Here’s last evening’s entry to our internal market log:

10/19/2022

We’re heading into Q3 earnings season and Q4 seasonality with net negative earnings revisions, high readings on our fear gauge, notably net-short positioning among speculators in US equity averages (save for the Nasdaq) and fund managers (per the BofA survey) sitting on the highest cash levels since 2001 — with 49% of them “underweight stocks.”

That’s a contrarianly bullish short-term setup for what I suspect would – should it play out – be yet another bear market rally in the end, but potentially one of the more substantial ones so far.

The big obvious headwind of course remains the Fed.

However, it appears to me that recent mayhem within UK politics, and, consequently, gilts and the pound, fears around waning liquidity in the treasury market, the SNB hitting the Fed swapline for billions recently, and so on, is beginning to weigh on the minds of even the most hawkish of the (Fed) bunch.

For example, Kashkari today:

“We could potentially pause at some point next year if we see clear evidence that core inflation is slowing.”

Well, it virtually without question will be “slowing,” so he knows it’s a foregone conclusion.

Here’s Bullard:

“I expect we’ll end the front-loading by early next year and shift to keeping policy sufficiently restrictive with small adjustments as inflation cools.”

“You have to think about what the reasonable level is, but it doesn’t mean that you go up forever.”

While that may yet sound hawkish, clearly, he’s offering something up that he had no desire whatsoever to till now… Same for Kashkari.

I believe they’re now listening to the messages coming from global credit markets and currencies… I.e., something will indeed break if they continue as threatened to this point.

They view guidance as an important tool in their box… To no longer essentially promise to kill inflation at all costs suggests that they’d like to guide markets into believing they will indeed pivot if/when they need to.

If that’s how the market ultimately digests it, it bolsters the 
case for a Q4 rally…

Now, make no mistake, the above is not a prediction, it’s simply an assessment of short-term probabilities (not certainties) based on our take of present general conditions…

Asian equities leaned red overnight, with 10 of the 16 markets we track closing higher.

Europe’s mixed so far this morning, with all but 9 of the 19 bourses we follow trading lower as I type.

US stocks are drifting around to start the session: Dow up 13 points (0.04%), SP500 down 0.23%, SP500 Equal Weight up 0.13%, Nasdaq 100 down 0.20%, Nasdaq Comp down 0.35%, Russell 2000 up 0.09%.

The VIX sits at 30.80, up 0.13%.

Oil futures are up 1.89%, gold’s up 0.17%, silver’s up 0.40%, copper futures are up 2.50% and the ag complex (DBA) is up 0.15%

The 10-year treasury is down (yield up) and the dollar is down 0.25%

Among our 34 core positions (excluding options hedges, cash and short-term bond ETF), 19 — led by AT&T, base metals futures, oil services companies, emerging market equities and, specifically, Brazil equities — are in the green so far this morning. The losers are being led lower by Nokia, Sweden equities, MP Materials, utilities stocks and industrial stocks.