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.

Outlines

00:00

📉 Market Analysis and Predictions

The paragraph discusses the market's performance and predictions made during a previous update in December. It explains the absence of a Santa Claus rally in January and the expected decline in the market, which was accurately predicted. The discussion revolves around the market's behavior in relation to reinvestment flows and tax loss selling. The video also touches on the volatility compression and positive underlying factors, such as the FED's communication of a pause at around 5% and affirmation from Brainard on transitory forces. The summary highlights the confidence in a short-term bullish thesis and the technical analysis of the 200-day moving average and the 'mother of all trend lines' in the S&P, suggesting potential quantitative strategies to push the market higher.

05:01

🌐 Global Economic Outlook

This paragraph provides an overview of the global economic situation and its impact on the market. It mentions China's reopening and stimulus measures as positive for growth, Europe's mild winter averting an energy crisis, and the stalemate in the Russia-Ukraine war providing some stability. The paragraph also discusses the FED's pause in the US and the low expectations for earnings, which have not been as bad as anticipated. The concept of a 'Goldilocks' scenario is introduced, where the market is not too hot nor too cold, and the potential for a soft landing is seen as bullish. However, the speaker warns that this could be a temporary rally before a larger downtrend, with the FED's actions being a key factor in the market's direction.

10:02

🔮 Future Market Expectations and Risks

The final paragraph focuses on future expectations for the market, emphasizing the potential for a bullish posture to extend into May. It advises being cautious during periods of market weakness and expiration, and being prepared for a more volatile second move down in the market. The paragraph also mentions the upcoming CPI release in February as a potential risk point and suggests that the FED's pause may lead to them being behind the curve again, forcing them to raise interest rates. The summary concludes with a reminder to be prepared for a potential left tail move and to maintain a constructive approach in the short term, while acknowledging the market's downtrend and the potential for significant moves in volatility in the next six months.

Keywords

💡Volatility

Volatility refers to the degree of variation of a trading price series over time as measured by the standard deviation of returns. In the context of the video, it is used to describe the unpredictability and rapid changes in the market, particularly in relation to the expected market behavior during the mentioned periods. The speaker discusses how volatility is expected to manifest in the market, especially in relation to the 'Santa Claus rally' and the subsequent market movements.

💡Santa Claus Rally

The 'Santa Claus Rally' is a seasonal increase in stock prices that typically occurs in the last week of December through the first two trading days of January. It is often attributed to an inflow of new investment and holiday spirit among traders. In the video, the speaker discusses the expectation and actual outcome of the Santa Claus Rally, noting that contrary to the norm, the market did not experience this rally and instead faced a decline.

💡Market Downtrend

A market downtrend refers to a period during which the overall direction of the market prices is declining, often marked by a series of lower highs and lower lows. In the video, the speaker uses this term to describe the general negative movement in the market and to contrast it with the positive periods typically seen in the market, such as the 'Santa Claus Rally'.

💡V Compression

V Compression in the context of the video refers to a narrowing range of volatility, often indicated by a convergence of the upper and lower Bollinger Bands, which are statistical chart indicators used to measure volatility. A compression suggests that the market may be consolidating before a potential breakout or significant price movement. The speaker mentions V compression as a positive underlying factor that contributed to their bullish thesis.

💡FED (Federal Reserve)

The Federal Reserve, often referred to as the FED, is the central banking system of the United States, responsible for implementing monetary policy. In the video, the FED's communication about pausing interest rate hikes is highlighted as a significant factor contributing to the bullish sentiment in the market. The speaker also mentions the FED's previous statements about inflation being transitory and how these have influenced market expectations.

💡Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing historical price activity, primarily through the use of charts and patterns. In the video, the speaker references technical analysis in the context of the 200-day moving average and trend lines, which are used to predict future market movements and guide trading strategies.

💡Quantitative Strategies

Quantitative strategies refer to systematic approaches to investing that rely on mathematical models and algorithms to identify and exploit trading opportunities. These strategies are often used by hedge funds and institutional investors to make trading decisions. In the video, the speaker suggests that if the market breaks above certain technical levels, quantitative strategies will kick in, potentially pushing the market higher.

💡Macro Perspective

A macro perspective involves analyzing the overall economic environment and large-scale market factors that can influence investment decisions. This includes factors such as global economic trends, geopolitical events, and central bank policies. In the video, the speaker provides a macro perspective by discussing various global events and their potential impact on the market, including China's reopening, the mild winter in Europe, and the ongoing conflict between Russia and Ukraine.

💡Goldilocks Scenario

The 'Goldilocks Scenario' refers to a situation where economic conditions are neither too hot (inflationary) nor too cold (recessionary), but just right for growth. It is often used to describe a period of economic stability and steady growth. In the video, the speaker discusses this concept, suggesting that the current market conditions may be perceived as a 'Goldilocks Scenario', but warns that this could change in the future as the market faces a larger downtrend.

💡Short Interest

Short interest refers to the total number of shares that have been sold short but have not yet been covered or closed out. It is an indicator of market sentiment, as high short interest can indicate that many investors are betting against a stock or market. In the video, the speaker discusses the concept of short interest in the context of market sentiment and the potential for a short squeeze, which occurs when a rapid increase in the price of a stock forces short sellers to buy the stock to cover their positions, driving the price even higher.

