2023 Year in Review
As 2023 ends, it is a time to take a look and review what transpired, both in the markets and my observations.
Taking the year month-by-month, in a quick overview:
January
“What was obvious from last week is that market participants are willing to take anything positive and extrapolate from there a bullish scenario… First, yes this is a positive in the jobs report, however we should be careful not to read too much into one data point. The Fed will not take this one report and call it a day, as there remains concerning elements related to the labor market.”
Even at the outset of 2023, market participants were clamoring to find some bullish impetus. At that point some market participants were thinking that the Fed was close to done increasing rates, I was on the other side thinking that if inflationary pressures remained, they would have to continue hiking. They did continue to increase rates with 4 more 25bps hikes.
While there were warning signs, and I was skeptical, I did not run to the sidelines. As I wrote at the time, “From what I have seen, the underlying economy appears to be relatively strong. That is to say, this Fed induced slowdown does not, at least currently, appear to be indicating significant stress points that would result in a drastic overhaul of the economy.” I did think that inflation would remain stickier than it has been, but I still traded tactically based on attractive risk:reward set-ups.
Regarding analyst expectations for 2023, “….currently analysts are pricing in a sharp rebound by year-end, as estimates are for a 3.7% increase in earnings in Q3 and 10.3% for Q4, with estimates for the full 2023 calendar year at 3.4%. With the economic outlook so murky, can analysts really be this confident over Q4 2023 to pencil in a 10.3% increase? I don’t know, it seems very optimistic.” While it turns out I was correct that Q4 was ultimately not this strong, analysts however have just pushed back this earnings growth into 2024.
Market Views:
Equities, “It may be the case that the inflation data is better than expected (ie. lower) and this could drive a short-term rally…I am putting on a small long, very short-term tactical bullish trade in the S&P 500 (4030 region)…. The fact is that other than corporate earnings, we may not see any other negative events (at least in the calendar, something unforeseen may occur) prior to the February 1st FOMC meeting, or the jobs report on February 3rd. Assuming corporations are generally positive in their earnings guidance, not a guarantee of course, equities may elevate from current positioning.”
Fixed Income, “As readers know, I put on long positions a while ago in the US 10 year in the 4-4.10% range, taking some profits in the 3.4-3.5% area. This has been a decent move back up in yields, but I will also wait as yield have quickly moved back towards 3.50%. I do have quite a bit of assets in short-term paper just collecting a nice yield while I wait for better opportunities.”
Oil, flat.
Gold, “I have been long gold since it broke just above $1800, adding to the position as it broke through $1830-$1840, taking some partial profits at current levels….Given the large and fast move up in gold, I am inclined to take some profits and perhaps re-enter on a pullback, but keeping on a core position as there are no signs that this trend is about to end.
February
The jobs data came out to better than expected. My take at the time, “The other concerning point about the jobs data is that even as the unemployment rate hit 3.4%, the lowest in over 50 years(!), it was not due to a decrease in the participation rate. That is to say, this is an actual strong number. The average workweek also rose - more people hired and those employed are working longer. This will most likely push Q1 GDP higher than current expectations. Again, if you were at the Fed, given your focus on the services labor market, is this actually a positive? I would say no, as I would be quite worried about the possibility of a re-acceleration in wage price pressures.”
“I would suggest that the March 22nd meeting is a done deal for a 25bps increase, and I think they should be leaning towards another 25bps at the May 3rd meeting.”
“I would again state, just because the economy is operating fine today does not guarantee strong performance forever. In fact I would suggest that the economic strength will continue to create underlying forces that will continue to push the Fed to go higher than expected and remain there for longer than expected. That is how I have been thinking about the economy for months, taking the “over” on the eventual level of terminal.”
Market Views:
Equities, “Going into the week long at approximately 4030, as I outlined last week, “…if the S&P 500 could exceed 4120 area, I would take some profits and move up my stop…” which I did take partial profits at 4120 and closed the position after the jobs report at my target of 4175.”
Following the long, I then went short:
“With the down day on Thursday I entered a small short position around 4095 (4100 in the March contract)”
Fixed Income, “While the move higher in yields to roughly 3.53 is interesting, it is not enough of a move yet for me to enter new trades. I would like to see a move towards or slightly above 3.61%. The next level of support would be in the 3.90% range.”
“If the 10-year moves up sharply with the CPI print, close to or above 3.90% I would start dipping my toe into the water with bullish positions…. I did enter an initial position at just above 3.9%…I believe demand will come in at some point as the 10 year gets towards 4%.”
This is the 2 year yield and the Fed Funds rate. The reason I wanted to bring this up again (I talked about this in the past) is that I think there will be a great buying opportunity in the 2 year (and gov’t bonds in general) but not quite yet. Once it is apparent that the Fed is at terminal, that will be a good risk/reward opportunity. position.
I also have funds in short term paper, including 6 month bills that I added at just over 5% yield. From a portfolio perspective, given my concerns regarding equities, I think this will provide a positive addition overall.
Oil, flat, “I am still short, but just a small position…I will keep a tight leash on this trade and close it if price action moves against me. Conversely, if the market were to break down through $66.50 and $65, I would be adding to the short.”
Gold, “I have been long gold since it broke just above $1800, adding to the position as it broke through $1830-$1840, taking some partial profits at current levels…….after a move from $1800 to $1975 (at one point) it is prudent to take some profits. Of course I did not do so at the top, more in the $1940 range…While I still hold a small position, I am worried that sentiment in gold has shifted with a move towards the mid $1800s possible, and even perhaps a test of $1800. A move towards the mid $1800s would be a signal for me to take my final profits and wait on the sidelines for a better entry point.”
I then closed my long, stating “Since I closed my gold position a couple of weeks ago, it has continue to remain weak.. For the time being I am on the sidelines, waiting for an attractive risk/reward entry point.”
March
Here is the unemployment rate going back to the 1950s. You don’t have to take my word about a move of 50bps higher from the lows… From the low point I added 1/2 of 1% as the red horizonal line. One can see that in the past the unemployment rate accelerated much higher once it breached this point. That is to say, the economy starts to tilt lower and then really moves fast, as firms get worried about demand dropping off, having too many employees it results in higher layoffs, which creates uncertainty for consumers and so on.
I think given the amount of spending that occurred by corporations and the government, along with historic levels of monetary stimulus, due to the pandemic, this has created large imbalances. We are still seeing those imbalances, although many of the goods/supply constraint issues have been resolved.
Market Views:
Equities, “As readers know, I’ve been short for a couple of weeks. Equities will most likely bounce with the news that depositors will be made in full. There is support below at 3800 and then at the 200 week moving average near the approximate 3720 area… I will keep most of the position unless price action indicate to me that this position is wrong, such as a sustained move back above the 4160-4170 area, or CPI comes in substantially lower than expected.”
The S&P 500 almost reached the 3800 level, as I noted last week that would be one area of support. As you can see, the S&P 500 is oscillating around the 200 day moving average. We could very well see a short-term bounce due to the Fed meeting.’
After closing this short position, “While I am long-term cautious and leaning bearish, I think a short-term tactical trade may be on the long side. Depending on how Monday opens up, I may take a long position, adding if the market moves above the approximate 4020 area. All very short-term and tactical. If negative news or price action emerges, I would be out. A long, if it gets some momentum, could move up in the 4100-4200 range.”
Fixed Income, “As I have been suggesting over the last few weeks, a move of the 10 year to yield over 4% is an attractive risk/reward, and we did see others think along the same lines as buyers emerged. I did continue to add to my position above 4%. I would be looking for yield near 3.60% to start taking some partial profits.”
Being short (yields, long notes) in the US 10 year from just above 4%, as the news started coming out after I published the newsletter last week with regards to SVB, I pulled my bids at the 3.60% area to take profits in the US 10 year until I was able to see where trading started to stabilize. In crisis events, investors rush into US government securities, so I knew there were sizable profits. I thought that within the next year we might hit 3.25% in the 10 year, however we are almost at those levels already! From a risk/reward perspective, I had to book some of these profits, which I did in the mid 3.40s%.
I have taken additional profits at approximately 3.30%. Given that when I went long the 10 year (and a little of the 2 year)….To me the risks are skewed now, as inflation remains and the Fed wants to keep fighting.
