CONTINUED CHANGES
Last week, we wrote and stated several times that inflation was peaking but also inflation was peaking because it has flushed out severe weakening of the economy. It is continuing to happen and happening in a big way. We saw it with our channel checks but more importantly, saw it in price movements.
Back in Oct/Nov, everything we bought and paid for…skyrocketed. Yields we borrowed on…skyrocketed. This tanked asset prices, especially growth stocks.
The opposite is now occurring and stunningly quick.
COMMODITIES of all stripes are topped and now heading lower, some heading much lower. Same for the most important commodity…oil. Now down about 15% off the recent highs with oil stocks being crushed after leading since beginning of the year. The move in oil stocks back down has been stunning. If nothing changes, prices at the pump should be down towards 50 cents/gallon soon. As we stated last week, copper, iron, steel, lumber,wheat, corn, soybeans and cotton had all put in tops of differing levels. They are now becoming tops of import. We have no clue what is going on with cotton today but the symbol BAL, a cotton ETF, is down over 11%. Cotton prices look to be down almost 5% today. Yes…cotton matters.
Because of this, yields have continued to back down. The 10 year is under 3.1% when just over a week ago, was almost at 3.5%.
All this is forecasting a recession or quite close. Of course, Reagan had the best line on recessions. A recession is when your neighbor loses his or her job. A depression is when you lose your job. We have no clue yet on whether it will be a deep recession but when you have so much debt and leverage in the system, nothing is off the table. The hope is that it is shallow and short-lived.
This has everything economically sensitive worsening in the market. This includes energy, commodities, travel-related, heavy machinery, industrials and because rates are coming down, financials remain under pressure. Short rates going up and long rates coming down squeezes financial’s margins. On the industrials and machinery, just go look at Deere, Caterpillar and AGCO croaking into new yearly lows today. This says a bunch. Semiconductors also labor as they are also quite economically sensitive.
Lower yields should help the beaten down housing and housing related names as well as some retail. They have been in a big bear. Lower yields can stanch the bleeding in any number of groups.
The big help and it may be starting right now is in the higher beta growth arena that has been absolutely bombed out with many names down 50-70%+. We are definitely seeing many of those names holding the lows the past few weeks while the indices kept going lower…a potential positive divergence. Watch the NASDAQ versus the DOW every day. If you start to see the NASDAQ up 1% but DOW up only 0.25%, you will know growth is starting to outperform.
If commodity prices stick to the downside, for sure, inflation numbers are going to come down and if they are smart, the fed will recognize it. Of course, they have not been so good at recognizing anything. If they were smart, if these commodity prices stay down, they would come off big rate hikes going forward. They would just let the market forces dictate like they are supposed to. Unfortunately, the fed continues to believe they are smarter than the market.
And of course, everything is a moving target. There is so much out there that can change things.Just know our thoughts of what we started to interpret last week of a change in the inflation complexion is not only coming to fruition but at hand. As always, if we see anything changing, we will let you know.
A NEW WEEK NOTES
From Friday morning:
At this juncture, a counter-trend rally/bounce would be as normal as the 90 degree+ days we are having in Florida this week. BUT KEEP IN MIND, and to repeat, a rally/bounce at this juncture would not change the main trend/big picture and is coming out of severe weakness. Coming into today, this week, the DOW is down 4.67%, the S&P 6% and the NASDAQ 6.12%. Even more shocking is what has occurred since the midday highs of just last Wednesday. In just 6.5 days to yesterday’s low, the DOW dropped 10.3%, the S&P 12.52% and the NASDAQ, 13.64%. Those numbers are not typos and the 6.5 days is not a typo.
If there is one area that may be in the bottoming process, it is the U.S. LISTED CHINESE STOCKS. As the indices have come down, they rallied off their bear market lows and while pulling back in the latest market dump, they have firmly held above the lows and are mostly now sticking ABOVE the flattening out 50 day moving average. The Chinese government had put the screws to their own companies but seems as of now, they have backed away. In fact, China’s central bank has given a tentative green light for Ant Financial to finally go public. Go backwards and read when the government stopped it dead in its tracks. This move pretty much started the screws on Chinese companies. The jury is still out on whether it goes public. This continues to be something to watch as these China names dropped as much as 90% over the past 18 months. There is every chance with such a huge drop, they can come out of the bear first. The big issue and the wild card will remain the China government as there is no way of knowing if we wake up one morning and they decide to put the screws to these companies again. We are on watch. Trust remains a 1 out of 10.
Otherwise, maybe we are finally starting a relief rally of unknown price and time. But we could have said that earlier in the week. To repeat, at this juncture, any relief rally would not change the major trend/big picture. Our fundamental worries all remain. We believe we are already in recession. We believe there is going to be some serious lower guidance issued as we go into earnings season. We continue to have less than zero confidence in those that caused a lot of the problems we are seeing and are still running the show. And just a little fact from our area. Inventory of homes have skyrocketed over the past 30 days and we mean skyrocketed. We are also seeing some significant price drops in quite a few homes.
Fast forward to this morning. Another big gap to the upside. Time to review some of the rules of bear markets:
Bear market rallies occur because of weakness, not strength. We repeat, in just 6.5 days to the recent low, the DOW dropped 10.3%, the S&P 12.52% and the NASDAQ, 13.64%.
Most of the biggest days the market has ever had were in bear markets.
Bear market rallies can last weeks and gain double digits. So far, the longest bear market rally for this bear market has been 11 days which means we are probably overdue for something better.
Bear markets usually have the cries of a bottom on every up day. We are getting a ton of that.
In bear markets, eventually they get them all.
Price will drop a lot farther than anyone would believe in bear markets. We have already outlined the numbers for the many on the NASDAQ.
We walk into this morning with deeply oversold conditions after another stunning drop. On top of that, we cannot even count one sector in bull mode as the whole energy complex topped out in recent days. Most do not understand how that can happen with oil prices so elevated. It is simple. THEY ARE STOCKS! What did we say? In bear markets, they eventually get them all. No sectors with a bullish stance is the definition of deeply oversold and a condition for near-term rallies. We can count on one hand when we have seen this.
We have no clue how long a bounce/rally lasts or how far it goes. We will just get the clues for when it peters out.
The crypto. Regardless of the trading over the weekend where so many are thrilled to see a good bounce off the lows, we remain with “90% of the coins will drop 90% or more with most going to 0!” We laugh when Elon comes out to defend Dogecoin when he is obviously neck deep. That one is down 90%+ from the highs.
Central bankers…do not get us started. They were out in droves over the 3 day weekend, all trying to defend themselves and despite going 0 for 100, they keep predicting the future. JUST REMEMBER, ALL ROADS EVENTUALLY LEAD TO EASY MONEY. That’s who they are. The only reason they are raising rates is because they are forced to because of the inflation they lit the fuse on. A couple of them came out to tell us eventually they can go back to 0% and print more money. We wonder why they would even say that.
Janet Yellen…keep in mind, that is not Janet Yellen. That is the administration talking. It’s good to know higher taxes and more government will cure the problems caused by the government. Feel better now?
HEADING INTO THE WEEKEND
Just some notes on what we think is important right now:
BOND YIELDS, after amazingly going from 2.7% to almost 3.5% on the 10 year in just 11 trading days, are finally pulling back. We have not seen the main trend change yet. Just a normal pullback. We think this is one of the most important parts of the market to watch. The same goes for OIL PRICES now pulling back. Price was quite relentless for weeks.
INDICES with a gap to the upside today. At this juncture, a counter-trend rally/bounce would be as normal as the 90 degree+ days we are having in Florida this week. BUT KEEP IN MIND, and to repeat, a rally/bounce at this juncture would not change the main trend/big picture and is coming out of severe weakness. Coming into today, this week, the DOW is down 4.67%, the S&P 6% and the NASDAQ 6.12%. Even more shocking is what has occurred since the midday highs of just last Wednesday. In just 6.5 days to yesterday’s low, the DOW dropped 10.3%, the S&P 12.52% and the NASDAQ, 13.64%. Those numbers are not typos and the 6.5 days is not a typo.
If there is one area that may be in the bottoming process, it is the U.S. LISTED CHINESE STOCKS. As the indices have come down, they rallied off their bear market lows and while pulling back in the latest market dump, they have firmly held above the lows and are mostly now sticking ABOVE the flattening out 50 day moving average. The Chinese government had put the screws to their own companies but seems as of now, they have backed away. In fact, China’s central bank has given a tentative green light for Ant Financial to finally go public. Go backwards and read when the government stopped it dead in its tracks. This move pretty much started the screws on Chinese companies. The jury is still out on whether it goes public. This continues to be something to watch as these China names dropped as much as 90% over the past 18 months. There is every chance with such a huge drop, they can come out of the bear first. The big issue and the wild card will remain the China government as there is no way of knowing if we wake up one morning and they decide to put the screws to these companies again. We are on watch. Trust remains a 1 out of 10.
Otherwise, maybe we are finally starting a relief rally of unknown price and time. But we could have said that earlier in the week. To repeat, at this juncture, any relief rally would not change the major trend/big picture. Our fundamental worries all remain. We believe we are already in recession. We believe there is going to be some serious lower guidance issued as we go into earnings season. We continue to have less than zero confidence in those that caused a lot of the problems we are seeing and are still running the show. And just a little fact from our area. Inventory of homes have skyrocketed over the past 30 days and we mean skyrocketed. We are also seeing some significant price drops in quite a few homes.
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Last week, we wrote and stated several times that inflation was peaking but also inflation was peaking because it has flushed out severe weakening of the economy. It is continuing to happen and happening in a big way. We saw it with our channel checks but more importantly, saw it in price movements. Back in […]