report today.

Interest Rates

One issue that is affecting both the near-term and the MACRO view is the FIXED INCOME scene.

The rapid rise in yields over the last 12 weeks, primarily led by longer-dated maturities, has been unnerving for investors. After all, this is not how 2023 was supposed to go, particularly in an environment of slowing economic growth, disinflation, and the Federal Reserve nearing the end of its tightening cycle.

We’ve discussed the consensus shift from a recession to a ‘soft landing’ narrative, There are several headwinds (i.e., student loan repayments, higher borrowing costs, slowing job growth) that could turn the recent string of positive economic surprises in the opposite direction and serve as a catalyst to take yields lower. I’m still of the opinion that it is way too early to call off a recession. Unless this time is different, historical data may confirm that view.

Yield Curve Inversion and “Recessions”

It has now been 300+ days since the US Treasury yield curve, as measured by the 10-year versus 3-month yields, first inverted late last year. After the initial inversion on 10/27/22, the curve briefly ‘uninverted’ before reinverting and staying inverted ever since. Back in the spring, during the collapse of banks like Silicon Valley and the First Republic, the curve inverted by as much as 185 basis points, which was the most inverted level since the early 1980s.

As concerns in the banking sector waned and economic data showed improvement, yields at the long end of the curve have surged, making the degree of inversion less extreme but still inverted nonetheless.

It’s no secret that inversions of the yield curve have almost always been followed by recessions. Given the seemingly still strong pace of economic data and indicators like the Atlanta Fed’s GDPNow forecasting a ridiculous 5.9% level of growth on a quarter-to-date basis, it has led to questions over whether it’s different this time. I think not, and the following data shows why.

It’s tempting to dismiss the yield curve in this cycle, but history has shown that recessions haven’t been quick to arrive after the yield curve first inverts. While it has been 300+ days since the first inversion of the current cycle, since the early 1960s, it has taken an average of 589 calendar days for a recession to arrive after the curve first inverts, and there were two periods where the yield curve inverted at two different times before another recession arrived. All this is to say that recessions usually take time to show up, and of all of the prior events, the only time that a recession arrived within 300 days of the yield curve’s first inverting was in June 1973.

Overall, with recessions taking an average of 589 days to arrive after the yield curve first inverts, that would put off a recession until early June of next year. It’s often suggested that steepening yield curves from already inverted levels are a sign that a recession is getting much closer, and that shouldn’t come as a surprise as the most inverted level of the yield curve for a given cycle has to come after the curve first inverts.

So, what can we take away from all of this? While it doesn’t provide conclusive evidence (we rarely get that) in determining whether we’ll see a recession shortly, it should prevent investors from following the increasingly mainstream view that a recession is out of the question just because the market is up by double-digit percentages in the last ten months and economic data hasn’t started rolling over yet. This year’s rally has also followed historical precedents.

The S&P 500’s strength during this period has been stronger than average but hardly unprecedented. Through August 24th, the S&P 500 was up 15+ since the curve first inverted last year. Of the nine other periods, there were only two where stocks performed better after the yield curve first inverted. Overall, the S&P 500 was higher in the ten months after the curve first inverted in five of the nine prior periods. So what we have witnessed this year after last year’s rout is right in line with historical norms.

Investors still face the same dilemma – Conflicting Signals. No matter which side you choose, there’s good evidence to support your view. Today’s evidence adds to the leading indicators that have been down for more than a year straight, and manufacturing surveys that are deeply in negative territory. That leaves investors asking how can you not have a recession in your forecast.

But how can we even entertain that thought with jobless claims and the unemployment rate both still at extremely low levels and the Atlanta Fed GDP Now tracking Q3 growth at 5.9%? While that GDP forecast suggests good growth, the fixed income market’s recent price action with yields dropping suggests weaker economic data is ahead.

There’s merit to both arguments, so there is little reason to assign labels to the market situation. Instead, I prefer to follow the equity markets’ messaging and see where it takes us. As the opening quote says, it will be best to keep an OPEN mind.

