The Market: I Was Wrong
The risk-off fever has not broken and 1987 is still every much in play (with today and tomorrow key junctures along the 87 analog path).
Discussion
Last week in the write-up below I concluded that the risk-off fever had broken, as evidenced by the sharp reversal in rates, USD, VOL, and CDXs. I was wrong.
Rates, USD and CDXs have all move right back to their highs in decisive fashion, with VOL being the lone holdout.
The VOL complex is its own beast at the moment, driven by market participants who place the macro backdrop at a distance second to VOL as a primary market driver. As discussed over on the private Xwitter account this weekend, Jason Shapiro and Bob Elliott recently, and brilliantly, summed up the current equity market structure. In short, there is no fundamental justification for equity market upside from here, and the best the VOL market is going to do is slowdown the downside momentum - and frankly, we need to hope that that’s all the VOL market does, as an exacerbation of the downside could easily materialize as a result of extreme levels of VOL selling and speculation.
Given the wide open path to SPX 2500-3000 by 3Q24 (the structural outlook), and the fact the equity market structure has not yet reached deeply oversold levels (outlined in the charts below) from a cyclical perspective (1-12 months) that would allow for shorts to be covered and tactical longs to be established even in the midst of a recessionary bear market decline, speaking to myself here it is mission critical to maintain a flexibly rigid bearish stance on stocks until a fully oversold market condition develops.
Exhibits
The long-end of the UST and TIPS curves has punched right back up to new highs alongside the move in Japan FICC.
The USD has ripped back to new highs.
Breadth continues to melt, led by rate-sensitive defensive sectors that continue to point the way higher for rates. 50dma breadth right back on the lows in today’s trading.
And most importantly from a cross-asset market signaling perspective, IG CDX continues to “stick” at elevated levels, maintaining the “gap” at SPX 3929 (as discussed last week here).
From an 87 analog perspective, SPX’s 20dma is about to cross below its 100dma. In 1987 that cross coincided with a decisive drop below the 200dma, leading to an acceleration in downside momentum.
Lastly, given all of the above, it’s mission critical to remain bearish until sentiment and positioning falls to deeply oversold levels that more appropriately account for the macro headwinds in place.