FLASH COMMENTS:
I am going to keep my comments brief.
The S&P 500 touched its 200-day moving average this week and going into the large option expiration on Friday experienced noticeable price weakness and a shift in its recent leadership from the June low.
What was the cause? Some are pointing to the continuation of hawkish Fed speakers, the German PPI data release that came in at a shocking 37% yr/yr, the OPEX, and that the countertrend short squeeze may have finally run out of steam.
From my perspective, the equity rally that began in mid-June that occurred from a severe oversold condition has not been supported by my medium work (yes, my tactical work did turn favorable) that is heavily influenced by forward earnings estimate revisions, and I have written in recent publication that I remained a skeptical bear.
Some key questions that remain unresolved:
- Are the estimate cuts that my work is still forecasting matter?
- Or will overly negative positioning and a dovish pivot by the Fed back to accommodative trump my negative sloped ASM indicator?
Well, as readers know, my process doesn’t allow for much wiggle room when my indicators are suggesting that maximum negativity for forward profits has not yet been reached. Additionally, my other work signals that a definitive shift to easing by Chair Powell and Crew would likely be a policy mistake if their goal is truly to bring inflation back to their stated 2.5% baseline. The combination of these two factors makes it nearly impossible for me to shift to a more favorable outlook. In addition, the fragility over the global economy concerns me quite a bit, and I do think that the major problems in Europe are being properly discounted as all eyes are on the Fed and what may or may not happen at Jackson Hole next week.
Bottom line: My work remains steady and tilted toward concerns about downside risk. Thus, I am still advising staying patient. Use the recent strength to sell into, raise cash, increase hedges, and reposition towards Growth, both defensive and offensive, and away from Cyclicality. The opportunity to aggressively pivot towards increasing risk, lowering cash levels, and moving to offense is still in front of us.
MAIN CLIENT ISSUES
- Back in the saddle this week and I had a full week of client calls and meetings. The contacts were certainly diverse across size, style, and some non-U.S. investors. So, a nice cross section and interestingly my two points from last week were once again the big takeaways.
- Clients that are more fundamental/macro driven with a medium/longer-term outlook remain quite skeptical of the ongoing bounce and most are more inclined to sell into the recent strength rather than chase it higher.
- On the other hand, clients that are more tactical and open to technical analysis have been more willing to play the bounce and chase for more because they can shift to neutral/bearish quite quickly.
- Additional takeaways and main discussion topics are as follows:
- The rate of change on inflation has peaked is nearly 100% agreed upon based on my discussions.
- However, a 50/50 split on whether inflation’s downward trend is now firmly in place or will it be a challenge to break its back and get pressures below 4-5%.
- The U.S. economy will likely not reaccelerate without a supply side change for energy and a fall in crude below $70, or the beginning of Fed easing. There was not a lot of conviction on soft vs hard landing, but there were a lot of questions asking about my view.
- Earnings are not likely to accelerate going forward, but some disagreement on whether they should be flattish or need to be lowered. No one had the view that there was significant risk to forward profits like the COVID lockdown period or Financial Crisis.
- There were a lot of questions asking about an update on the S&P 500’s ASM indicator, which is my proprietary earnings revision metric, and my thoughts on how much further I think it must fall.
- No one had the view that a Fed easing was imminent. With that being said, there were a lot of varied opinions on how much higher, how much longer, and when will policy have less of an impact on equities.
- There was not a strong consensus on what the impact of the Fed’s upcoming increase in their monthly Quantitative Tightening actions, and most are not considering it in their positioning thought process.
- No one was fully on board with the rally that began in June, and most were between skeptical: “The last 100-200 SPX points make zero sense”.
- Nearly everyone was aware that positioning still appears to be negative, that there is a record short positioning in SPX futures, and there may be more mechanical flows/corporate share buybacks. This was a point of concern for most.
- Lots of questions on positioning. Most want to shift to more offensive positioning despite concerns and few get excited about my preferred defensive stable growth names that I flagged as favorable.
- No one had a firm view on what Chair Powell may say at Jackson Hole on Friday, August 26.
SPECIFIC CLIENT QUESTIONS
- What are your thoughts on the recent sector (GICS L-1) leadership?
- Any single stock names catch your attention this week?
- What are your most aggressive tactical indicators saying?
MY ANSWERS
- What are your thoughts on the recent sector (GICS L-1) leadership?
The leadership has had a clear shift since the S&P 500 touched its 200-day moving average and moved lower into week end (see below). My key indicators generally support most of the new leaders (Energy, Utilities, Staples, and HC) and could be an important foreshadowing of the weeks to come if the resumption of downtrend has occurred.
My growth bias, both defensive and offensive, sector positioning (Above Neutral — HC, Staples, Tech, Energy, and Utilities & Below Neutral — CD (equal-weighted), Financials, Industrials, Materials, and Comm Services) has been underperforming since the June low, but this week saw a nearly 180 degree shift back to the sectors that my 8-panels are favoring (August Sector Update). Is this a signal that the recent rally is over? A few days are not enough evidence, but my work says things are likely coming my way eventually. Stay tuned.
- Any single stock names catch your attention this week?
The following names are favorable and were frequently discussed last week — EQT, ALB, RTX, TPX, AMZN, CMG, STZ, KDP, PEP, CPB, PM, SWAV, CAH, MCK, ADBE, ADSK, and PYPL.
I am also including the updated book of favorable names with a market cap greater than $2.5 billion as a good place to start looking for new ideas.
Fundstrat Global Portfolio Strategy – Estimate Revision Model – Positive Rated Names
- What are your most aggressive tactical indicators saying?
V-squared flipped to unfavorable today and now confirms the negative reading from HALO-2, which is the first time both been flashing negative readings at the same time since the June low..
When using my highest-frequency and most aggressive tactical timing tools — V-squared (orange line top chart) and HALO-2 (purple line bottom chart) – which were extremely helpful in identifying many of the tactical trading reversals since 4Q17, they are now both unfavorable for the first time since the S&P 500’s June low, which are contrarian bearish readings.
Granted the rollover in V-squared is quite small, but if it holds and both indicators keep heading south there is a high probability that the S&P 500’s rally may have just ended. Investors need to be quite careful while they both remain unfavorable.
If my other tactical tool, HALO, also rolls over next week, it would be a strong confirmation and raise the odds even more that the equity market has downside risk until they both reached their next bullish reversal signals. (Notice it is rolling over — see red arrows — for the first unfavorable signal since June.)
** NOTES – The proprietary Fundstrat Portfolio Strategy V-squared indicator shown in the top chart (orange line) shows the ratio of VXV (the 3-month CBOE S&P 500 Volatility Index) and the VIX (the 1-month CBOE S&P 500 Volatility Index). This tool is also useful for identifying aggressive tactical trading bottoms for the S&P 500.
The proprietary Fundstrat Portfolio Strategy HALO-2 Model, which is the purple line in the lower chart shown above, is the raw tactical data behind our standard HALO multi-factor model described on the previous page. It is useful for identifying aggressive tactical trading bottoms for the S&P 500.