Past couple of weeks have been pretty nasty in the markets. We are seeing the opposite of the action we saw in late June and July i.e. falling yields and tech leadership. July Job numbers released at month end were fairly robust. At first the market response was positive but by end of the day it was negative. You always got to be careful to give too much credence in the market's reaction to a single data point. These types of headlines often create knee jerk, emotional type moves and a game of chicken element amongst traders who have made bets on either side of the market. One thing I noticed is that when the market had been up on the day the put/call ratio was high which says there was plenty of hedging/bearish betting going on which is contrarian bullish even though the market reversed course and closed in the red. Put/call ratios have rapidly risen during this market slide, fund flows have reverted back to negative and NAAIM exposure has retreated to 33% and is probably in the 20s right now as the latest figure was as of Wednesday's close. AAII sentiment last week had 50% bears vs 22% bulls. That's back to a lopsided 2:1 ratio you typically see at a market low. The market is also now ST oversold. All of this is suggesting that that the market is ripe for at least a strong bounce and supports the notion of a base building scenario unfolding rather than a market that is primed to make major lows....at least at this point right now. AAII positioning showed a marginal uptick of equity exposure to 65.5% for end of August. That's disappointing if you're hoping for an eventual bullish resolution to this market. Once again, AAII is showing a clear disconnect of how they are feeling vs how they are positioned and suggests that if the bulls make some kind of stand here, we're not going to be out of the woods. Granted, this is just one indicator and you should never hang your hat on just one indicator. I've showed plenty of other positional indicators which suggest extremes in bearish positioning. Bottom line is that market action looks ugly but there's enough pessimism to suggest a bounce is immanent. At the very least, not an ideal time to be going short here.
There's this narrative that strong job data automatically equates for the need for higher rates. This is such naïve and dangerous thinking. From 2010-2020 we had generally strong job creation with a fed Funds rate averaging sub 1%. Where was the hyper inflation that this should have created? Even when the labor market was considered tight in 2018 and 2019 inflation was tame. Low rates did however contribute to asset price inflation i.e. housing and equities but not in the CPI/PPI as many doomers were predicting.
Inflation pressures have recently been generally abating despite the strong payroll numbers we've been seeing in recent months.. In Europe, not as much due to obvious reasons. To try and kill the economy in order to reign in inflation due to the external factors causing it is ludicrous. That's like cutting off a healthy foot in order to deal with a mangled toe. If the Fed hikes rates high enough for long enough, that will probably induce a recession and the bankruptcies and liquidations which result will temporarily help suppress inflation but unless the fundamental factors which created the inflation in the first place aren't dealt with, it will come back with a vengeance. If while in recession the factors that actually created the high inflation are sorted out, it, then the Fed may end getting undeserved credit. That's what happened in the 80s when Paul Volker was given credit for "breaking the back of inflation" which is bullshit....that will be the topic for another day. All I have to say for now is look at the high inflation rates in countries like Turkey and Argentina and you will see how toothless high interest rates were in taming it. Alternatively, look at Japan which has struggled with deflation for decades with 0% interest rates.
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