NEW: Notice new section (above): added so you can see our tactical ideas
We publish on a 3-day a week schedule:
– SKIP Sun eve / MON am (Traveling)
– SKIP MON
– Tue eve / Wed am
– Wed eve / Thu am <– Schedule Change
– SKIP Thu eve/FRI am <– Graduation ceremony to attend
Tune into our webinar “Super Granny” Shots next week 5/23 (Tuesday) at 11am
- we discuss “Super Granny” shots that are expected to tactically gain near-term
- and “Sleeping grannies” which we expect to tactically underperform
My schedule is a bit off kilter this week as I have two graduations to attend (one college and one high school) so we are publishing our commentary a day early. Overall, our current view remains the same as we see markets fighting a game of inches. There remains the binary risk of the debt ceiling default risk, but beyond that, we remain constructive.
- Our data science team, led by “tireless Ken” has created a new regime market analysis. The team examined how S&P 500 reacts to 2% drawdowns over a one week period. These are sharp sell-offs and generally:
– if we are in “buy the dip,” losses are recovered quickly
– if we are in “sell the rip,” further losses are seen
- To model this, they looked at all 2% 5D drawdowns and calculated market returns over next month (20D) and to smooth this, looked at 6M rolling averages. The criteria for:
– “buy the dip,” is gain >2% next 20D
– “sell the rip,” is decline <-0.5% next 20D
- Since 1928, the regimes and resulting annualized returns are as follows:
– “buy the dip” 60 times and avg gain 28% (annualized)
– “sell the rip” 30 times and avg loss -25% (annualized)
– Using this model, we have been in a “buy the dip” regime since 3/23/23.
- Positive feedback loop created by “buy the dip”: What does it mean that “buy the dip” regime is back? This is creating a positive feedback loop, in the sense that capital invested on dips will recover losses quickly. This was hardly the case in 2022, where for a 9 month period, every single dip of 2% (5D) was followed by an additional bout of selling. This has not happened in 2023.
- Macro community inches towards constructive: The macro community is shifting their views, progressively. Earlier this week, Paul Tudor Jones (PTJ) said he believes the Fed is done hiking and PTJ expects stocks to be higher by YE. And today, Steve Cohen, founder of Point72 said “I’m making a prognostication — we’re going up…I’m actually pretty bullish.” He made these comments at the SALT iConnections event (story here).
- EPS estimates higher “buy the dip” fundamental investors: Additionally, forward EPS estimates are beginning to inch upwards, the first time since pre-2022. And this should also turn fundamental investors into “buy the dip” buyers.
BOTTOM LINE: Still expecting an upside resolution towards S&P 500 4,200-plus but binary risk-on into “debt ceiling”
The fact is, a binary event is weighing on market risk-appetite at a time when there is little incoming macro data. Thus, markets are stuck in the near-term. That said, we see the rationale for being OW the following:
- OW FAANG: FAANG remains our favorite sector pick and the rationale remains the same:
– FAANG solves labor inflation/positive leverage to AI
– solid revs growth in 2023 and continued value capture via R&D
– reasonable valuations considered less risky than USA
– still non-Consensus as many believe 2021 marked top
- Tactical Buy REGIONAL BANKS—”price flip” today, suggesting continued strength: Some positive events today contributed to a 7.5% rally in $KRE:
– Western Alliance $WAL gave a positive update on deposits, helping spark a rally.
– Positive “price flip” on DeMark — meaning, after a “13” buy setup (see other notes)
– we got price to follow through and suggests further upside
– Regional banks $KRE closed above the 20 DMA, which means momentum strong
We are sticking with our tactical OW on the notion of “temporary Fed put” on regional banks. The 5 names we highlighted are: $NYCB $EWBC $WAL $BANC $CNOB
- OW Industrials $XLI: We see bottoming of PMIs as rationale to OW $XLI.
- S&P 500 P/E 14.8X ex-FAANG—REASONABLE: We simply do not see equities as that expensive, especially with Fed on a “pause.” Ex-FAANG, the forward P/E is 14.8X and the most expensive stocks are Staples (~20X) and Utilities (17X).
BUY THE DIP: Returned since March 23, 2023
Our data science team, led by “tireless Ken” has created a new regime market analysis. The team examined how S&P 500 reacts to 2% drawdowns over a one week period. These are sharp sell-offs and generally:
- if we are in “buy the dip,” losses are recovered quickly
- if we are in “sell the rip,” further losses are seen
To model this, they looked at all 2% 5D drawdowns and calculated market returns over next month (20D) and to smooth this, looked at 6M rolling averages. The criteria for:
- “buy the dip,” is gain >2% next 20D
- “sell the rip,” is decline <-0.5% next 20D
As shown below, the differences in returns during these regimes is quite significant. Since 1928, the regimes and resulting annualized returns are as follows:
- “buy the dip” 60 times and avg gain 28% (annualized)
- “sell the rip” 30 times and avg loss -25% (annualized)
The full list of instances is shown below. There are 60 regimes of “buy the dip” and 30 regimes of “sell the rip.”
Below is a time series and we can see the change of regime over time. The thresholds are marked with red lines:
- from April 2020 through early 2022, a “buy the dip” regime was in place
- April 2022 saw this flip sharply into a “sell the rip” as dip buys saw significant realized losses
But since March 2023, this regime has flipped positively again. And as we see, buying dips lead to recoveries within a month.
Macro community inches towards constructive…
The macro community is shifting their views, progressively. Macro investors tend to focus on top-down factors like Fed policy and broader economic variables.
- Today, Steve Cohen, founder of Point72 said “I’m making a prognostication — we’re going up…I’m actually pretty bullish.” He made these comments at the SALT iConnections event (story here).
- Steve Cohen and Point72 are considered among the most successful hedge fund managers today. So him being constructive carries a lot of influence in the investment community.
Earlier this week, Paul Tudor Jones (PTJ) said he believes the Fed is done hiking and PTJ expects stocks to be higher by YE. Paul Tudor Jones, a legendary macro investor, on CNBC Monday suggested “Fed is done raising rates.” PTJ is the first major macro investor, we believe, to have shifted to a more constructive view on inflation/rates. He also noted he expects stocks to “finish the year higher from here” and granted, in his interview, he also noted that higher rates are like “chemo” and thus, a recession is on the horizon. But the key is he believes the Fed is done raising rates, and this means the inflation trade should be fading.
REGIONAL BANKS: Western Alliance helps spur a rally
Some positive events today contributed to a 7.5% rally in $KRE:
- Western Alliance $WAL gave a positive update on deposits, helping spark a rally.
- Positive “price flip” on DeMark — meaning, after a “13” buy setup (see other notes) we got price to follow through and suggests further upside
- Regional banks $KRE closed above the 20 DMA, which means momentum strong
- We are sticking with our tactical OW on the notion of “temporary Fed put” on regional banks. The 5 names we highlighted are: $NYCB $EWBC $WAL $BANC $CNOB
Below is the daily DeMark of $KRE and we highlighted the “13” buy setups:
- On 5/2, the TD sequential count registered a “13” buy
- On 5/4, the TD combo (v1b) registered a “13” buy
- the count has turned positive for both combo and sequential
- And today was a solid price flip, moving also above the 20 DMA.
US VS CONSENSUS VIEW: Last week’s data positive for forward returns, but still huge gap vs consensus
Below is a stylized graphic illustrating the difference between our constructive view on equity markets (still see ~4,750 by YE 2023) versus the persistently negative views held by the vast majority of our institutional investor clients:
- this is designed to show that despite relatively encouraging incoming data, there is still a sizable gap between our constructive view and the bearish consensus view (Fundstrat client consensus).
