Standing at the Cross Roads

Green 9 Demark signal likely tomorrow

Standing at the Cross Roads

Lately, like many of you, each morning I wake up Mon-Friday and wonder if the wall of worry is continuing (rally) or if a rug pull (decline) is upon us.  The checklist each morning is: 1) interest rates, 2) oil and nat gas prices, 3) Russia/Ukraine news, 4) China overnight feast or famine, 5) Fedspeak.  As we reflect upon the rally of past couple of weeks, it is certainly not based on improving “macro” factors.  Rates are in an epic sell-off (in % terms) not seen since the 1970’s, commodities remain stubbornly high, Russia seems dug in for a long-term campaign, China is leaning the right direction perhaps/maybe and the Fed is preparing us for 2 50 bps rate hikes before summer.  As we espoused for weeks, it has ALL been sentiment.  First, they killed the longs and now they killing the shorts.  CTAs were max short the market and believe it or not have covered and bought over $100 billion of equity futures this past week. 

Suddenly, the market narrative has flipped.  Hey maybe the Fed can engineer a soft landing?  Hey maybe it doesn’t matter if rates are going up or the Fed will drain $2-3 trillion from its balance sheet?  Hey maybe inflation has peaked sequentially and will show better year-over-year stats by the end of 2022?  We put all of these in the bucket “things you hear when stocks are going up and dips get bought”, quite the opposite of the market lows early March when it was “who wants to fight the Fed and valuations aren’t exactly cheap.” At the end of the day, not much has changed since the market lows, other than price.  Sentiment got extreme, gross and net exposures got too low and whether you want to call it a bear market rally or not, it has taken most players off guard.  Many will need to explain to their investors what happened to their relative performance in 1Q.  So what’s next?