We last wrote to you two weeks ago, and our attention was focused on the divergence between the bond market and the stock market. We told you that when this happens, we always favor the bond market. We also told you that due to CTA and systematic positioning, the pain trade was lower. The S&P 500 is down 2.9% since. It’s not rocket science or black magic. Always follow the bond market. The bond market has been signaling that rates are headed higher. Since late 2022, the stock market pundits have been obsessed with a “soft landing”. The Fed is looking at the inflation figures coming in and they will need to keep interest rates higher for longer. The stock market is beginning to see that there is a “no landing” scenario in play with rates higher for longer. Oh well, the rally was nice while it lasted.
The reality is that the 2023 stock market bounce was due to relief from tax selling and, in addition, speculator behavior. That drove the computer strategies to pile on, forcing the market higher. The bond market has figured it out. When will stocks? They may have this week. The S&P 500 closed Friday at 3970. It is now below its 50-day moving average (DMA). The all-important 200 DMA is at 3940. The market is in negative gamma, and the systematic driven programs are long and looking to sell stock. The market is probably going to stay under pressure until at least the next option expires in March.
At the end of 2022, everyone thought that the first half of 2023 would be negative for stocks, with the second half higher. When everyone thinks something is going to happen, something else will. The market bounce from tax-loss selling and FOMO has the stock market up. Inflation and growth are showing persistently higher. The Fed may get more restrictive here as the data refuses to budge.
It appears that the yield curve is starting to un-invert. That means we expect the technical recession to begin within 5 months. That brings us to June/July at the earliest. Bear markets tend not to end until the recession begins. That would mean that the bear market lows could be coming this summer. The recession hits in the second half of the year. They say never predict time and price, but suffice it to say I won’t be going anywhere without my computer this summer.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.