Think Fast!
The Boat vs the Beach
When you were a kid, do you remember friends would shout “think fast!” and throw something at you? It would raise your heart rate and shock your system. The stock market did just that this week! The Powell word salad press conference at 2:30 on Wednesday started a stock and bond market rally that would see all of the major indices jump by 5-7% by Friday’s close. It was largely the same message. The long end of the bond market has done the tightening for the Fed, so they can stand pat and let their restrictive stance work its way thru the system. Friday’s jobs report showed the exact amount of softness to put a stamp on the “Fed is done” raising message. So much so that 2024 interest rate swaps now show a near 100 bps of cuts starting mid- year. How is that for the game of THINK FAST!
Of course, there were some hints that the beach ball had been submerged under water during September and October long enough and any hint of less negativity could cause a bounce. In fact, in our substack last week we told the group that all three major indices hit the price exhaustion signal on TD Sequential Demark indicators. Also, CTAs, according to the brokerage house projections, were record net short stocks and bonds. A bear might scream, “do you really think the 10 year moving from 5% to 4.57% changes the economy or the EPS outlook much?” The answer is for sure, NO! Tesla complained that higher interest rates incrementally kill leasing dynamics and is, in large part, the reason they keep lowering EV car prices. No one is cheering about a 7.5% 30 year fixed mortgage instead of 8%. One might even say the ISM survey this week points to signs of contraction in the economy. The $IWM, perhaps the most economically sensitive index, hit a 52 week low last Friday and rallied almost 7% for the week. You want an explanation now, don’t you? Let’s try below to explain what we think is happening and more importantly, what is to come between now and year end.
A good friend that runs a trading desk texted me Friday that most of his orders were shorts looking to cover and trying to be patient to do so on a fade. He then pontificated that before the close he would likely see “just get me out” orders to rid themselves of the pain before the weekend. Phew! This means it was all a mean reversion bounce, forcing shorts to cover and once it exhausts, we head back down? Not so fast. Let’s try and visualize what occurred this week and put some numbers to it: