Market Squeeze

Daren:
[0:01] It's Friday. Oh, right. This is the best time of week, Chris, where we get to wrap up the markets.

Daren:
[0:09] Another interesting one. We didn't end up in all-out war in the Middle East this week, so I think we can celebrate that as good news. We saw the market go higher. It's very clear there is a wall of money and stimulus from just about every government in the world, stimulating the economy and the markets right now. It's pretty hard to imagine any other outcome than the markets going higher, given that one fact alone. I think if we've learned anything over the last three years, Chris, is that nothing matters more than stimulus. That is the 800-pound gorilla on the markets. Wouldn't you agree?

Chris:
[0:55] Absolutely liquidity is the most important factor global liquidity.

Daren:
[1:00] That is um but so we're going to talk all about liquidity when we come back and how everything else has not worked except for following liquidity uh which is i guess somewhat newsworthy and we'll be right back after this

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Daren:
[1:52] All right. So for those who don't know, what is liquidity, Chris?

Chris:
[1:57] Liquidity is a fancy word for money being pumped into the system, basically. How readily available is cash? And that has different ways of coming into the system. You know, it could be direct stimulus checks like we saw during COVID. It could be in the form of loans, whether that's, you know, the PPP loans being forgiven, but also just credit in general being more readily available. So liquidity comes into the system from a lot of different ways it comes in from uh different uh you know areas around the world it's not just the u.s um you know we saw i think it was two weeks ago that china announced that they were going to start supporting their markets with some some stimulus and and liquidity to um you know they trying to get the the lending market going again in China and that market took off as well. So, you know, and I, like you said, in the short term, at least it has been the most important factor by a long shot. I think it was the famous Marty Zweig who said something to the effect of don't ever fight the Fed. Right. And could be wrong, could be right, but it's, it's definitely seems to be ringing true these days.

Daren:
[3:21] Yeah. Well, and I would say over the last three years with everything that's gone on from COVID to recovery from COVID to insane inflation, et cetera, the end of the day, I guess the moral of the story just came back to how much fiscal and monetary stimulus was coming into the market, certainly here in the US and certainly abroad as well. So this is, I think, ties real well into the cartoon here from Hedgeye, and that seems to be what's happening. I guess you just have to wonder at some point, does the party come to an end, right? Like if it's just one sugar high after another sugar high, and- can the government just stimulate until forever? I don't know, right? I mean, that's the great question.

Chris:
[4:05] Well, so far, there hasn't seemed to been too many consequences other than, of course, the inflation that got out of hand briefly. But speaking of rates, as of today, just last week and most of this week, actually, there's about a 50-50 shot between a quarter point drop in rates at the next meeting in November, right after the election on the 7th, or a half a point. So a quarter point to a half a point drop now, we're at nearly 93% probability of a quarter point. And then there's a 6%, a little over 6% probability of no cut at the next meeting. So talk about expectations being thrown off. But this is another thing that if somebody went back and told you this stat, this is crazy. Nearly half of the S and P 500 by market cap, meaning like what's, what's the market capitalization or what is the market value these companies at nearly half of the S and P 500 by market cap is currently under government antitrust scrutiny. Yet, uh, seems to keep chugging along, right?

Daren:
[5:19] So they haven't added visa to this one yet though so it must be more than that oh no there it is sorry it's

Chris:
[5:24] On there yep yep.

Daren:
[5:25] This one's classic right where you get nancy pelosi like a week before the investigation opens up by doj like magically your husband sold all their stock i mean for real like it's just crazy blunt obvious at this point

Chris:
[5:45] So a lot of people have been wrong. A lot of very smart people have been wrong. This chart was from September of 23. So September 29th of 23. So almost exactly a year ago today. And this was from Bank of America's Ian Hartnett one year ago. He said, central banks likely ain't finished breaking stuff. Stay bearish and defensive and sell the last hike. And in brackets here, I'm not sure who added this, but it says since then the S&P is up 33.1%. So, you know, there's just been a, we were talking before the call, all the economic indicators, whether you're talking the yield curve, you're talking the SOM rule, you're talking unemployment rates, all these things, they've all been wrong. They've all been wrong so far, knock on wood right knock on glass table uh you know so um investing is hard nobody knows what the future holds be prepared for anything and um you know the spectrum of probabilities are really endless in terms of what the results can be um moving forward well.