- As warranted, we will update the below chart but as it stands:
– we see +14% upside to equities in the next 12 months
– many clients believe we will “re-test” the lows, which implies -15% downside
- The reasons for the yawing gap are multiple, but we highlight a few on the graphic below:
– Debt ceiling risks are “binary” and impossible to normalize
– fears regional bank contagion widens to a financial crisis
– growing office vacancies threaten a CRE meltdown
– EPS risks substantial given Fed tightening + regional banks
– inflation remains sticky via prices and via wages
– Fed is only “paused” and could easily start raising again
– Russia-Ukraine war could easily become a larger conflict
- We have written extensively our counterpoints to the above, but the ultimate issue is that:
– we believe inflation will prove to be far less sticky
– solves many of the above issues
– lots of bad news priced in by the -27% drawdown in 2022
– 10-yr yields falling = supportive of equities
– investor position is so negative, hard to cause further downside
ECO: Generally light week ahead…
Many economic reports this week, but few will likely be as market moving as inflationary reports. As shown below, the highlights are:
- May Regional ISM surveys due (Empire 5/15 8:30am ET, Philly Fed 5/18 8:30am ET)
- April Retail Sales (5/16 8:30am ET)
- Housing data (5/16 10:00am ET May NAHB Index, 5/17 8:30 April Housing starts, 5/18 10am ET April Existing Home Sales)
ECONOMIC CALENDAR: Key May data is inflation and ISM, and April was overall “tame”
Key incoming data May
5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection 5/2 10am ET Mar JOLTSSofter than consensus 5/3 10am ET April ISM ServicesTame 5/3 2pm Fed May FOMC rates decisionDovish 5/5 8:30am ET April Jobs reportTame 5/5 Manheim Used Vehicle Value Index AprilTame 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared 5/10 8:30am ET April CPITame 5/11 8:30am ET April PPITame 5/12 10am ET U. Mich. April prelim 1-yr inflationTame 5/12 Atlanta Fed Wage Tracker AprilTame
- 5/24 2pm ET May FOMC minutes
- 5/26 8:30am ET PCE April
- 5/26 10am ET U. Mich. April final 1-yr inflation
- 5/30 Conference Board Consumer Confidence
Key data April
4/3 10am ISM Manufacturing Employment/Prices Paid MarchTame 4/4 10am ET JOLTS Job Openings (Feb)Tame 4/7 8:30am ET March employment reportTame 4/12 8:30am ET CPI MarchTame 4/12 2pm ET March FOMC MinutesTame 4/13 8:30am ET PPI March Tame
- 4/14 7am ET 1Q 2023 Earnings Season Begins Better than feared
4/14 Atlanta Fed Wage Tracker MarchSemi-strong 4/14 10am ET U. Mich. March prelim 1-yr inflationHawkish 4/19 2:30pm ET Fed releases Beige BookTame 4/28 8:30am 1Q23 Employment Cost IndexSemi-strong 4/28 8:30am ET PCE MarchTame 4/28 10am ET UMich April final 1-yr inflationHawkish
POSITIONING: FINRA Margin debt shows positioning is far more bearish than most appreciate
One might think that this doesn’t mean stocks need to rise, even if the data has moved towards the “soft landing” camp. But keep in mind, investors have de-risked and de-levered to a significant extent. We covered much of this recently including the massive swing to short S&P 500 futures contracts and the surge in ICI retail cash balances.
Today, we want to highlight the collapse in FINRA margin debt. The latest figure shows margin debt is now $607 billion:
- this is down -35% since late 2021 and a decline of $330 billion from peak
- during GFC, the FINRA deleverage was $216 billion, so already surpassed
- margin debt as % market cap now 1.59%, matching “dot-com” 2002 25-year low
- In other words, while this might be a marginal positive shift on fundamentals, there is a far greater positioning shift ahead, if the data ends up proving to be “soft landing”
This time series really shows the extent of de-leveraging. The level of margin debt to market cap is at 1.59% and same as dot-com trough
- so any decisive “soft landing” data will shift positioning far more dramatically
POSITIONING: FINRA margin debt highly correlated to equity market
We highlighted how FINRA margin debt has collapsed since 2021 and went into a waterfall decline for much of 2022.