Oil, “I am still short, but just a small position. WTI bounced off the 200 week moving average. I am a bit worried about this position, especially with how the market moved last Monday and Friday, with buyers emerging from the lows of the day to push it higher. I will keep a tight leash on this trade and close it if price action moves against me. Conversely, if the market were to break down through $66.50 and $65, I would be adding to the short.”
Gold, “Gold has had a strong move the week prior, with little change last week. I do not have a position now but am waiting to see how gold reacts. If we get another quiet week, or a small down week, I may enter into a new long.”
April
Markets at this time were still thinking that Fed cuts were coming in 2023. I was not convinced, stating “In short, I believe the Fed has tried to indicate to the market that a) they would like to do one more 25bps increase, and b) rate cuts are not coming in 2023. The market does not believe them.”
Regarding corporate earnings, “Analysts still expect Q3 2023 earnings to increase by 2.3% and Q4 by 9.3%. I think the Q4 expectations are too high, given that monetary policy lag will be hitting the economy hard at that point, along with even further tightening of credit conditions due to the banking crisis.”
Regarding the economy, “The more likely scenario (in my opinion) is that the economy falls into a recession over the next few months.”
While I was correct on corporate earnings for Q4, I was incorrect on the recession call. Given the unusual level of savings accumulated due to the fiscal response as a result of covid, I think it has pushed out the recession call. Corporate earnings did come down significantly, but instead analysts have pushed out the re-acceleration into 2024, which has driven equities higher in late 2023 along with the prospect for Fed cuts.
The unemployment rate is something that I spent some time discussing with regards to the Sahm rule, “One thing we do know, if history is any guide, is that if the unemployment rate increases by 0.50% from the lows, approximately, it tends to accelerate higher. That is to say, if we get a data point of unemployment at 3.9%+ given the low at 3.4%, I would expect (again, from a historical perspective) that it most likely will not stop in the low 4s, but rather move towards 5% and exceed that level.
Market Views:
Equities, after being long then short in March, I closed that position and wrote, “I would go long, adding as it moved through 4020. I did go long and add this week….At this point, 4200 is the next area of resistance.”
Friday is the jobs report and I would like to take some profits before that number.” That is exactly what I did on Thursday, up over 100 handles it seemed prudent from a risk/reward standpoint. I still have a small position. I have actually put on an options trade with small downside potential but large upside if the S&P 500 breaks the approximately 4200 area, as it may gather momentum towards 4300-4325.
Fixed Income, “The fixed income market is consolidating a large move, as such I will stay on the sidelines after taking profits.”
Late in the month, regarding the 2 year “I would take opportunities to short (futures, lower price/higher yield) in the 4-4.15% area, looking for a move towards 4.40%.”
Oil, “I was short a small position, but as Monday came and oil pushed back up through the $72 area I closed the trade…
The risk/reward has tilted significantly and I am flat.”
Gold, “If gold closes above 2000, I would expect to see many other traders enter into longs or closing shorts…. as gold moved above 2000, it quickly moved $40 higher. It appears that the next level is 2080-2090 region.”
May
As the jobs data came out, I wrote “…the economy may continue to hold steady and create a problem for the Fed and the markets. The Fed wants to see weaker labor market, that is not occurring. The markets think the Fed will start cutting later this year, that is not going to happen if the labor market remains resilient.
My view is that this strength in the labor market will remain for sometime, but ultimately it will crack and I think the Fed will have to drop rates by a larger amount than markets are pricing in. That is to say, I think the markets are leaning incorrectly at the moment in thinking a) Fed will cut soon (I think that probability should be lower) and b) the Fed will cut by less than my forecast (at least the probability of larger cuts should be higher).”
While the labor market has not “cracked” yet, I was correct that the economy did hold up stronger than most thought and there were no Fed cuts in 2023.
Regarding the banking crisis, “All of us have to see what happens from the recent banking crisis, but I can’t foresee a situation of growth in credit creation. This decreased appetite for credit will be a drag on the economy.” What is interesting is that credit creation has not increased, but continued to be pulled back, yet the economy has performed well. This is, as noted earlier, as a result of excess covid-related savings that were depleted in 2023. I did not accurately take into account the magnitude of impact that these savings were to play a part in the economy in 2023 (along with almost everyone else).