Daren:
[7:04] I think part of the issue though Chris is that when you think about markets we have a black and white sense of it right? Like there's a right, there's a wrong. And that's really just the wrong way to think when you think about markets. The only appropriate way to think about markets is through a lens of probability, right? Like there's no rule that's always right. There's a probability it might be right, but there's no one that can make the argument to me that these markets are going to do exactly what they've done in the past, given all of the influencing factors going into the markets now, right? I mean, you've got the fiscal deficit we're running now. We're running our debt in our country is increasing at a very rapid rate, dangerously so perhaps. Um, and you've got a, I would say a, a very active fed, a very active set of central bankers from around the world. And that's not historically been the case. So things have really changed. And I think that presents a, even more. Delicate process for investors to try and understand like, well, what should I do then? If none of these rules that have played out or playing out, what do I do now? And that's why you have to stick to a set of timeless principles or processes.

Chris:
[8:24] Yep. Yep. Or you just believe that the Fed or central banks around the world are going to bail it out every time. And there's a safety net under the market that hadn't existed before. I personally feel like that's pretty sketchy to believe that, but I can see how people would believe it after what we've been through over the last decade plus. Sentiment this week moved down slightly, but still elevated from AAII. And the CNN fear and greed index is still set at greed 71, pretty much unchanged from last week. Bitcoin swung pretty dramatically from 61 greed last week down to 41 fear this week. So not sure exactly what's going on there, but Bitcoin's like your manic, crazy uncle. You just never know if he's up or down. Changes week to week.

Chris:
[9:28] So this, we've got a series of charts here and we can go through these kind of quickly. It's basically saying the same thing on all three charts, but from Bespoke, he says, Bespoke Investment says, here's a look at our global central bank rate monitor, which highlights the easing we're seeing around the world. So they're consistently falling after a long time of increasing. And if you go to the next chart, you'll see September of 24 was the biggest month of monetary easing since April of 20, which was COVID. Now, granted, it's not the scale that we saw during COVID, but still significant. And so, you know... You can see back to great financial crisis. So going back to the pattern that we've seen from the central banks is that they've supported the markets through all these different issues really since the great financial crisis. And what we saw in September is on par with some of the liquidity that was injected in great financial crisis times.

Chris:
[10:38] And then this last one is from Cross Border Capital. They're kind of famous, I think, at least from what I've picked up on telling people about this theory that, look, there's a cycle in global liquidity. That's what really drives asset prices. Pay attention to that because I remember them saying a year ago, hey, there's an uptick in this liquidity. The cycle's starting. We're bullish risk assets because of it. Um do you seem to remember the same thing Daren.

Daren:
[11:12] I do yeah because they came well maybe they've been on the scene for a while but i started hearing them um not maybe about a year ago and um that was kind of their argument that when liquidity kicks up in that cycle you don't bet against it you just follow it and we're certainly seeing that now right

Chris:
[11:37] So what is all that liquidity provided so far? Well, if we go to the next slide, we see that S&P is heading for its best year so far since 97. That was pre-internet bubble year to date. So the market's responding positively to that liquidity. Now, think back to 22 when the opposite was happening, when liquidity was being pulled out of the market globally. Central banks around the world were hiking in response to elevated inflation rates. And so they were in a coordinated hiking cycle instead of a liquidity cycle. And assets everywhere got pummeled, basically. You know, stocks, bonds, just everything lost at the same time with interest rates going up, money getting tighter, the liquidity being pulled out of the system. So we have two very good recent examples of these liquidity changes.

Chris:
[12:40] And I think when you go to the next chart, the other sign of this is that we're seeing the rally broaden amongst the S&P. We've been talking about that a lot over the last few months where it's no longer as concentrated as it was to begin the year and much of what we saw in 23. But now it's starting to broaden out across the stock market, across the size. So small, medium, and large are benefiting more equally, whereas we were just seeing the large stocks really.