💡CPI (Consumer Price Index)

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is a key indicator of inflation and is closely watched by central banks and investors. In the video, the speaker anticipates that the next CPI release could be a potential problem spot for the market, as it may influence the Federal Reserve's decisions on interest rates and inflation control.

Highlights

The expectation of no Santa Claus rally in January was accurate, as predicted in the December update.

The market decline starting the Wednesday of Opex was followed by sideways action and a subsequent move up around mid-January.

The reinvestment from earnings and stock appreciation, which usually occurs at the beginning of the year, was absent due to the market being down.

Negative flows paired with tax loss selling were significant, but the market handled this well, as expected, given the V compression.

The continued short-term bullish thesis is supported by the V compression and other positive factors happening underneath.

The FED's impending pause, communicated around 5%, is a significant bullish factor for liquidity.

Brainard's recent affirmation that the forces are transitory in nature supports the current market situation.

Technically, the 200-day moving average and the mother of all trend lines in the S&P are key levels to watch for potential upward momentum.

The end of month and beginning of month flows are generally positive, especially in January, which could contribute to upward movement.

Globally, China's reopening and stimulus, Europe's mild winter, and the stalemate in Russia and Ukraine contribute to a positive outlook.

The FED's pause and expectations on the earnings front being less bad than anticipated are contributing to a positive short-term sentiment.

The concept of a Goldilocks scenario is emerging, where the market is not too hot and the expected recession is not as bad.

Short interest and poor sentiment, similar to March 2020 levels, indicate a potential for a bullish short-term trend.

The counter-trend rally is expected to be temporary in the context of a larger downtrend in the market.

A soft landing could ultimately mean outperforming earnings and growth from China, which may force the FED to tighten liquidity again.

The secular nature of inflation remains a concern, and the FED's pause may put them behind the curve again.

The next six months could see a steepening trade as the market reacts to various economic indicators and FED actions.

The period after the next CPI release in February could be a potential problem spot for the market.

The market is expected to be cautious around the February 14th and 15th due to the potential for increased volatility.

The general bullish posture is expected to last until May, with the market being constructive and looking for pullbacks.

