Macro and Flows Update: January 2023 - e13

Summary

In this market analysis update, the speaker discusses the absence of a Santa Claus rally and anticipates a short-term bullish trend due to factors like the Federal Reserve's pause on rate hikes and positive macroeconomic developments. Despite the temporary optimism, the speaker warns of a potential downturn in the future, emphasizing the importance of being prepared for increased market volatility and a possible shift in the Fed's policy stance.

Takeaways

• 📉 Expected market decline post-Opex and sideways action was accurate, aligning with the预判 of a non-Santa Claus rally.
• 🔄 Market downturns are typically followed by tax loss selling, but the market has handled this well, indicating underlying positive factors.
• 🔍 V compression and other positive undercurrents have contributed to a short-term bullish outlook.
• 📈 The 200-day moving average and a significant trend line in the S&P 500 suggest potential for higher market movement.
• 🏦 FED's communication of a pause around 5% interest rates and reassurances of transitory inflation have bolstered market confidence.
• 🌐 Global events like China's reopening, mild winter in Europe, and stalemate in Russia-Ukraine contribute to a generally positive macro environment.
• 💹 Earnings expectations are low, but actual results may not be as bad, providing a potential positive surprise for the market.
• 🚫 However, the 'Goldilocks' scenario is temporary; a counter-trend rally is expected to be followed by a larger market downtrend.
• 📊 The secular nature of inflation suggests that the FED may fall behind the curve again, leading to higher interest rates and a steeper yield curve.
• ⏳ Market participants should be cautious around key dates like the next CPI release and expiration, as these could trigger increased volatility.

Q & A

What was the expectation for the market in January, as discussed in the video?

The expectation was that there would not be a Santa Claus rally in January. Instead, it was anticipated that the market would experience a decline starting the Wednesday of Opex, followed by sideways action and eventually a recovery move up around mid-January.

Why was a Santa Claus rally not expected?

A Santa Claus rally was not expected because the market was down, and the negative flows paired with tax loss selling were significant. This is in contrast to years when the market is up, and there is significant reinvestment from earnings and stock appreciation.

What does V compression indicate in the context of the market?

V compression refers to a narrowing range of volatility, which in this context, along with other positive factors, was seen as a signal that the market would handle the negative flows well, as it did.

What is the significance of the 200-day moving average mentioned in the video?

The 200-day moving average is a technical indicator that helps to identify trends in the market. In the video, it is mentioned as a level that, if broken above, could trigger quantitative strategies and trend followers to push the market higher.

How does the FED's communication affect market sentiment?

The FED's communication is very influential on market sentiment. In the video, it is mentioned that the FED's indication of a pause at around 5%, and Brainard's affirmation that the forces are transitory, are seen as bullish for liquidity and positively impact market sentiment.

What is the current situation in China in relation to COVID-19 and its impact on growth?

China has reopened after getting through a significant portion of its population contracting COVID-19, reaching a type of immunity level. This reopening, along with stimulus measures from China, is very positive for growth.

What was the expectation for Europe regarding an energy crisis?

There was concern that Europe would face an energy crisis going into winter. However, due to a mild winter, this concern has been alleviated, and the situation is now seen as positive.

What is the current stance of the FED on interest rates?

The FED is currently communicating a pause in interest rate increases. They are looking to ensure they have not overreacted, which is seen as a positive development for liquidity in the market.

What is the 'Goldilocks' scenario mentioned in the video?

The 'Goldilocks' scenario refers to a situation where the economy is not too hot nor too cold – essentially a soft landing. This means that while the Fed does not need to fight inflation in the short term, the expected recession may not be as severe as anticipated, creating a temporarily positive outlook for the market.

What is the potential risk in the 'Goldilocks' scenario?

The potential risk is that the 'Goldilocks' scenario is a counter-trend rally within a larger downtrend. The soft landing could lead to outperforming earnings and economic growth, which could force the FED to tighten liquidity again, leading to higher interest rates and a steepening trade in the next six months.

What is the outlook for the market after the next CPI release in February?

The outlook is cautious, as the market may have run enough by that point to present potential problems. The next CPI release could be a problem spot if the market continues to rally, and investors should be watchful for a potential left tail or downside move in the market.

What is the recommended approach for investors in the short term?

The recommended approach is to be constructive and not too dogmatic. While the market is seen as being in a downtrend overall, the short term is expected to be bullish, and investors should look for pullbacks and opportunities to be positive as sentiment turns.