Chris:
[13:12] And just within the large stocks, just a handful of those large stocks were providing all the returns.

Chris:
[13:21] Now, if you are someone that watches economic data, knows economic history, it's really been a hindrance and not a help. And, you know, I think it's important to keep in mind that, you know, I think Annie Duke, the, you know, she's kind of a famous decision-making expert. She's a famous poker player and she talks a lot about how you can have the right inputs and have the wrong results, you know, even with the right inputs. And I think it's, I don't know, maybe constructive to think about the fact that, hey, if you look at all these indicators that had always worked in the past, literally, you know, pretty much every one of them has been wrong. And so if you are someone who is a risk manager or you're taking a look at probabilities of outcomes that could happen.

Chris:
[14:19] You know, in order for you to have had the best outcome in this situation, you would have had to say, all of these signals are wrong, right? And I think that's where you, when you look at, you know, a lot of these experts that were calling for a recession over the last couple of years were wrong, but they were wrong for the right reasons, if that makes any sense. Because when you do look at the inputs, this is the first time that I know of that they've pretty much all been wrong across the board.

Chris:
[14:53] So lucky for those that have called it. But this is another one, the SOM rule, or sorry, this is the yield curve inversion, which we talk about a lot. This is the longest yield curve inversion in history without a recession. We've got the SOM rule versus claims. The SOM rule has never been triggered with claims as low as they currently are, even when the labor force was much smaller. So over and over, you're seeing these situations that just haven't happened before. And maybe a lot of that is because of this liquidity. It's one of the first times that I know of where we've been pro-cyclical with it, injecting all this liquidity with unemployment low, with growth fairly strong. Basically, usually the government and the central banks react to the economy counter-cyclically, meaning when things are going poorly, that's when they turn on the fire hose. But right now, they're flooding the market with money when nothing is really going haywire. So maybe that's what's causing all of these indicators to be thrown off.

Chris:
[16:09] So speaking of indicators and stimulus, this is from macro charts showing that China's Hang Seng Index has triggered its strongest breadth advance, so meaning that the number of stocks above its 10-day advance decline line, the strongest one in history, which has been a classic bull market initiation signal. This is another one i distinctly remember last fall the word uninvestable being thrown around about china remember everybody was totally so bearish on china it's uninvestable that was literally the word and uh boy has that been wrong but.

Daren:
[16:54] It's it's that's the thing dude it's not even like it's not even about whether or not that company's actually investable in it's purely about what's the stimulus coming into the market and is there going to be liquidity because the liquidity covers all sins and

Chris:
[17:10] That's the reality yeah yep well and the fundamentals do look better so this is from meb faber showing the cape ratios for china and india back when they were the hottest thing to be in um in the early 2000s going into the great financial crisis their cape ratio which stands for Cyclically Adjusted Price to Earnings. So it smooths out the price to earnings ratio over a 10-year period to kind of give you more of a, I guess, a clearer picture is the expectation. And so China hit 55 and India hit 49 back then.

Chris:
[17:49] And everybody knows really since 2007, the Chinese stock market's gone nowhere. I mean, it's gone up and down, but it has not advanced since then. And that's pretty classic when markets hit fundamental thresholds that are just kind of way out of the norm in terms of the valuations just get sky high. You're susceptible to lost decades or more. In the case of Japan, it was 30 plus years. So I would say, yes, watch liquidity, watch stimulus, but also take a look at those underlying fundamentals and realize you know, is it the beginning of the

Chris:
[18:31] party or the end of the party? Like, did they just bring the booze out or is, you know, is it late in the night and it's starting to get out of control? Right.

