‘Buyers’ Strike’ Stock Market (And Sentiment Results)…

On Wednesday, I joined Seana Smith and Dave Briggs on Yahoo! Finance to discuss the low volume (plus tax-loss selling) buyers’ strike taking place in the market this week. Thanks to Taylor Clothier, Sydnee Fried, Seana and Dave for having me on. How does the strike get resolved? Watch here.

Here were my show notes ahead of the segment plus some additional market thoughts:

Seasonal strength:

Market rallies ~18% in 12 months following midterm election. (Nov-May best months of year)

GDP:

Atlanta Fed GDPNow tracking at 3.4% for Q4.

Fed slowdown:

(50bps in Dec) followed by 25-50bps 2023 – then pause:

What happens after a Fed Pause?

h/t Seth Golden

The Jobs Report was stronger than expected (more jobs & higher wage growth but lower hours). ISM Services PMI also hotter than expected:

PPI (Friday +7.2% est) and CPI (next Tuesday) are key to give Fed Cover to slow:

h/t zerohedge

Stocks have now fully retraced the rise that was attributed to Jerome Powell’s (relatively) dovish statements last Wed.

10-year Treasury closed at 3.43% today (35bps lower than it was trading when Jerome Powell spoke last Wednesday and down from 4.33% peak). This is sending a dis-inflationary signal that the Fed has already been too restrictive and will result in falling prices (deflation) in coming months (if not as early as next week’s report).

1982:

The S&P dropped 27% when Volker was tightening in 1981-1982. The market bottomed in August 1982 when inflation was still at 6.93%. On October 5, 1982 (while inflation was still 6.55%), Volker said he “may shift tactics.” The stock market recovered 100% of the losses within 4 months and went on to make new all-time highs the next year.

Earnings:

Grew 2.5% in Q3 v. 2.8% estimated. 2023 estimates have come down ~8% over the last 6 months (from $252 to $232).

Most analysts are calling for earnings to come down another 20% and are therefore bearish on the market. History shows the stock market bottoms well before earnings. In most cases the S&P 500 had recovered to new highs by the time earnings bottomed 6-12 months later: 1957, 1974, 1982, 1990, 2009, 2020.

Recession Fears:

Managers are as scared of a recession today as they were in April 2020 and March 2009. While they were right to be scared, they were wrong to be in record cash as the stock market bottomed before the recession was declared (March 2009 bottom, March 2020 bottom):

Those calling for a recession may be right, but with a 25% peak to trough move in the S&P much of the pain (to equity prices) may be priced in already. The market is a discounting mechanism and just as it crashed before the economic pain (earnings deterioration), it will rise well ahead of the economic recovery. In other words, the stock market can go up even as the Fed achieves its goal of putting people out of work.

Get ahead of it:

As Warren Buffett says, “if you wait for the robins to sing, it’s already Spring (and you missed it).” So while managers are still sucking their thumbs sitting in cash, know that the “Pain Trade” is up, not down (despite any short term noise).

No one is positioned for any possible good news and the bad news is already known

Tech:

Managers are the most underweight Tech since 2008:

If you were buying high quality tech the last four times managers were this underweight (2008, 2006, 2004, 2002), you made money (see blue lines to the month) below:

We added select tech/semis in decent size for client portfolios in October. It seems Warren Buffett had similar thinking with his recent $4B purchase of Taiwan Semi (TSM) (21% 5yr EPS growth rate – trading at 13.5x next year’s earnings). While most investors were convinced China would attack Taiwan imminently, Buffett swooped in to be “greedy when others were fearful.”

Some “No Brainers”:

Amazon (AMZN): Down ~55%
Disney (DIS): Down ~55%
Meta (META): Down ~70%
(KWEB)/(BABA)/China: Down 70%

AMZN is back at 2018 levels despite:

AWS rev 2022 3x – +$80B (up from $25.7B in 2018)
Ad rev 2022 3x -+$35B (up from $10B in 2018)
E-commerce revenue doubled from 2018
Prime members 163.5M (up from 100M in 2018)

Emerging Markets:

Emerging Markets (EEM) are now trading at 2007 prices. Historically they trade opposite the $USD. When the dollar is strong (black line below) – as it has been rising since Spring of last year – Emerging Markets have sold off ~40%. When the Dollar stops going up as it did in 2002, 2009, 2016, 2020, you will see a monster rally in EEM – just as we saw:

+480% from 2002-2007
+189% from 2009-2011
+96% from 2016-2018
+97% from 2020-2021

Now onto the shorter term view for the General Market:

In this week’s AAII Sentiment Survey result, Bullish Percent flat-lined to 24.7% from 24.5% the previous week. Bearish Percent ticked up to 41.8% from 40.4%. Sentiment is still despondent for retail traders/investors.