Since my last post we've had a market bounce and there's been some notable developments. Commodity stocks have sold off hard. XLE, this year's top sector YTD has taken quite a tumble. A lot of hot money had been piling into this sector. Prior to this tumble, the monthly BOA global fund manager positioning report was showing a massive overweight in commodities and respective underweight in tech. Cash was also massively overweight. Obviously this was a wrong way bet for the ST at least. I've been noting evidence of the rapid shift out of tech for months now. We could very well be at the point where its washed out on a medium term basis and perhaps long term basis. There has been a complete unwind of once high flying stocks like SHOP and ZM as they have gone so far as to hit COVID bear market lows. That would appear to be a big overshoot to the downside. For about a month or so, these types of stocks a.k.a the unprofitable/high p/e tech stocks, have quietly been showing relatively strength. It's still far too early to declare a change in trend but if it continues, it would be encouraging as these type of stocks were the first to go down. Probably the main reason these stocks are showing some signs of life is the recent decline in commodity prices and other inflation pressures. Chinese freight rates for instance, have rolled over. Housing prices have rolled over. It's too early to declare the decline in commodity prices as a major rollover just yet. It could very well just be a pullback due to over-crowded longs getting rug pulled. I suspect the Fed will probably not make much of these emerging signs of cooling inflation just yet and hike again in July, but they need to signal that they are aware of them and will not simply react to lagging indicators.
The above was published mid June. When you see such things on the front page of a mainstream newspaper it's a strong contrarian signal. At the very least it suggested a ST market rebound as sentiment is extremely negative. The University of Michigan consumer confidence index just registered an all time record low - even worse that than during 2008 financial crisis. Again, such an indicator has strong contrarian implications as it signals extreme pessimism and history shows future longer terms returns to be strong. The one time it didn't work so well was in 2008 when it hit an extreme in June of that year of 56, rebounded to 70 by September only before tanking again to 55 in November for obvious reasons. The current reading is 50 which as previously mentioned, is a record low. Taking this into account along with other indicators both anecdotal and quantifiable such as the BOA bull bear indictor, it's signaling that at least a ST market bottom is immanent or has been put in. Of course, there's good reasons to believe that that we aren't near a LT bottom but we need to keep an open mind. I was looking back at the 2011 bear market lows and at the time there were recession fears and major concerns about a European debt crisis which was going to lead us to the next phase of the financial crisis. Things certainly looked dire but that's why it's hard to buy at bottoms because it always feels that things will only get worse.
In recent years bulls were able to make the case of TINA - there is no alternative. Well, now there is. GIC rates in Canada have not been this good since 2000! You can get a 5 year GIC today at 5%. That's pretty damn good. Yes, this is a negative real return at the moment but you would expect inflation to subside in the years ahead. Even if it averages 3% for the next 5 years that's still a pretty good return for a 100% risk free investment. How much of a deterrent is this to equity markets? It's got to count for something. The only way I see a bullish resolution to this is if GIC rates peak and start coming down notably but that's not happening as they keep climbing making fresh highs daily. It's hard to get bullish on the market longer term when risk free alternatives are now attractive and getting more attractive by the day. The high interest rate environment for me, is the biggest bearish factor for the market - whether it be high mortgage rates\choking off housing or high GIC rates providing an attractive alternative. If the market sniffs out that rates are peaking at a point where it's not too late (we avoid a painful recession) we can get a bullish resolution and we'll look back to this period as a major growth scare with a healthy cleansing of excesses. That's certainly not a given by any means. There were enough signals and red flags to suggest that a major bear market has began. But again, that's not a lock either. I'm trying my best to keep an open mind as to how this is going to turn out. I think though that if there's going to be a bullish resolution to this, the market is not simply going to do a V shape upwards move from here. It would likely chop for several weeks. As usual, I will take my cues from the market and the indicators and adjust my outlook accordingly. As of now, I suspect it will be treacherous trading for both bulls and bears. The easy money of last week's bounce has been made. With bond yields and oil prices rebounding as I type this, it's going to serve as a headwind again.
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