Being subject to alarm is not something I do often, if ever, here at Zenolytics.
In fact, if you are to pull up a chart of the SPX and look over every major correction during the past decade plus, accompanied by the analysis provided here (well over 1000 posts spanning 12 years) during each of those corrections, you will find that I was screaming "buy the dip" from 2011 onward.
2023 has been a different story, however.
We came into 2023 heavily long, nearly 200% into the new year and through most of January, while everyone was tripping over themselves in a rabid panic:
However, since February, the operational protocol around here has been either slightly above 100% invested, barely invested at all or net short.
In other words, my unbridled lust for leveraged upside gains has been tempered by a market that is unusual, to say the least.
The current character of the market, being as unusual as it is, begs the question: If the market is behaving in anomalous manner consistently, can we rely on what are seemingly reliable statistical studies to get us through the rest of the 2023, after the markets stalled out in late July?
What I am referring to, of course, is the entitled investor class who believes they possess a birthright to a Q4 rally irrespective of circumstance, fundamental, technical or otherwise.
While I know better than anyone how imbalanced the markets may seem from a sentiment standpoint, with recent options data, CTA allocations and pure panic as a result of yields spiking the way they have, there are points in time when contrarian sentiment fails. When it does fail, the markets put together moves that call into question everything you believe to be true about oversold readings, valuation analysis, sentiment and so on.
Now, before I go any further, we are rather aggressively invested on the long side presently, with a 65% long allocation in just three hyper-aggressive growth names. By no means the leveraged positioning that we took on so many times in the past many years, but nonetheless, still bullish.
Since the Twitter post above, we have seen a nice rally take place, with what is likely to be continued follow through in the days ahead.
What should concern everyone is what happens past October.
Let's dissect what lies ahead:
- CPI on Thursday - minimal cause for concern. Inflation data will remain tepid, being inline or below expectations.
- Earnings season starts on Friday with major banks reporting. More than likely an upside catalyst for banks, as higher rates lift margins, causing a bid in overly depressed bank names.
- Tech earnings start the following week. Mostly good, or perhaps it is better to say they won't be bad enough to cause any downside reaction that is noteworthy. In fact, if earnings triggered a downside swoon I would feel sorry for the bears, as bell ringing tops prior to major declines are not allowed. Earnings causing a decline with any follow through whatsoever is a classic bell ringing top. With so many bears remaining in the market, bell ringing tops are a near impossibility.
- The first week of November is AAPL and the Fed. This could be where the problems begin.
Given the overall technical setup, I am expecting AAPL earnings to be mediocre, at best. However, this isn't where the major problem lies.
Once the Fed seemingly commits to no more rate hikes or a much more tepid attitude towards hiking rates, the inflation trade has a significant probability of turning into the recession trade. This means that lower rates will be seen as a signal of impending danger, while everyone believes that lower rates guarantee further upside.
In other words, the mantra like chant of lower rates are good for stocks and higher rates are bad for stocks is about to flip during Q4, where with a little a more upside, investors will be betting the house on a continuation forward for the remainder of the year. This market is about to trap a lot of investors in the most loathsome, ruthless way possible.
We remain bullish. However, that will be changing during the weeks ahead.
Things are about to get complicated. Perhaps extremely so.
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