Market Views:
Equities, While I still have a small long position, I would add to it around the 4200 area… this is exactly as how I managed this trade. I kept buying throughout the day, as it seemed to me that it would be unlikely for a significant pullback at this point. Once you have strong demand all day, then a prior intraday top created going into the close, a third time at that level tends to drive right through. Given that a lot of people were watching 4200, I thought it was an attractive risk/reward.
Fixed Income, “As I discussed earlier, the jobs report is troubling and due to my uncertainty I closed and took profits in the majority of my 2 year trade.”
The last few weeks I went long the 2-year at just under a 4.10% yield, then closed the majority in the 3.85% area after such a quick move
I think 2024 is when cuts will happen, and also by a larger amount than anticipated.
Oil, “I would open a small short, with the thinking that concerns over the economy may push the price of oil lower and test the $64-$65 area, with the potential of breaking lower towards $60 (adding along the way). A reversal and move higher through the $74-$76 range would be a place I would look to stop-out, moving trailing stops lower.”
I put on a small oil short position last week and quickly closed it out as the narrative started to float that China may create stimulus through a fiscal push. Given the lack of clarity over direction, muddling through this range for quite a while, and push/pull over economic strength/China/OPEC+, I will remain flat for now.
Gold, “After taking profits at higher levels…I had a small position left after taking profits at higher levels and I am closing that position.”
June
“Markets have now pushed out cuts by the Fed into 2024. As I have been discussing for months, the idea of Fed cuts this year was far too early.
While I have been skeptical, I have been trading equities from the long-side, because (as I have said many times) I am not going to stand in front of a wall of cash and the momentum that comes with that inflow. However, I find it hard to believe that corporate earnings will re-accelerate so strongly in Q4 and into 2024 given the tightening of monetary policy.”
“On Friday Fed Governor Christopher Waller made a strong point in terms of how the Fed is thinking about monetary policy and the banking crisis….I think he is perfectly clear, rates need to stay elevated and perhaps increase further to fight inflation.”
Market Views:
Equities, while being long from 4200 and the current SPX at just over 4316, “Given the uncertainty this week, and potential headwinds technically, I am going to take most of the trade off and book profits.”
Fixed Income, “There is just too much uncertainty and I do not gamble with my capital. I need an attractive risk/reward set-up and while I did add very small amount, I am being careful as the 2-year may actually move even higher - perhaps to 4.80%….This is exactly what happened. We may have some move back down if Powell is dovish, but given the information from the Fed, it seems like the 2 year trade is still not the right time to go into a large position….I think they may very well increase yet again, putting the 2 year set to move even higher, perhaps reaching the 4.9-5.0% region. At that point, it may attractive but I would need to determine how long the Fed will remain at the ultimate terminal level.”
Oil, “Flat in these markets.. I do not feel strongly at this point, so will watch closely.”
“I would probably enter a short position on a break below $67, and adding as it moved lower. (again, small position initially, then adding to it)”
Gold, “Gold is consolidating and I am inclined to put on a bullish position, but just not yet.”
July
Markets are finally pricing in what I have been saying for months - the idea that the Fed will cuts rates this year is a very low probability (never say zero probability).
Fed cuts have now been pushed out well into 2024, as they should.
Can the Fed say mission accomplished? Not yet. They know this too, which is why they will increase rates by another 25bps this week. Markets put in a massive bid in the two year recently, but I think this is way too soon for such a move. Remember, the two year trade is profitable just as the Fed is about to enter into a large and substantial rate cutting cycle - we are perhaps a year out from rate cuts.
Nothing this week indicates to me that a recession is about to hit immediately. Consumer sentiment may worry the Fed, but if disinflation continues, they will be fine with it unless the trends pause or reverses.
Market Views:
Equities, “I mentioned risk/reward. The way I think about this situation would be for an initiation (of a short) around and through 4500, stop around 4600, with initial target of 4300, 4200 holding the majority of the position with the potential of a move all the way down towards 4100.”
Fixed Income, “The 10 year - 2 year spread….I think by the end of 2024 this curve will be closer to flat. However, there can be quite a bit of oscillations that occur between now and the next few months. … we have not yet hit terminal, as the Fed will most likely move again this month. There is no rush to put on a large position. I am comfortable entering a small position, very tiny in fact, and adding as time passes and confidence grows that the depths of this inversion have occurred.”
