Macro and Flows Update: January 2023 - e13
Summary
TLDRIn 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
📉 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.
🌐 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.
🔮 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.
Mindmap
Keywords
💡Volatility
💡Santa Claus Rally
💡Market Downtrend
💡V Compression
💡FED (Federal Reserve)
💡Technical Analysis
💡Quantitative Strategies
💡Macro Perspective
💡Goldilocks Scenario
💡Short Interest
💡CPI (Consumer Price Index)
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
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