2024.03.25 Weekly

“Stretched” SPX

Wall street has been upping their SPX year-end targets as SPX set another record high last week on the back of a dovish FOMC that has largely ignored the recent inflation reacceleration. While there was some acknowledgement of a higher than 2% inflation outlook in their longer-run dots, sticking to 3 cuts for 2024 was undoubtedly a boost for stocks.

Taking a closer look at US equities this week…

TECHNICALS

SPX is looking rather ‘stretched’ again crossing the +14% threshold against the 200dma on Thursday for the first since the beginning of 2021. Below shows all the forward returns from the daily closes where SPX was more than 14% above the 200dma since 1986.

The stats does include days and weeks where SPX stayed consecutively above that threshold. But instead of filtering out repeated signals, I thought to keep the analysis simple to show how SPX could trade under these ‘stretched’ conditions, and it’s quite clear that steady gains are hard to comeby in the near-term when this ‘stretched’.

SPX momentum has been slowing down over the past month as the 100dma is catching up faster than SPX is rallying. It does remain quite stretched historically, and adding this to the above analysis (SPX is both more than +9% above the 100dma and 13% above the 200dma) we get the below distribution.

Not too different from just looking at the 200dma alone but arguably a better representation of current overbought conditions.

VALUATIONS

Strong earnings growth has helped to keep the P/E down relative to it’s early 2021 peaks — where we last saw equities being as stretched (against the 100 and 200dmas) as it is currently.

If it weren’t for the earnings boost, US equities would undoubtedly look way too expensive — we’ll return to this point next.

The P/E expansion has been all about Tech. Bubblicious?

Perhaps, but it still seems too early to go raving about this being reminiscent of the dot-com bubble. If anything, index concentration risk is concerning.

But not only are big-tech more profitable, they are cash generating machines! Cash to market cap and FCF yield 👀

What also stood out from the median valuations chart is Industrials valuations appearing to be quite extreme in the upper 90th percentiles. It’s been on a smoking hot run, and one sector I’ve got my close eye on alongside Tech.

EARNINGS

So far, this rally has been about a better than expected profitability via recent earnings results (and the backdrop of disinflationary progress leading to imminent fed cuts and improving prospects of a soft-landing).

But if earnings expectations drives stock market returns, it begs to question whether it can be sustained? Looking closer at the above chart, 12 month forward EPS growth appears to be plateauing, hovering around 11% since November.

Momentum in positive earnings surprises has faded the last quarter.

2024 expectations is “backend loaded” where NDR notes: “The single quarter estimates suggest more vulnerability to downward revisions in the second half. Consensus estimates jump from the mid-single digits in Q1 and Q2 to near 20% in Q3 and Q4. Some of the spike can be attributed to year/year comparisons and single stock estimates, but the macro backdrop does not support such a big move.”

MACRO BACKDROP

Atalanta Fed real GDP nowcast shows growth decelerating while blue chip consensus forecasts has also been plateauing with the top range flat-lining and bottom range moving lower and widening the downside skew.

Similar to what we observe on the GDP nowcast chart, US data surprises saw a big upswing during the Jan-Feb months but has started to roll off from the Feb peaks. Recent data is pointing to some slowing e.g. the uptick in U6 and Youth UE on the last payrolls report caught my attention though weekly claims data (4wk average) is holding steady at low levels but very slowly rising off recent lows. Flash PMIs last week showed services activity cooling off slightly while inflationary pressures have picked up.

There is a sense that economic growth momentum is fading. If so, shouldn’t earnings growth as well? Meanwhile, there is evidence of price pressures continuing to persist, posing some fresh ‘stagflationary’ challenges. Stagflation risks aren’t good for equities, and the more data points in that direction in that direction, I see equities struggling to put in meaningful gains from here.

QUARTER-END

Looking ahead, it’s a short week ahead with PCE interestingly released on Good Friday and Quarterly expirations falling on the Thursday. Perhaps that may trigger some positioning squaring to start a little pullback for early Q2… 🤔

NEWSFLOW

MARKETS

• US stocks cap global market rally with best week in three months (FT). The ‘Everything’ Rally Rolls On. Thank You, Central Banks (Barrons). Wall Street revamps 2024 S&P 500 targets after record-setting stock-market rally — At least five Wall Street banks have lifted their S&P 500 targets over the past two months (MW). Steady Fed outlook boosts stock market’s hopes for coveted ‘soft landing’ (RTS). Reddit shares soar 48% in New York IPO — Deal gives social media group popular with meme-stock traders a market value of almost $10bn (FT). Thiel, Bezos and Zuckerberg join parade of insiders selling tech stocks — Bosses sell hundreds of millions of dollars in company shares this quarter in sign that markets may be peaking (FT). Investors pour money into US corporate bond funds at record rate (FT).
• Bank of Japan scraps radical policy, makes first rate hike in 17 years — new short-term rate target in 0–0.1% range, BOJ to apply 0.1% interest, Board votes to ditch bond yield control and risky asset buying, expects ultra-easy conditions to stay for time being, may hike rates if trend inflation heightens further (RTS). BOJ chief vows to keep monetary stimulus, nods to price momentum — BOJ will slowly scale back bond buying, balance sheet, Waiting too long for exit could have led to inflation overshoot, Ueda repeats BOJ will keep accommodative monetary conditions, Finance minister warns watching yen moves with sense of urgency (RTS). Intervention threat curbs dollar’s ascent towards new high on the yen (RTS). ‘Mr Yen’ says Japan could intervene if yen falls to 155 (CNBC). End of negative interest rates in Japan raises threat of yen volatility — International investors and foreign governments have used the currency as a reliable vehicle for low-cost borrowing (FT). Japan braces for life with interest rates after historic change — millions of Japanese, from small business owners to first-time homebuyers, are sizing up how to adapt to higher borrowing costs (RTS).
• Bank of England holds rates at 5.25% (FT). Mexico becomes the latest major Latin American economy to cut rates (FT). Bullish Jay Powell sticks to Federal Reserve’s rate-cutting script (FT). Clarida sees possibility of fewer rate cuts than expected this year — “If the Fed were targeting CPI right now, we wouldn’t even be discussing rate cuts” (CNBC). Christine Lagarde says ECB will not commit to path of rate cuts (FT). The great central bank policy reversal kicks off — Swiss kick off rate cuts among major central banks, ECB likely to follow in June, BoE, Fed to come next before the summer is over, Inflation is on downward trend but not yet extinguished (RTS). IMF’s Georgieva urges central bank independence amid election-year rate-cut pressures — cited IMF research showing that between 2007 and 2021, central banks with strong independence scores were more successful in keeping inflation expectations in check (RTS).
• Oil prices rise as heightened geopolitical risk exacerbates supply concern (RTS). Bitcoin tumbles from record high as Grayscale ETF outflows hit $12bn (FT). Have the inflows into bitcoin funds dried up? — inflows into 11 new bitcoin exchange traded funds that received US regulatory approval in January went into reverse this week. Investors will be watching daily data to see if the $850mn that leaked out of the ETFs was a blip, or a harbinger of a bigger pullback for the world’s biggest cryptocurrency (FT).

AMERICAS

• Biden signs $1.2 trillion spending package for government funding until October (CNBC). US business activity stable in March; inflation picks up — S&P Global flash U.S. Composite PMI dipped to 52.2 from 52.5 in February, “Costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year. The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months” (RTS). US economy on solid ground as weekly jobless claims fall, home sales surge — Weekly jobless claims drop 2,000 and Continuing claims increase 4,000 (RTS).
• US single-family housing starts, permits near two-year highs — Single-family housing starts surge 11.6% in February, Single-family building permits increase 1.0%, Completions soar 20.2%; houses under construction up 0.3% (RTS). US existing home sales rise to one-year high in February — Home sales jumped 9.5% last month, the highest level and monthly increase since February 2023, “Additional housing supply is helping to satisfy market demand” (RTS). Surge in Home Prices Draws Eager House Flippers (WSJ).
• Canada’s retail sales fall in January; slight rebound seen in February — Retail sales dropped by 0.3% in January after a 0.9% jump in December that was spurred by holiday season sales, Core retail sales increased 0.4% for the second consecutive month, food and beverages the biggest contributor contracted 0.9% (RTS).