The Week On Wall Street

Coming off back-to-back weekly gains, the S&P started the abbreviated trading week with a choppy session. The index sputtered, stalled, and ended with a modest loss. Wednesday and Thursday saw the selling intensify, and so did the losses. All of the major indices closed in the red, but the BULLS scored minor victories each day by rallying stocks to close each day well off the lows. Nonetheless, the weekly trend remained down.

An attempt to really stocks back on Friday fell apart, However, the S&P did manage to break its 3-day losing streak, while the NASDAQ Composite ended its 4-day losing skein. The bifurcation in the market continued as the DJIA ended the week with back-to-back positive sessions. However, all of the indices closed the week with a loss.

Geopolitics

G20: India is hosting a meeting of the Group of 20 large economies in India this weekend. The proceedings have started on a dour note with reports of a collective statement warning of “cascading crises” posing a threat to long-term growth. China’s President Xi elected to skip the event. He made domestic comments on Friday which we will discuss later. This is the first time the Chinese leader has not attended a G20 summit since the first time the group had a leaders summit back in 2008 (although during the COVID pandemic video conferencing was used).

A border dispute with India is one possible reason for Xi’s absence, as could be a great power competition with the United States. Russian President Vladimir Putin is also not in attendance. Russia has not been expelled from the G20 since invading Ukraine, though there have been sporadic calls (including from President Biden) for that outcome.

The G20 is largely irrelevant from a specific policy-setting perspective. But it is helpful as an indicator of where policymaker attention is currently focused. The meeting agenda has a few such areas: the invasion of Ukraine, worries over a US recession, slower activity levels in China, and high inflation are the key concerns.

The key takeaway is the obvious absence of both Xi and Putin.

President Xi spoke today and advocated speeding up infrastructure investment and “boosting state firms’ competitiveness”. These comments reinforce the theme of the standard Chinese playbook which focuses on investment-based and supply-side stimulus.

The Economy

Goldman Sachs has lowered its odds of a recession in the next 12 months down from 20% to 15%. Giving odds for a recession in such a precise manner certainly makes for great headlines and it’s always good to have baseline forecasts. It certainly is a bold call and one that I’m not in agreement with.

The final US Services PMI Business Activity Index posted 50.5 in August, down sharply from 52.3 in July. The rate of output growth slowed for the third month running and was only marginal. Although some firms noted that activity growth was led by efforts to work through past orders, weak client demand and a return to contraction in new business weighed on the expansion.

The Global Scene

Global Services PMIs were released this week

The UK

The headline UK Services PMI Business Activity Index registered 49.5 in August, down from 51.5 in July and the lowest since January. Any figure below 50.0 indicates contraction and an overall reduction in service sector output. The latest index reading signaled a marginal decline in business activity, which contrasted with a solid pace of expansion throughout the second quarter of 2023.

Eurozone

HCOB Eurozone Composite PMI Output Index at 46.7 (Jul: 48.6). 33-month low.

HCOB Eurozone Services PMI Business Activity Index at 47.9 (Jul: 50.9). 30-month low.

Input price inflation accelerates for the first time in nearly a year

S&P Global Europe Sector PMI

Another data point showing weakness is now bleeding over to “services” in the Eurozone.

• 19 of the 20 monitored sectors recorded declines in output during August
• Metals & Mining leads the wider downturn
• “Software and services” was the only industry to register a rise in output

With all but one of the 20 monitored industries posting a contraction in activity during August, the latest S&P Global Sector PMI data signaled a widespread deterioration in European economic conditions. This was the highest total of sectors to have recorded a drop in output since May 2020 and signaled a narrowing in the sectoral divergence that had been apparent in the previous few months.

China

China’s “Services” struggles to remain in expansion. At 51.8 in August, the seasonally adjusted headline Caixin China General Services Business Activity Index slipped from 54.1 in July to signal a modest increase in activity. While service sector output has now risen in each of the past eight months, the latest upturn was the slowest recorded over this period.

India and Japan continue to be the lonely bright spots in the global economy

India

Despite falling from 62.3 in July to 60.1 in August, the seasonally adjusted S&P Global India Services PMI Business Activity Index indicated one of the strongest increases in output seen since mid-2010. When explaining the latest upturn, survey participants mentioned positive consumer appetite, favorable market conditions, and successful events

Japan

At 54.3 in August, the headline au Jibun Bank Japan Services Business Activity Index rose from 53.8 in July to extend the current sequence of rising business activity to one year. The expansion was solid overall and the strongest recorded for three months.