Chris:
[18:40] I think that's where you want to kind of keep an eye on it. So, um, I thought this was very interesting, um, from bank of America and their quote here is that retail, um, which is, I guess what they call basically, you know, mom and pop investors, anybody that's not a large institution, like a pension or hedge fund, um, that, that type of investor. So retail has missed the gold rally for the first time since GLD's inception. GLD is a common ETF. Um, maybe the most popular, uh, ETF, uh, for, for gold. And, uh, they say we're tracking 25 billion of physical gold ETF outflows since buying peaked in October of 2020. And so you see the gold price there on the dark, uh, the dark line gold's been hitting all time highs, uh, pretty much daily. And then you've got the outflows from the investor base, which is interesting. I'm very surprised, but also makes me kind of wonder about the gold market because you're not really hearing, very few people ask about it. You don't hear, you know, you don't go to parties and people aren't talking about it. So it's kind of quietly hitting these all-time highs and doing well. So we'll see how long that lasts.

Daren:
[20:09] Well, as long as the central banks keep buying, right, and that's what clearly is driving a lot of this gold price, then it's pretty hard to argue that you're going to see anything other than continued price movement. Maybe not up as fast, but certainly there's a lot of support. And I think given the last week and just the stuff going on in the Middle East, I The things just keep piling up from a geopolitical standpoint that suggests that gold will continue going up.

Chris:
[20:37] Yeah.

Chris:
[20:40] So Lizanne Saunders talking about Redfin data here. U.S. homebuyers need to earn just shy of $77,000 per year to afford a median-priced starter home, $250,000, which is down by 0.4% year-over-year. That's the first annual decline since August of 2020 for Redfin. So finally starting to see a little relief on that front. Now, what's been very curious or confusing, depending on how you look at it, is that interest rates were going down into the Fed meeting in expectations of rates getting cut. Since they announced the cut, interest rates have been going up. And I have had more than one person say, you know, what in the world? How are rates going up now?

Chris:
[21:38] So it's kind of a conundrum. Like, you know, what is the private market saying with that? Like, you know, because we talked a lot about how the private market was going down while the Fed was holding the rates high in kind of a way of saying like, Hey, you guys need to cut rates. You're too, you're too, uh, you're, you're too tight. And, um, now with the rates spiking here recently, interesting, like what, what is the private market saying? Is it just a blip on the radar and that's going to turn back down to the downtrend? Um, or are we going to kind of change directions and start getting increasing

Chris:
[22:14] rates in the private market while the feds lowering rates? That'll be a, that'll be a fun one.

Daren:
[22:22] All right, let's dive in and take a look at the markets and how we closed up this week. We'll start with the S&P like we always do, pretty much. Pretty decent week overall. We lost some ground midweek, but today certainly went up. The jobs data came out today and there was quite a surprise in the non-farm employment change. Uh they expected one fifth or they expected 147 it was actually 254 the thing that always annoys me about the job data is it's extremely noisy though right it comes out and the market moves off of it and then you know two months later a month later like oh yeah by the way um there was a hundred thousand less jobs than we thought but how the market

Daren:
[23:16] Puts that in chain it takes that into account is interesting um so your s&p 500 um we didn't finish at an all-time high um i guess you did we did for the weekly chart we did we finished at an all-time high on a weekly candlestick this week we didn't make the all-time high but we finished we closed up the market in all-time high so pretty hard to say anything other than that's bullish um and going back to where we talked about the start of the program there's just so much liquidity coming into the markets. Pretty hard to bet against this. Additionally, there were people betting against this. And when jobs data comes out all of a sudden, and it's better than expected, I mean, the economy's stronger, people go, oh, oops, maybe I shouldn't short the market. And it forces them, that squeezes the market, call it a short squeeze, and pushes it higher. And the fact that we closed up at 57,572, we definitely squeezed higher. So we continue to climb and that's a bullish candlestick. And I think going into next week, I would expect that given the news from today. That obviously fed also into the crypto markets, which are the front end of the risk curve. It was a down week overall. But I wouldn't say that I'm particularly concerned about that chart. It just looks like consolidation. And NVIDIA continues to rock and roll. But I think I'll point out, Chris, and

Daren:
[24:44] Nvidia, it's been doing well the last three, four weeks, but now we're broke out above this trend line and closed above that trend line. And I think that's very pronounced. And I think we need to pay attention to that. I don't really like to say it because I'm kind of tired of watching Nvidia win, but it looks like they're going to continue winning.

