Bear market or new bull?


The Marktoor with the furious debate.

As a reminder, this market is still missing a new trend. Both SPX and NASDAQ are essentially unchanged since May last year…


Brief pain in a photo

Not only is the public not at risk long enough, but they also have shorts that hurt like hell as the market, especially technology, exploded higher yesterday. According to GS, yesterday was the largest shortcovering since June 2022 (99th percentile 5 years).


Chasing European equities – you are not early

The European Citi index of economic surprises has been beating the US version by miles lately, but we’ve seen that happen before. What we have not seen is such outperformance from Europe. Europe over the US has become a major consensus trade, but you’re not here early…


Credit protection back to recent lows

Both the iTraxx main and the CDX IG returned the bounce movement.


VVIX knew

Muted VVIX eventually “flowed” into VIX, which moved lower after the initially sharp move lower in October. Note that VVIX and VIX have been moving in opposite directions lately. Nothing grand, but worth seeing. VIX at these levels looks relatively attractive given that several macro events and big gains are on the way.


Bond volatility is key

Let’s see if MOVE gets “inspired” by VXTLT printing new recent lows…


Falling margin debt

Rising margin debt is god to the bulls, not so much falling. The latest increase in equities occurred despite the decline in FINRA margin debt.



The calculation of buybacks has changed a lot over the past 12 months as borrowing costs have risen sharply and the equity risk premium is still quite low. The median return on future earnings is 5.8%, the median cost of debt is 5.8% for S&P 500 companies buying back, excluding financial and utilities (debt cost as proxied by S&P credit rating and using the latest yield on those credit rating (e.g. BofA corporate bond table of contents)). A year ago, earnings returns far outweighed the cost of debt, making buybacks a wise choice. As the environment has changed, GIR expects buyback activity to decline 10% next year, assuming zero earnings growth. In a recession scenario, buybacks are down 40% historically. A theme worth seeing. (GS)

Some interesting breakpoints

The theme of the market “maximum confusion” continues. We’re currently thinking about seven things that seem to be at breaking point, call them market mysteries, that need some clearing up before we can have a belief in direction.

1. Markets are rising – inflows to money markets are increasing

Things you like hmmm…the graph of cumulative cash flows across assets. Can the rally continue without evidence of cash flow FOMO? Or can we peak without real FOMO flows?


2. Can the public afford to do as they say?

According to the latest JPM survey, clients aren’t too interested in increasing equity exposure, but the question is whether they can afford not to add when things are tight.


3. Now What: US vs Europe?

Just when everyone agreed that the US would underperform Europe, US markets decided to make a huge comeback, leaving Europe far behind. Is this the next theme of maximum pain?


4. Will Sentiment and Flow Follow Price in Tech?

The final squeeze looks very different from the fall squeeze, where Dow was the leader and Tech was the laggard. We outlined our technical logic in our post on Jan. 8. Tech bounce like the pain trade from here? This swap has worked out very well, but the major stream has only recently started looking for technology. As GS’s Nocerino writes, “…we’ve seen more confidence from investors in the tech space over the past 2-3 sessions (especially LOs). Will we see a mass chase of HFs and LOs before the Tech rally is over?


5. Have we now correctly modeled FX for Tech?

Suddenly, FX is a nice buffer to tech thanks to a dramatically weakening dollar. Reported revenue for Tech is likely to be 1% – 2% higher in CY Q4 and ~2 to 4% higher in 2023 than expected when companies reported Q3 results due to the weaker USD. IBM (+4% or $2.5B in revenue) and AAPL (+3% or ~$11B in revenue) look poised to take the biggest advantage in 2023. Historically, consensus doesn’t work well when updating models for currency movements. Companies have a higher incidence of beating consensus revenue when the currency is positive, and companies tend to outperform on revenue beats. (Sanford Bernstein)

6. How is this gap being closed?

US credit protection is relatively lavish. CDX IG vs SPX continues to trade with a fairly large gap.


7. Will there be more “must buy”?

Friendly reminder that the CTA models are now well above the short (3917) and medium (3966) thresholds. The long-term level is 4084. GS writes, “CTAs buy +$13B of S&P in the next 5 sessions, moving them from short S&P to long S&P.” Remember, the corporate buyback blackout ends on Friday, so the big VWAP bid of $3-4 billion a day is back. And add to that the potential for reversal of stock outflows – remember this year has started completely opposite to what January usually brings (normally the month with the biggest inflows).

