smoke & mirrors – ValueTrend
Today, I’ll address a couple of things such as the bond market, and some economic notes before we get into a question posted by a reader on my last blog. I wanted to expand on the concept of the S&P 500’s returns this year. Just how robust is the SPX?
“The market makes the news, the news does not make the markets” Bob Farrell
Soft landing?
Question: “Frankly, the Fed has won the battle of the American consumer — they are slowing down. And the question is what happens next.” Bank of America CEO, Brian Moynihan
Answer: “What comes next is the end of the “soft landing” and the natural transition to the “hard landing.” David Rosenberg
Upside/downside potential in the 10 year treasury
Some thoughts on the risk reward potential for the 10 year US bond for the coming year. Calculations courtesy Rosenberg Research.
RISK: If the economy doesn’t soften and the Fed is forced to raise another +100 basis points from here over one year (most extreme case imaginable), this implies a total return of -2.6% after yield
REWARD: If the economy softens and the Fed eases -100 basis points over one year, this implies a total return of +12.7% after yield.
This appears attractive as a potential trade with those risk reward tradeoffs. So what are the technical odds of those risk reward numbers? On the chart:
- Massive support for the 10-year right now.
- Beyond a minor move on Monday of this week, too early to say if that support is holding. It actually looks to have broken support on this monthly bar chart, but this may be a spike.
- Simple momentum studies like ROC (bottom pane) suggest an oversold market that is diverging positively against price – implying a bounce sooner or later
Given the above – I’d say wait a bit longer, but the odds look good if price can move back above the support line.
Bank Credit
Recall my video about 2 months ago noting the decline in consumer discretionary spending. Discretionary Stocks Point Towards Weaker Economy – ValueTrend
Bank credit basically means the amount the banks can lend. Clearly, higher rates mean you qualify for lower loans if you are on a fixed income.
Question: If you think the market is in great shape and earnings will go up to justify a rising market – where will those earnings come from?
Answer: Here’s an updated bank credit chart (Rosenberg). Until rates fall, consumers can’t buy as much, and earnings growth will remain subdued. The consumer is tapped – see my very important stagflation video if you haven’t already. Note the credit card delinquency chart I address in that video. Investing in Stagflation – ValueTrend
Magnificent seven less magnificent lately
Regular reader Paula noted the robustness of the SPX – asking me if I felt 4200 support will hold. As y’all know, I don’t predict, I do prepare. I just follow the markets lead – if it breaks, sell more stocks. If it holds, start to leg in. What I did mention in my reply to Paula was that the “Magnificent Seven” have done most of the lifting for the SPX this year. I compared them to a star hockey player on the team. He/she better not get injured, lest the weaker members be unable to win the game.
Below is a swath of the six stocks (I didn’t repeat the 2 variations of Google) – daily chart back to May. Note that only Google shows any uptrend. I don’t think the SPX’s star team is looking so robust.
The SPX doesn’t look so wonderful when you apply an equal weighting to its components (vs. the 29% weighting the Mag. 7 in the cap weighted index). In fact, the equal wt. SPX is down about -3% on the year vs nearly +10% return on the cap weighted. SPX is not holding up well when you equalize its holdings.