Daren:
[25:05] This is what's called a doji candlestick where it's really compressed in the middle. It means the buyers and the sellers are kind of still debating on where it's headed next. It can usually be a topping or a bottoming candle. But the fact that it closed above this trend line for the week, I think you have to take that as bullish on its face. Microsoft, interesting with all the other big seven, they're doing pretty well, but Microsoft continues to show weakness. Um so i think that's interesting i think your point earlier about the market getting more depth to it is well taken Chris um the oil markets with all the hubbub over in the middle east uh we've seen more oil markets go higher uh what's interesting though when we're talking about this this consolidating triangle here for a few weeks and the fact that we broke below And then now we came up to the bottom of this trend line, which is, I would call that resistance now. And it got sold off there. So basically got sold off below 75. This could be a rejection because this looks like a completion of a double bottom we talked about last week, extended up, got resistance here. That's the move. So it could actually be down for oil. So one scenario is this jobs data is...

Daren:
[26:35] I don't want to say fake, but not accurate. And then the market takes that into account later. And we actually are headed more towards a recession. The fact that everybody's just given up on all these like indicators that have, you know, the yield curve inverting, and that leads to recession, the SOM rule, all those almost makes me feel like, oh, well, if everybody's completely given up on those things, it's probably going to come true now.

Chris:
[27:03] But yeah exactly as everybody goes oh nothing to worry about.

Daren:
[27:09] Yeah now the 10 year is interesting you had quite a candle today right so when the jobs data came out the rates just went higher right and so maybe the market's saying whoa we got that wrong albeit this is i would say resistance this line here right around 3.98 in fact it closed right below that the move's done and then it could reverse. I could see that kind of story happening here. I think, you know, the, any way you look at it, you have to say at least the medium term rates are, the trend is lower. You know, this would be the trend line that I would say, oh, rates are headed higher. So if we break above four, hold 4.1 ish, then I'm going to say rates are going to start going higher, but we've still got some blue sky to get into before that's the case right in this area. So next week, if we see something like that in a breakout, um, then maybe we say rates are headed higher, but right now it still has to contend with that resistance zone. Um, so I, I wouldn't take the victory lap yet. Not a good day for bonds because of interest rates, just kind of shocking higher. But that goes nature of the beast, right?

Daren:
[28:32] All right. Let's see. What else do we want to look at today? Oh, I thought that was interesting, Chris, your point earlier we were talking that the number, like tell everyone that point you said about,

Daren:
[28:44] and this isn't to get political, but I think just really fascinating. So what was the number one performing asset class during the Trump administration or the lowest performing asset

Chris:
[28:54] Class during the Trump administration? Yeah, sector of the S&P, right? And gosh, Let me think of who I heard this from so that I can credit them because it was such a mind-blowing stat. So the lowest performing sector under President Trump was the energy sector. And the highest performing sector under President Biden has also been the energy sector.

Daren:
[29:26] What are the chances of that?

Chris:
[29:28] Is that policy related? Is that just a cycle, you know, like where the sector does horribly and then it does great? I don't know. But I think it's one of those things that you would just on its face, you would never guess, right?

Daren:
[29:47] Yeah but that just goes to say like if you're trying to predict markets because of who's going to win or not win 32 days from now it's a fool's errand like it just it's not not something you're going to be successful to try to not invest invest it's better just to stay with your principles stay the course. Anyway, that's an interesting stat. Well, so I think we're going to leave it there, Chris. I think it was an interesting week. Markets moved higher generally.

Daren:
[30:21] I think the jobs data was interesting, surprising, but I don't trust it, I have to say. I'm waiting for it to be revised, but they continue to pace higher. I will note the only thing kind of on the S&P, you'll see this long-term trend line I got on the SPX and you can see the market actually didn't break above that long-term trend. So it's still acting as resistance, but it seems to be like it's working and building higher. So anyway, we'll see what happens the rest of October. We're four days in and so far so good. It's usually been a very volatile month during presidential elections. And I can't imagine that this election is going to be any different. But who knows? And we will see. As always, we'll wrap up the markets on Friday. Take care, everybody. Have a wonderful weekend. Bye for now.

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