- some investors pushed back saying high margin interest rates is the reason for the decline
- we highlight the relationship between FINRA margin debt changes and S&P 500 returns.
- notice the sharp relationship? Whatever the driver, if FINRA margin debt starts to expand, this is positive for stocks
- and as we previously noted, FINRA margin debt as % equity is the lowest since dot-com, implying the figure is not likely to further shrink.
SMALL INVESTOR POSITIONING: Even small investors are ultra-bearishly positioned
As Sentiment Trader’s Jay Kaeppel highlights, there is a significant increase in small-speculator short positioning:
- notably, this figure is the most short since the series began in 1990
- think about that, a 35-year high in shorts by small investors
- again, highlighting how lopsided the positioning is currently
STRATEGY: Focus on Industrials, a week to make a tactical positive bet
Both the ISM PMI and S&P Global US PMIs are released on Monday:
ISM Manufacturing PMI has been better than consensus.
- Actual 47.1 vs Street 46.8 and last month 46.3
S&P Global US PMIs has come in slightly lower than consensus, but remains above 50.
- Actual 50.2 vs Street 50.4 and last month 50.4
Whenever PMIs bottom (see below), Industrials tend to bottom. This first chart shows rolling change for US PMIs and US Industrials returns.
This distribution table puts this in a clearer light. When PMIs are rising and from low levels, Industrials see strong gains.
- Since 1948, when PMIs are over 50 and are rising (n=60), Industrials see positive forward 6M and 12M gains of 85%/95% of the time with median gains of +12.6%/21.5%, respectively.
- Those are very favorable risk/reward and high absolute return opportunities.
Industrials are oversold vs S&P 500 on 20D %-change, with a z-score of -1.2.
- The top chart is the relative price ratio of Industrials vs S&P 500
- The bottom is the z-score of the 20D % change.
- The most recent 4 times this was seen, Industrials staged strong rallies vs the broader market.
- This is not that different than the signal we highlighted two weeks ago regarding FAANG/Technology. And we know that FAANG powered higher in the past two weeks
And Industrials are the most oversold vs other sectors, particularly against Staples.
34 GRANNY SHOTS: Updated list is below:
The revised 34 Granny shots are shown below. The list is sorted by the most attractive (most frequently cited) to least. To be a “Granny shot” the stock needs to appear in at least two portfolios.
- There is only 1 stock appearing in 4 of 7 themes: $MSFT.
- There are 3 stocks in 3 of 7 themes: $XOM $AAPL $CDNS.
Consider these the stocks that are the most commonly seen as “grannies” and thus, the higher quality ideas. To be a granny, a stock must be in at least 2 of 7 themes.
Communication Services: $GOOGL, $META
Consumer Discretionary: $AMZN, $GRMN, $TSLA, $ULTA
Consumer Staples: $BF/B, $MNST, $PG, $PM, $KO
Energy: $DVN, $OXY, $PSX, $VLO, $XOM, $MPC
Financials: $AXP, $FISV
Health Care: $AMGN, $HUM, $ISRG, $MRK, $VRTX
Information Technology: $AAPL, $AMD, $CDNS, $KLAC, $MSFT, $NVDA, $PYPL, $FTNT, $NOW, $ON
34 Granny Shot Ideas: $GOOGL, $META, $AMZN, $GRMN, $TSLA, $BF/B, $FISV, $MNST, $PG, $PM, $DVN, $FTNT, $OXY, $PSX, $VLO, $XOM, $AXP, $MPC, $AMGN, $NOW, $ON, $ULTA, $VRTX, $AAPL, $AMD, $CDNS, $KLAC, $MSFT, $NVDA, $PYPL, $HUM, $ISRG, $KO, $MRK