If we see the 2-10 yield curve move down near the depths of -1.10 (+ or - 0.05) I would be interested in entering a position, and looking for spikes back the other way to lighten up when the spread moves +30-40bps steeper.
Oil, “I think a small long position in the range of $73-$74 area, with a stop around $69 and an initial profit target of just under $80. $77.50ish area will most likely offer some resistance, let’s see what happens and either cut the trade then if there is too much selling pressure, or add if the market looks strong.”
I did go long, as I wrote last time, in the range of $74. $77.50ish area will most likely offer some resistance…This is still the case, it is now testing that area twice. A breakthrough this region should propel oil towards $83ish. A failure to break would not be positive. Stops are moved up towards the $72 region.
This has been a very nice move in WTI. Note that I am using the continuous contract here, each contract month the actual price is slightly different, but the price action itself is similar. On Monday WTI was like a hot knife through butter in that region, no stopping it moving higher.
I am looking at this $83ish region for a partial profit taking zone. Having said that, if WTI is able to get through that area of resistance, it has a decent probability of moving into the low $90s range.
Gold, “Still on the sidelines. I cannot see a trade that offers above average risk/reward at the moment.”
August
There are signs that pressures in the labor market are ebbing, with temporary help dropping sharply and average hours worked ticking down. Interesting to note that Leisure and Hospitality average weekly hours has not re-accelerated at 24.1, same as last month, but last year it was 24.6.
Overall, this report is one that is moving in the right direction. As I have said many times, and we all know, the unemployment rate and labor market are lagging indicators. Given the “labor hoarding” that is occurring, it may be causing even more issues in terms of transmission mechanism of data related to the underlying economy.
Earlier in the year we were all worried about tighter lending standards. This continues to be the case, but now demand is weakening as well.
The other three lines are more interesting, delinquency rates on credit cards (orange), all other consumer loans (grey) and all consumer loans (blue), with the data comprising of all commercial banks and seasonally adjusted.
All of these areas (non mortgages) have recently experienced a rise in delinquencies. I think this is important to consider, especially given all of the other headwinds. Retailers have already started indicating their worry going into the next few quarters.
It is true that the absolute level of delinquencies remains low, but the move higher in percentage terms is surprising. If the economy is so strong, what is driving this move higher in delinquencies? Monetary policy must be the primary contributor, as we cannot point to massive job losses.
Market Views:
Equities, “This week I did initiate short position at 4500 region… The risk/reward was attractive, given that a move to exceed recent highs will be my stop area (in that range), and profit targets are far below stop levels (starting at 4300 and below). I also put on a November options trade, this time with defined risk (a spread strategy) with the idea that we may oscillate the next couple of months (and I might close the futures short), but the S&P 500 could drop back into the 4100-4200 area, which was where it was trading just in May.
I did close a little of the position to take profits on Friday and will continue to do so around current levels, as I think the 4325-4335 area might be one of support. If the S&P breaks through these levels, I would expect the next area of support will be in the 4200 region
Fixed Income, “That was a sharp bear steepener last week! The long end of the curve really moved significantly off the updated supply information. Normally when the 2-10 year curve is this inverted, it is the front end the drops in yield just prior to, and during, a Fed rate cutting cycle. We are not experiencing that, as bond traders sell out of positions to incorporate changes in risk premium at the long end. I would not chase this spread, but wait until we have more economic data.”
Overall, I am still sitting on the sidelines. For the front-end of the curve, I need to see some deterioration in the economy to give me an idea of when the Fed will cut (nowhere in sight just yet). However, the long-end of the curve will start to look attractive to myself and other investors if we can get a little higher in yield, reach some old levels not seen in over a decade, such as 5.50%
Oil, “I think a small long position in the range of $73-$74 area
Given the outlook, as noted above, while I may take some small profits (perhaps 20% of the position) in the $83ish region, I would like to retain most of the position in the event that WTI does move towards the next area of resistance, which I see in the $93-$94 area. A break below $76-$77ish area (depending on if there is news and so forth) would cause me great concern and I would most likely exit (ie. risk-free trade at this point).
Gold, “Still on the sidelines. I cannot see a trade that offers above average risk/reward at the moment.”