Transcripts

hello and welcome back to another macro

and flows update video from Kai

volatility when we last talked uh in

December we mentioned that uh we were

likely to not see a Santa Claus rally in

January effects uh that were typical uh

actually quite the contrary we thought

we would uh starting the Wednesday of

Opex uh get a decline uh followed by you

know some sideways action fall down uh

and eventually uh we thought that would

remedy with a move up sometime uh you

know mid Jan 6 Jan 10th Jan 11th um and

we'd get a rally that's exactly what

we've seen why do we believe that

because uh in these years where the

market is down the

reinvestment um you know that exists in

most years when the Market's up to

Sideways from earnings from uh stock

appreciation is significant and is front

run at the end of the year into the

beginning of the year that's what makes

the generally most positive four weeks

of the year that Santa Claus rally in

January effect that actually runs in

opposite um during years when the

Market's down and uh you know those

negative flows paired with tax loss

selling can be significant into the end

of the year and in the beginning of the

year the market actually handled that

very very well as we expected it would

given the V compression um and several

other positive things happening

underneath the surface that was really

the tell we thought that would be the

case but that was definitely the tell it

was actually even you know uh stronger

and more stable than we even um you know

hoped and thought um that really has

given us uh confidence in this continued

kind of short-term uh bullish thesis uh

that V compression continues to be the

case v is very well supplied at the

index level um it's easy to hedge at the

end of the day um there is an impending

pause importantly communicated by the

FED at about 5% we got even more

affirmation of that from Brainard um

recently um you know she has very

clearly mentioned that her belief that

that these forces are again transitory

in nature that that word sounds familiar

last time they said that uh they

inflation was significantly worse and

and longer Liv than expected and that

really ultimately is what drove that

initial decline we'll get back to that

we believe that will again be the case

but for the time being the FED is is

very much communicating they're going to

pause look around make sure they haven't

overreacted and that's quite bullish for

liquidity um in the context of what

expectations have been um important

technically the 200 day moving average

uh sits right where we are right now um

you know has really been uh as met and

conjoined with a you know what some

people called the mother of all trend

lines this overwhelming trend line in

the S&P that's been declining if we

break Above This level a lot of other

quantitative strategies will kick in

Trend follow Etc to um to push um you

know this thing higher this is all very

short term to be clear um the there's a

Fed event vs uh sitting there on feed 1

as well as unemployment on feed 3D that

are significant relative to how low the

VA is around it that should serve as

another structural source of Vana and

charm flows as we approach that as on

top of that you have the end of month

beginning of month um generally positive

flows um especially in twoo it's a

positive month so far at the beginning

of the year that could also serve as um

positive structural

flows from a macro perspective um if you

look if I told you six months ago if you

look across the world at the different

continents what would be happening now

you would actually be quite bullish um

China uh is has finally reopened uh they

have gotten or they're most of the way

through um people about they say 80 to

85% of the population has now got en Co

so they've reached some type of immunity

level um you know as we get through that

with this kind of reopening and we're

getting stimulus from China that's very

very positive for for growth um Europe

which uh was very worried going into the

winter that they would get some type of

energy crisis has had a very mild winter

that has ended up being uh you know

again a a positive story uh Russia and

Ukraine even though that war continues

it's muddling through it's a stalemate

um in some ways it's stabilized and is

less kind of uh prominent on the macro

uh picture um here in the us as we

mentioned the FED is pausing uh and a

lot of expectations on the earnings

front have been uh even though the

expectations have been really low um

some of that those low bad expectations

continue to um be less bad Than People

expect so a Fed pause on the horizon um

ultimately that earning season here

really get we get some clarity right as

we go into the FED uh meeting on fed

first right as we are at end of month

beginning a month here and uh you know

in particular the buyback blackout uh

which is is currently in place one in

January 27th so that's also a positive

impulse all very short term though this

is important to mention um you know this

concept of a Goldilocks you know yes

things AR too hot so the fed's not uh

you know having to fight inflation in

the short term but you know the the

recession that everybody expected is

maybe not as bad as they expected this

kind of soft Landing idea for most

people seems very very bullish it's this

Goldilocks kind of scenario that people

keep painting you're hearing that come

into sneak into headlines more and more

a given short interest out there under

Investments poor sentiment which is

actually is you know by a lot of metrics

still uh kind of at the lows of March

2020 in terms of how bearish sentiment

is and allocation is is very low

anecdotally I've had three investors

that that are investors in the fund come

to me um and uh you know not small

investors uh you know some some impr

prominent ones and really Express how

they they're worried that they have uh

you know not performed as as well in the

last year uh taken down exposure and now

they're not performing to the upside um

with some of their personal you

their their Investments um that

expresses this kind of uh need to get

back in and and being one of the last

ones in on that could be a real problem

as this chase continues and shorts get

squeezed so this is really um quite

bullish shortterm um set of set of

factors um that said I want to be very

clear here at the end of this uh this

update um you know Goldilocks that

concept um we believe is actually the

worst case when you go past the next

month or next couple of months in this

counter Trend rally um we do believe

it's just a counter Trend rally in the

context of a much bigger kind of

downtrend in the market and that's

actually we believe the worst case a

soft Landing ultimately means that that

earnings is outperforming you know the

economy is not the market and ultimately

a soft Landing growth from China and

acceleration again will force the FED

which is really what matters and

liquidity to become tighter in the

months again yes they will pause yes

they believe it this inflation is

transitory but the secular nature of

inflation that we've talked so much

about is alive and well and we believe

we'll take a second leg higher again

after a slow small recession and that

pause that the FED is making will make

them behind the curve again ultimately

um and ultimately force them to come

back in and raise interest rates forcing

the long end of the curve higher We

Believe there'll be a steepening trade

uh in the in the next six months so buy

the rumor for now but be prepared to

sell the news um you know the worst case

as we mentioned uh will will happen as

the FED is forced to come back into The

Fray as markets rally to be more

activists to be more hawkish um that is

ultimately what matters for these

markets is liquidity and rates and we do

believe a lot of these positive Trends

um that we've seen in lower oil

commodity prices um you know a a weaker

dollar um Etc will accelerate again to

the upside as we move forward um months

from

now for now after we reach February the

next CPI uh that next CPI could be a

potential problem spot if this Market

runs enough uh ultimately we do believe

we're stretching the rub rubber band so

we would be very cautious as as we go

into and out of um this next CPI in

February on the 14th uh particularly the

Fe 15th uh which is vix peration is a is

a date to be cautious and watchful for a

potential left tail we do believe a left

tail a downside move in these markets is

going to be much more volatile in the

second move down as we've mentioned but

that's likely to come you know not right

now right in the in after a rally that

we we see coming at least for the next

uh 3 weeks and then uh you know two and

a half weeks and then uh if we get

through that February week uh which we

believe is somewhat dangerous um we do

believe that we might stretch all the

way to May in terms of a generally

bullish um posture so uh again we'll

watch during those periods of weakness

during expiration but generally looking

for pullbacks looking for for uh a

shaking of the tree and shorts um

generally constructive um as this Market

gets bullish as sentiment turns um as

the FED starts to move from a pause to

potential more activism um you know and

other such news CPI may be no longer

surprising to the downside um things

along those lines could really initiate

a much more volatile second move leg

down um in the months to come as we've

spoken about before so as always be

water uh never be too uh you know

dogmatic in Europe approach um you know

this Market is ultimately in a downtrend

we do believe a left tail sits out there

um and eventually uh you know long Vol

in particular will have a significant um

potential uh move here in the next six

months but in the context of that we do

believe uh you you have to be

constructive and dogmatic in the time in

front of us as always uh wishing you the

best uh we'll be back in touch next

month uh that's it for today take care

this does not constitute an offer to

sell a solicitation of an offer to buy

or a recommendation of any security or

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whether such security product or service

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nothing in this video is intended to

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and nothing in this video should be

construed as a recommendation to buy

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