EUROPE

• BoE: UK inflation ‘moving in right direction’ for rate cuts — Bailey: “further encouraging signs that inflation is coming down”, “We’re not yet at the point where we can cut interest rates, but things are moving in the right direction” (RTS). UK inflation hits lowest rate since 2021 at 3.4% — February figures come below forecast (FT). UK businesses keep up recovery but prices still a worry, PMI shows — input prices eased back slightly from February’s six-month high, for selling prices it rose to the highest level since July 2023 (RTS). British retail sales hold steady in February (FT). UK consumers turn positive about their finances, GfK survey shows — consumer confidence index remained unchanged at -21 from February below -19 expected, “The improved personal finance measure is encouraging because it’s the first positive and the highest score since December 2021” (RTS).
• Euro zone business activity close to stabilising in March, PMI shows (RTS). Germany likely in recession as recovery delayed, says Bundesbank — ZEW economic research institute and fresh PMI data suggest that at least a bottom has been reached (RTS). EU leaders to back tighter euro zone fiscal stance in 2025 (RTS).

ASIA

• Japan’s broader price trends moderate, complicating BOJ outlook — Feb core CPI rises 2.8% yr/yr, matches forecast, Core-core CPI rises 3.2% yr/yr in February (RTS). Japan’s factory activity declines slow, service sector picks up (RTS).
• Australia’s central bank holds rates, waters down tightening bias (RTS). Australian Households Riding Out Pain of Soaring Rates, RBA Says (WSJ). Australia to recommend minimum wage rise in line with inflation (RTS). Australia’s Job Market Bounces Back in February — Employment grew by 116,500 over the month, outstripping the expected increase of around 40,000 (WSJ).
• China faces ‘fork in the road,’ IMF chief says, urging Beijing to embark on pro-market reforms (CNBC). China leaves benchmark lending rates unchanged, as expected (RTS). China’s property investment declines slow but sector still shaky (RTS). China’s Youth Jobless Rate Edges Higher After Methodology Change (WSJ). Foreign Direct Investment in China Continues to Fall (WSJ). China blocks use of Intel and AMD chips in government computers (FT). US and Japan plan biggest upgrade to security pact in more than 60 years — Biden and Kishida to announce move to counter China at White House meeting next month (FT). China blocks use of Intel and AMD chips in government computers — Microsoft’s Windows and foreign database programs also sidelined as Beijing favours Chinese hardware and software (FT).
• South Korea’s push to make its markets global dogged by FX history (RTS). South Korea’s efforts to cut its currency red tape (RTS).

EQUITIES

Global equities ACWI U-turned higher after closing below the trendline on the Friday of the previous week, then pushed new ATHs on a dovish Powell.

Developed markets EAFE found timely support on the trendline before putting another record high. Emerging markets ex-China EMXC resulted in last week’s close being a false breakdown but the rally did fall short of pushing the mtd-high.

Across these index charts, there is a bearishly divergent trend on both the weekly and daily timeframes and if confirmed with trendline breaks lower, I would take that to be a good short signal.

Some charts I’m watching closely…

SPX exceeding measured targets and fib extension with the Thursday rally stalling at the rising trendline running from Dec/Feb highs. A close below the 5200 handle and the 5180 level would be a start to indicating a reversal.

OMX is a great cyclical baramoter for Europe. The sharp rally is beginning to stall in this area and should it start to breakdown from here, I think thats a good sign that broad risk is pulling back.

Revisiting the cyclical-defensives spread for US and Europe — I’m still leaning on this pivot area for the market to come off the reflation theme. The upward bias remains in tact, but US has appeared to have hit a wall against these levels, while the European spread has caught up.

In Asia, Nikkei225 chart is rather interesting, especially in view of the short idea I’ve discussed last week. Gotten hosed on the first attempt but willing to try it again here with a tight stop and fantastic R/R potential.

Take a closer look at US equities, NYFANG+ is hugging and puffing away. Last Thursday’s reversal candle printed at a technically strong location. Needs a lower close to get validated however which it failed to do so on the Friday session.

Small-mid-caps index chart is stalling yet again at this 2021-peak reference level with momentum increasingly looking like its rolling over.

Most-shorted stocks index rallies continues to be capped by the upper trendline with momentum also rolling over.