September
I think what the Fed is trying to do is prevent markets from front-running them by indicating a stronger economy, so rates will have to remain higher. But since they forecast inflation to drop, there is no need to worry about significantly higher rates, just a longer duration at terminal.
This is a smart ploy, and one that hopefully I can take advantage of going forward. We are seeing yields move higher off this publication, just as the Fed had planned.
As such, higher yields are becoming an attractive option for me to consider, with significant headwinds for stocks. It is very hard to call turning points, but for long-term portfolios I think averaging into this move higher in yields makes sense.
Market Views:
Equities, “I was short the S&P 500 in early August just above 4500 area. I thought we might have been entering into an area of support in the 4325-4335 area and I took partial profits as I reported in the last report.
While I would like to say that I kept my entire short position, that was not the case. The move higher on August 29th did scare me a bit, and I slightly reduced my position, as I wanted to lower my overall level of risk. From initial short entry at just over 4500 in the S&P 500, so far I closed about 1/4 of my position in the 4360 area, another 1/4 just below 4500 leaving me with a profitable trade so far and half of my position open.
I did take partial profits on Friday again, another 1/4 of my position was closed at 4325 region. Why? The S&P 500 is now hitting another area of potential support…I still think there is a probability of the market moving towards 4200, but I would prefer to be prudent and book profits ahead of another round of consolidation.
Fixed Income, “As the 10 year moves towards 5%, I will start averaging into this trade (long) with small size. This is a longer term trade. While I am unsure as to when it will turn, I think a move back down towards 3.25%-3.50% by the end of 2024 or early 2025 is a reasonable probability.”
Oil, “I went long in the range of $73-$74 area
I did take partial profits in the $83 area. I took additional profits at just under $91 last week, and am holding 1/4 of my position now with a final trailing stop that is currently just under $88.
Gold, “Gold remains trading in a tight range. At this point, I have no position or view and am waiting to see which way the market will break. At that point, I will evaluate the risk/reward situation and see if there is an attractive trade.”
October
Beyond what I have been discussing for most of this year, and many others, regarding the lagged effects of monetary policy, the disconnect between bottom-up equity analysts and top-down macro strategists, geopolitical risks, the premium valuation for equities and of course inflation, among other variables, there is a new, significant factor coming into play - the difference between the supply and demand of US Treasuries is creating a significant back-up in yields.
It could very well be the case the markets are just pricing in a higher r*, or long-run equilibrium interest rate in the US versus other nations. This would reprice the entire curve with higher yields, while r* in other countries remained as-is. That would create a buying impulse into the US dollar.
Now, while that seems logical, equities do not appear to be pricing in a higher long-run equilibrium interest rate. There is a disconnect here - will yields drop back down or will stocks drop. It is very hard to envision a situation that both are correct at current prices.
I have already discussed delinquency rates before, with the Beige Book reporting additional increases in this area albeit from a low level. However, in some assets, delinquencies are rising sharpy.
Finally, the most important part of the Beige Book, in my opinion, was the statement “ …firms struggled to maintain desired profit margins.” Analysts expect S&P 500 earnings to rise approximately 12% in 2024. That takes into account an expansion of profit margins. If firms are already struggling to pass on higher costs to a consumer that is becoming pickier, can we really assume that profit margins will increase next year? I would take the other side of that and assume that margins may continue to erode, or at least stay relatively constant.
Trading the Fed
Given the equity market selloff going into the Fed, this may open a short-term trading opportunity.
Historically, if the markets are in a downtrend, the Fed day has been generally positive. I wanted to take a look over the past couple of years and see how this has worked out over recent history.
When the S&P 500 is below the 200 day moving average the day before the Fed announcement since 2021, half of the time the close of Fed day was positive, and half of the time it was negative. However, the average gain was 2.34% and the average loss 1.24%. I would flip a coin all day long with that risk:return profile of a 50% win rate. I would also suggest that the current level of selling momentum is also quite interesting/large. Therefore, I think we may see a short-term rally off the Fed announcement.
As such, I will be looking on Monday and/or Tuesday to put on a very short-term options trade, expiring by the end of the week to capture this potential rebound, while also permitted me to hedge my short exposure (more below).