Food For Thought

Fumbling, Bumbling Bureaucracy

The U.S. Court of Appeals for the D.C. Circuit ruled that the Securities and Exchange Commission had improperly denied an application from the asset manager, Grayscale Investments, to create a Bitcoin exchange-traded fund.

The court went on to say the actions taken by the SEC were “arbitrary and capricious”. That opened the door for investors to rush in and get back into risk-on mode in the Bitcoin markets. The Grayscale Bitcoin Trust which was added as a “trade” in July rocketed 17% higher yesterday. With renewed interest, I’ll keep this trade on for a while longer.

Between the recent court rulings against Lina Khan and her overzealous FTC, along with this scathing admonition of an equally overzealous Gary Gensler and the SEC, one has to wonder why these two appointees are still piloting these agencies.

The Wall Street Journal reported that the FTC plans to file an antitrust lawsuit against Amazon (AMZN) later this month. BofA put out a research note indicating that would hardly be a surprise.

Given press reports and FTC Chairwoman Lina Khan’s public views on Amazon prior to her role with the Commission, BofA thinks an antitrust suit is now “expected.” The firm, which thinks a trial would most likely be in 2025, and a settlement, “while unlikely, is always possible,” has a Buy rating and a $174 price target on Amazon shares.”

If the FTC proceeds and the stocks sell off- it will present an opportunity. The sum of the parts is greater than the share price today. However, given the poor track record of Lina Khan at the FTC – it’s doubtful this case will be anything but a media circus event that ends with little to no impact on Amazon.

This climate that presents attacks on business sectors, select companies and Capitalism seems never-ending and confirms the anti-business backdrop in place. Rest assured that is not a positive for Corporate America.

Energy

With the administration delaying action to replenish the Strategic Petroleum Reserve, the emergency stockpile now sits at just 349 million barrels -well below roughly 600 million at the start of 2022. Indeed, the last time it was this low was 1983.

According to the administration, price gains for oil are behind its cancellation of an offer to buy 6 million barrels on the open market last month, as West Texas Intermediate crude has floated above $80 per barrel, up from $67 in June. While some fear that restocking efforts could heighten price pressures, US Secretary of Energy Jennifer Granholm recently stated that replenishment might not be completed until after the president’s current term, which ends in January 2025.

Form a political standpoint that makes perfect sense. The administration will not take any measure that will take crude oil off the market thus stabilizing or pushing energy prices higher than they are now.

However, this doesn’t change my view that the other major players who control the market are not committed to higher oil prices. Hence there is no change in my strategy regarding oil stocks. The administration’s position concerning this entire SPR issue confirms my BULLISH view of Energy.

I’ve mentioned this since early 2021. Those who control the situation control the price. U.S. energy policy does not allow for control. The administration has no bullets left if they want to try and take prices down. Unless they remove regulations and work with the energy industry to open up the US spigots. A highly doubtful move.

Meanwhile, the Saudis have their interests as the priority. To that end, they extended the previously announced oil production cuts to the end of the year to keep supply in check. Despite the “rhetoric” about sanctions etc., Russia can still affect the supply scene. They too announced a 300k barrel cut for September.

With WTI now moving back to the mid-upper 80’s, it’s obvious who is in control.

The Daily Chart of the S&P 500 (SPY)

It was a difficult week for the BULLS. The mini-uptrend came to a halt leaving the S&P 500 in the middle of a narrow short-term trading range

Another situation in time where the BEARS can make a case for lower prices ahead and the BULLS can call for the start of another rally. The problem for investors, both cases have merit.

Investment Backdrop

This Section reviewing the other indices, Growth/Value analysis, and various sectors will now be covered in a NEW BASIC Service that I will be rolling out soon.

Final Thought

Higher Treasury yields, higher oil prices, a higher dollar, and higher costs for the consumer are all things that equity bulls do not want to see. Yet that is the scene investors are working in during a seasonally poor period.

That might prompt many investors to simply say;

Wake me when September is over. “

THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!