VIX got decimated last week. I’m not one for TA’ing volatility instruments but the slowly rising trend off the lows is what has my attention, paritcularly that its reestablished itself above the rising trendline. These indicators ought to recover back to its recent mtd-highs to have some confidence in vol picking up, which admittedly, don’t currently see it doing for now and therefore keeps me content with nibbles than looking for something bigger on the short-side.

COMMODITIES

The rally in the Bloomberg commodities index has lost some steam last week — Metals has dragged down the overall index while Energy has been chopping sideways and Agriculturals grinding higher.

Copper has faded from its high and looks to be eyeing a retracement to its breakout levels.

I’m still very much focused on Gold shorts — got trailed on my previous attempt but back with entries in the 80s and 90s after what looks like a blow-off top candle above 2200. The fact that Gold has bee unable to hold above 2200 as yields have come off in a big way last week is, imo, rather telling. I do see yields finding a floor around current levels and therefore retaining some conviction of Gold retracing much of the breakout move we saw earlier in the month.

NatGas looks terribly heavy and I’m becoming rather disinterested in it. I do see potential in it down the road however if this evolves into a W-shaped double bottom. Though I missed the last WTI rally, I still hold the same view of only being interested around the 77.50 level. Until it ventures below the 80 handle, I don’t see much to do here.

RATES

There was some expectation that the FOMC median dot plot ‘could’ shift from 3 to 2 cuts last week. It stayed at 3 and the market has been in short covering mode.

As a result of that possibility being priced out and the Fed sticking to its 3 cuts for 2024, we saw yields retreat last week (Purple) almost back to where we started at the beginning of the month (Green).

US10yr reverted back to the 4.2% handle, where I noted a sustained decline as unreasonable for now absent negative growth triggers.

10yr real yields also backed up into the 1.8s which has been a big pivot level in recent months. If I’m right about these levels holding up, we should see USD maintain its recent strength and Gold retrace its breakout move.

CURRENCIES

No strong views on currencies at the moment as I feel major FX will succumb to a strong USD environment ahead on US yields finding a footing and adding to the widening in rate differentials, as well as some risk-off tones to creep back in over the quarterly rebalancing period.

USD Index

USD +1.10% strongest across the G8FX indices which is somewhat surprising given the pullback in yields and a broadly risk-on mood. Perhaps some of that action can be attributed to the weakness we saw in EMFX (JP EMFX index chart above) mostly stemming from the Yuan.

For now, the USD is technically strong and shaping up for further gains with last week’s action validating the breakout. Would be worth keeping a close eye on USDEMs this week as well as US yields.

G8FX indices weekly view

CAD +0.56% benefiting from USD crosswinds and some favourable data — inflation lower and retail sales was much better than expected, sees CAD GDP this Thursday. It is expected to point to a more positive growth picture after being essentially flat for many months, so I think CAD could continue to trade well this week.

AUD +0.30% performed well last week despite the Thursday sell-off — perhaps some profit taking on the back of a strong payrolls with some Yuan weakness creeping in. Price action is looking constructive however.

EUR +0.24% has had the tailwinds of improving sentiment and an overly dovish ECB sentiment. Data continues to show improvement but I do wonder whether it can continue to rally with the latest breakdown in EURUSD and widening rate differentials against the US.

GBP -0.13% similar to the EUR I continue to see cable trading heavy. The MPC has now taken on a full cutting bias while data has confirmed inflation pressures are easing off.

NZD -0.62% by far the weakest of the commodity-dollars. GDT auctions continue to be weak while Q/Q GDP printed negative last week. I don’t see where good news will be coming from until RBNZ the week after, so I would expect NZD to stay under pressure.

CHF -0.64% the SNB was the first in G10 to cut rates on top of turning net-sellers of CHF earlier in the year. Mataining a bearish bias and expecting the CHF to retrace a lot more of its 2023 rally.

JPY -0.76% remains heavy despite the BoJ’s historical exit from NIRP. Perhaps the move was a little underwhelming vs market expectations but to be somewhat expected as its hardly made a dent to the status of quo of Japan having exceptionally low interest rates while foreign yields are substantially higher. Will take a lot more to see JPY bull case to make some sense. Positive on USDJPY until nearer the 155 handle, at which point it may be the time to position tactically for MOF intervention risk.

That’s all for now, have a good week trading.