Market Views:
Equities, “This will be a short overview of my S&P 500 trade, since not a lot has happened. Essentially, I entered a short in early August just above 4500 area. I have been closing my position over the past weeks around 4360, 4325 and just below 4500, leaving me with a 1/4 position short.
I moved my stop down and will close the remainder with a move up through 4410. Luckily for me, it did not trigger my stop.
The 4250-4275 (SPX) is a key area, with of course 4200.
The market rolled over nicely after trading sideways.
I am still holding a small portion of my short. I think we may get a bounce back up, or at least consolidation around these levels.
If the SPX moves above 4285, I would close my short entirely and re-evaluate.
Fixed Income, “I am very hesitant to stand in front of a freight train, and as such while I did nibble in the 10 year, I am going to sit on the sidelines and see where the market tops out and eventually rolls over. Will it be in the 4.75% range, or will the 10 year move towards 5.3% and even higher? No one really knows, but this level of directional movement without a pullback is very rare. I will add that the bond market, as most markets, can and does overshoot to both the upside and downside from equilibrium.
Oil, “I went long in the range of $73-$74 area
I did take partial profits in the $83 area. I took additional profits at just under $91 last week, and am holding 1/4 of my position now with a final trailing stop that is currently just under $88.
After closing this position, “What will I do now in the oil market? Nothing. Given the situation in Israel, and the fact that WTI has dropped right in the middle of a wide trading range, there is no attractive risk:reward trade. I will sit on the sidelines for now in this market.”
Gold, looking to go long, I wrote “I would want to see a move above 2010-2015, with an initial objective near the recent highs for partial profits of 2080, and an initial stop at entry of 1955. If it gets through 2080-2085 region, it could make a run for 2175-2200”
November
There are times when markets are in a sweet spot (I prefer not to say “Goldilocks”) with little potential to change the narrative. We may be in such a position now, at least for a short period of time.
The market so far is viewing “bad” economic news as “good” news for stocks. For now, this makes sense. Milder economic growth and signs that inflation is abating will keep the Fed at pause, even as companies are reporting relatively strong earnings results (so far). We are in a sweet spot - for now. However, as monetary tightening policies weigh down on the economy, companies will increasingly struggle to increase revenue and profits, this is when they will start to guide down forecasts and analysts will have to adjust their prognostications.
Analysts have pushed out stronger growth expectation, as Q4 projections are for earnings growth of 3.2% versus 8% in September. I was not supportive of such an optimistic forecast back then and analysts did eventually lower their numbers, but what they did to justify current equity valuations is that they pushed up future quarters, with Q1 2024 growth at 6.7% and Q2 2024 growth of 10.5%.
For the remainder of 2023, we could very well have a year-end rally. Companies have reported, so no reason for them to start warning yet prior to year-end. Consumers still have jobs (for the most part) and there may yet be still some savings to be run down, along with increased credit card usage. However, 2024 may bring a hangover with this spending binge that could result in more than just a headache.
Market Views:
Equities, “Monday October 30th and Tuesday October 31st I put on option trades that were bullish of the S&P 500, and I did close out my short as the S&P 500 moved through my stop.
I am interested in putting on a long position in the 4370-4400 area…A breakdown through 4310 would invalidate my long (ie. region for a stop level) and I would add a little over the coming days and perhaps even weeks if the market indicates that buyers are taking control.
After going long in the 4400 area
I think there is a reasonable probability for reaching close to 4600, perhaps partial profit taking around 4590. I would want to enter stops around 4450 and 4430.
Fixed Income, “I do think the trend in 2024 will be for lower yields in the 2 year, and higher prices. The weekly jobless data on Wednesday may add some fuel if it comes in higher than expected as well.
I will be putting on a small position in the 2 year early this week.”
In the 2 year, “I would add on the way down in yields, 4.84%, 4.81%, 4.80%. Perhaps with PCE and Powell (as noted earlier), it could be the start of a much larger move over the first half of 2024.”
Oil, “This is a very risky week, as OPEC+ is set to meet following the delay from last week. If Monday or Tuesday oil (seen here through the continuous WTI futures on NYMEX of CL) were to move down through $73.80 region, I would go short… I would stop out at or just above $77, with initial target of $69, another target zone of $67 and potentially even $64.50. Conversely, if WTI moved back above $77.86-$78, I would go long…. Target in that case for initial profit would be $83, stop in the $75 region.”
