Morning Note: A “Fascinating”, And Telling, Development, and more….

Optimistic vaccine headlines and a bit of merger mania saw Asian equities rally overnight (12 of the 16 markets we track closed in the green) and has Europe, on balance, in rally mode as well this morning (12 of the 19 bourses we track up on the session thus far). U.S. equities are bouncing back from two weeks of decline rather nicely: Dow up 319 points (1.30%), S&P 500 up 1.52%, Nasdaq up 2.06%, Russell 2000 up 1.27%.

The VIX (SP500 implied volatility) is down -3.15%, VXN (Nasdaq vol) down -2.42%.

Oil futures are off -0.27%, gold’s up 0.81%, silver’s up 1.41%, copper futures are up 1.08% and the ag complex is down -0.64%.

The 10-year treasury note — in conflict with this morning’s party atmosphere — is trading higher (yield lower) and the dollar (clearly adding juice to the party) is taking a -0.35% hit as I type.

All but one of our core positions (ag commodities [our third-largest exposure]) are trading higher on the session thus far. Our core mix is up 0.71%, with tech, banks, financials, emerging market equities and healthcare leading the way.

I’ll leave you this morning with the following snippets from yesterday’s entry to our internal market log:

“Last Friday marked the end of the first 2-week stock market draw down since March. The S&P 500 fell 4.55%, with tech taking the biggest hit among sectors, down 11.20%. Our core portfolio fared much better, down just 0.50% for the period.

During the first week only utilities and materials equities advanced. Last week, it was only materials. All other sectors took hits.

While major foreign indexes declined with the U.S. during the first week, the Eurozone and Asia-Pac actually saw gains the second. That, plus two weeks of gains in our base metals and ag exposures, along with last week’s gains in gold and silver, explains our core mix barely declining while most of its equity positions sold off.”

“A fascinating development, which no doubt speaks to the dotcomesque nature of what we’re dealing with, shows up in ETF flows: TQQQ, which is a triple-levered instrument tied to the Nasdaq 100 tracking ETF, saw large net inflows last week (that would virtually have to be your aggressive, inexperienced, retail trader), while QQQ (the Nasdaq 100 tracking ETF) saw equally large net outflows.

The latter jibes perfectly with the spike in QQQ short interest and the large move to net short among traders speculating in Nasdaq Index futures. The former jibes perfectly with the “Robin Hood” (retail investor mania) phenomena.

The Fed meets this coming week, and judging by the strong rally in futures occurring as I type, traders are expecting a strong confirmation of the “we’ll do whatever it takes” message. Positive vaccine (prospects) news over the weekend, no new US/China bad news to digest, an expected smooth power transition in Japan, and, per the correlation we’ve been pointing to of late, a weak dollar, all adds up to what’ll likely be a strong start to the week come tomorrow morning. It wouldn’t surprise me to see stocks retrace a good chunk, if not all, of the last two-week decline over the next few days/weeks.

That said, volatility remains very elevated — and while some underlying short-term supportive structures are reemerging, they’re not nearly as prevalent as they were during the huge March thru August rebound — which suggests that it wouldn’t take much to have traders turning tail in a hurry.

Bottom line: There’s not sufficient evidence to strongly suggest that, on balance, the phenomena that have brought the market to new all-time highs have yet played themselves out.

Longer-term, the litany of concerns, from staring down the third peak in debt to GDP since 1870 (1929 and 2008 being the previous two), a mere 12 years after the last, to all-time high valuations among too many metrics for stocks, amid feverish speculation, and amid macro conditions that leave virtually zero chance of recovery to a level justifying said valuations in the foreseeable future (not to mention the long-term effects of moral hazard [keeping failed institutions afloat], the likes of which America has never seen)… well, let’s just say that the fundamental risk/reward setup is exceedingly unappetizing right here.

From an asset allocation perspective; our thesis demands that we remain very nimble and, thus, willing to consider/exploit opportunities — unique to the circumstances we find ourselves in — among equity sectors, while exploiting the obvious values across the commodity and currency spaces, and keeping a put hedge on as insurance against the kind of major stock market decline history suggests is likely to attend such conditions…”

Have a great day!


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