The biggest question of all: to break or not to break

SPX; the tight triangle/wedge-like formation, the major trendline, and the 200-day moving average. Frustration is huge, and it will get bigger – until finally something breaks.


“Wall Street story of recession is changing faster than a TikTok video”

Never have we seen this volatility and divergence in views, data and market prices when it comes to a recession. We are everywhere and the potential story changes daily. Needless to say, it is very difficult to find out what the real consensus is. What is clear is that we certainly entered 2023 dead with the coming recession, but the narrative has shifted more towards a soft landing. The question is, have we gone a little too far in this shift? Let’s take a look at some of the most important data and views.

Is Goldilocks just a one-night stand?

Obviously not, because she’s been hanging around all January and refusing to leave. However, Barclays doesn’t think she’s marriage material: “We have a feeling that the current Goldilocks environment won’t last long; the “soft landing” story is exaggerated. We do not see the US labor market slowing to Fed comfort levels without heavy job losses. The run-off of the Fed balance sheet has a long way to go, putting the brakes on valuations in the medium term.” (Barclay’s equity strategy)

Are we there yet?

Morgan Stanley’s WiW survey yesterday suggested that 90% of investors expected a “soft” landing. Also interesting to note is that 40% of investors expect earnings this quarter to be a positive catalyst for cyclical risk appetite (20% negative and 40% neutral). We entered the year with everyone who believed in a recession and saw earnings as the catalyst to bring stocks down. Now everyone believes in a soft landing and only 20% see revenue as a negative catalyst….

Recession not priced in

Kolanovic thinks the market will move lower due to weakening economic data and missed profits. JPM: “A recession, in our view, is currently not priced into equity markets as several segments (e.g. European equities, US industrials) have remained virtually flat over the past year and acted as if the energy crisis, war and sharp monetary tightening did not happen . Soft US activity data and a lower than expected PPI suggest we are in the later stages of the tightening cycle.”


Credit spreads in the US are well below recession levels

The smartest guys in the room act like there’s no recession coming. US credit spreads are well below their US recession averages.

JPM Credit

Sometimes bad things take time

Investors seem frustrated with how long this ‘manufacturing recession’ will last. It is worth remembering that the ISM has been contracting for two months – after nearly three years of expansion… Based on seven previous inflation cycles since 1951, the MS EU cap goods team warns that cyclical investors should brace themselves for a longer and deeper downward cycle in 2023. They believe 1973-4 is a clear precedent for what happens next. Traditional canaries in the coal mine – Housing, Auto and Korea – data points flash red.

Morgan Stanley

Do you choose soft or hard?

Goldman says US “hard data” turned positive in January as “soft data” continues to contract… No one said it was going to be easy.


Stronger belief in “soft landing”

GS: “We are increasingly confident in a global soft landing this year, clearly contrary to consensus”.


Smells like 2007

Reminiscent of 2007, all major indicators of recession flashing red and then appears the wild card joker mystery riddle China a “ruins” of the analysis. JPM: “The shadows of late 2007: heightened chances of US recession intersect again with powerful tailwinds from Chinese growth”. However, recession eventually won that time.


Sniffing out more weakness

The short-term forward spread has reached its lowest level in more than 20 years. The spread reversed in late 2022 and has accelerated its flattening in the new year, reaching its most reversed levels since late 2000, just a month before the Fed was due to launch a massive easing campaign following the burst of the tech bubble. JPM: “…we respect the message the markets are giving us, which is that a recession may be lurking faster than our own opinion….”


Pretty joyless rally

“I don’t think I remember a good start to a year that has been received with less fanfare or appreciation. We entered the year bearish…..under risk…. with a market that was under ownership… and where that lack of ownership was most acute in China, Europe and the UK. Cue quite a material cover bid… the impulse of which triggered a beta chase… for the final domino an influx kicker. The sum of the parts adds up to a nearly 10% move in Europe to start the year. There is growing hope. The tone has mellowed with a greater chance of a soft landing. Oddly enough, that is despite continued aggressive commentary of either higher for longer and/or there may be more to do to beat inflation once and for all” (Booby Molavi, GS)

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