Gold, “Gold is catching my eye again. I am not ready, but am watching that market closely. A move above $2010 would make me bullish.”
A move through $2010-2015 would be important and I can imagine there will be stops just above in the 2015-2020 region (ie. potential for a spike higher). If (and there is always an “if”) gold does move through this region, it could be setting up for a much higher move into the $2080-$2090 region.
December
This past week a few Fed speakers re-iterated their views that the Fed is done with hiking. What is important to note is that Fed Chair Powell did not push back on that assessment Friday.
This section is also important as one concern that I (and others) have is to what extent will policy makers push back on the move down in yields. As Waller stated, long-term rates are still higher than in the beginning of the year, and inflation continues to decline. They are not panicking from the move down in yields recently, therefore additional information that bond buyers should not be worried about the Fed derailing the rally (for now).
Wednesday is FOMC day. The statement and Summary of Economic Projections will be out. The “dot plot” is what many people will be looking for as an insight into what the Fed is thinking and what message they are trying to send to the market.
Regarding the dot plots, “I think they may try to use it as a signally mechanism. If they keep it at 50bps, they are signaling the market is too optimistic that the Fed will cut and pushing the narrative that they will remain at terminal for longer than expected. If they plot 75bps of cuts, I think the market will love that and push yields down hard as participants may see that as a signal that the Fed won’t push back on cut forecasts and perhaps initiate policy change sooner than excepted.”
It was extraordinary how dovish the Fed has turned given the level of inflation. Yes, inflation is certainly moving in the right direction, but signaling to the market that cuts are coming and not pushing back on the easing of financial conditions was a surprise.
Market Views:
Equities, Going into last week I was long in the S&P 500 at just under 4400. So now what am I planning to do? Well, I did sell a small portion but am holding to the vast majority because, as I mentioned before, with year-end coming up and little to change the narrative it is hard for me to see a large sell-off.
Next level I am targeting is 4730 and then 4800. Stops are moved up in the range of 4510-4530.
There is the very real possibility of a blow-off top here in December if CPI comes in below estimates….even though there has been talk that people have turned bullish (and they have), a continued move higher into year-end will squeeze fund managers that are under-allocated.
I took additional profits as the S&P 500 hit my 4730 target, with now just over half of the position reduced and locked up….I would also move my stops up to lock in these gains, range of 4640-4670.
Taking out approximately 300 S&P 500 points is a good way to end the year.
Fixed Income, “I wrote last week, “…I would add on the way down in yields, 4.84%, 4.81%, 4.80%. Perhaps with PCE and Powell (as noted earlier), it could be the start of a much larger move over the first half of 2024.” The two year moved all the way down to 4.54%.
I am going to hold onto the position, with an eye at the 4.35% region as an initial profit taking zone.
Oil, “I did end up getting whipsawed around…After an incorrect call I usually don’t rush into another position, but it appears the market is quite negative on oil. OPEC+ members agreed to 2.2mm barrels of reduced production, yet this was not enough to stem the wave of selling pressure. The problem is that OPEC+ is calling on volunteers…. This time the agreement sounds even flimsier.
I am short a small position. I think prices may rebound slightly. I am looking for a nice break below $73 to start pressing the short. Initially looking for $67.50 and then $65. Initial stop $77 region
I initiative a short on Monday late in the day, as the market indicated that buyers were not stepping in. I added on Tuesday again late in the day, as the pop higher in price in the morning was met with selling pressure taking price under $73. Wednesday was quite obvious that longs had stops around the $71 region, and that pushed WTI lower.
The move higher on Friday does worry me. I will move my stops down, in the range of $72.70-$73. Essentially I will close and make a little/breakeven if oil moves higher in price, or hold my position if oil turns back down.
Gold, “On Monday, gold (in this continuous chart) closed above $2010 and I entered long. I kept adding in the $2018-$2020 region. While I thought there would be a short squeeze, it looked like their stops were slightly higher. Very nice, strong move throughout the entire week.
I closed most of my position Friday and will close the remainder on Monday at essentially a wash trade. I don’t like the price action. It looks like some large traders used this move up to unload a lot of their holdings.
Thanks for reading!
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Excellent synopsis of the year. You made some good points!