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- Equity markets remain in recovery mode as gains are held.
- Meme stocks lose momentum but GME spilt rekindles interest.
- US employment slowing but revision helps stocks.
A slightly calmer week again after some recent volatility, well for equity markets at least. Bond markets remain highly agitated and await a showdown with the Fed. Bond traders seem to be penciling in a recession pretty sharply as they push short-term yields higher. This caused the now well-followed yield curve to invert. And go below zero, ie 2-year rates are higher than 10-year rates. This usually has a pretty decent record of identifying imminent recessions but some analysts are beginning to question the theory. The chart below looks pretty clear-cut to us. US recessions are the shaded areas that follow each move below the black zero line.
Back to the week then and the employment report on Friday basically just pushed the decision out for another month. Fed Chair Powell has bet the house on the continued strength of the US economy, backing it to handle multiple rate hikes and 50 bps next month. The bond market is not so sure and neither are we. Friday's jobs report though was a bit underwhelming in this respect. The headline number was a bit lower than expected-indicative of a slow labor market. But the revision was pretty strong and that kept equity investors happy, for now. Chinese stocks were once again in focus on Friday as a Bloomberg report outlined that Chinese authorities may be about to give the US full access to audits of Chinese companies to comply with US listing requirements. This has been a huge weight around the neck of Chinese tech names and Friday saw some massive gains for Didi, Alibaba and others.
Equity positioning data
The fund manager community now look to be slightly overweight equities and underweight bonds after correcting the underweight equities position over the past two weeks. This was partly behind the equity rally as were the elevated corporate buyback programs. Both of these bullish effects are now on hold with the upcoming earnings season seeing buybacks entering blackout.
As we can see below the fear factor has dissipated from investors' minds. The markets have now factored in soaring energy prices, the war in Europe, and a stronger rate hike cycle. Markets, as we always say, hate unknowns, now these are known and valuations and expectations can be adjusted accordingly. This does not mean the latest rally from lows means all is rosy, merely that investors have adjusted. Further falls are likely next week but not of the shock and awe variety. We can see just how balanced things are or in other words, no one knows what to do now! Neutral is at one of the highest we've seen from the AAII survey.
Source: AAII.com
Source: CNN.com
S&P 500 (SPY) stock forecast
The recent rally confounded many investors as energy prices soared, war raged in Europe and yields ticked higher. But rally we did as positioning, trend following, and buybacks all helped stabilize losses. Equity positioning quickly moved to underweight equities as the Ukraine conflict raged. Once equities began to show some form of bounce, trend-following CTA’s jumped in squeezing those short and those that needed to buy (mutual/pension funds). Finally, corporate buybacks are at record levels and progressed aggressively over the past two weeks. All of these factors have now abated. Fund managers are now actually slightly overweight equities and underweight bonds. Corporate buybacks are entering the blackout period due to the upcoming earnings season.
The technical view on the chart confirms the slowdown in momentum. The SPY rallied impressively back above the double top at $458 and briefly spiked above it to $462. But this was not sustained. Now we're back in neutral. So where does the next momentum come from? We feel the risk-reward is to the downside as momentum has stalled and flows are also stalling. A move back below $448 will confirm this and see some momentum trading shift into trend-based selling programs.
Earnings week ahead
This lack of momentum is not likely to be changed by earnings next week. Take your pick from a pretty tame week.
Source: Benzinga Pro
It is a similar story with economic data light on the field after this week's employment report. All eyes will be on the bond market to see where yields take us.
The author is long Alibaba stock
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