Bizarre Love Triangle
“The biggest piece of M&A in the past 12 months was the merger of Treasury and Fed,” Michael Hartnett, B of A. Can Yellen, Powell and Biden make markets behave from here? Let's dig in...
1. A Good Place for a Pause: Russell 2000
Source: TradingView. Through year-to-date 2024.
With its 2-week 9% sell-off (peak to low), we believe the near-term selling in the Russell 2000 and for that matter equities overall may be exhausted.
Although it could drop a little further to $192, in our view, the Russell 2000 is very close to a level from which it could bounce.
While we don’t see a full near-term recovery, we do see the Russell 2000 moving back up to the $198 level (the 2022 / 2023) ceiling, where we believe a real test will take place.
If we were forced to make a call, we would say that there is a 70-80% probability, that the Russell 2000 will bounce back towards $198 before falling through the $192 level.
Throughout this year, we have highlighted imbalances - 10-Year yield, inflation, the dollar, earnings, valuation - that we referred to yesterday as a perfect storm. None of these have been mitigated or resolved.
We see these factors likely taking the S&P 500 towards 4800 (see chart 2 analysis) and the Russell 2000 below $192.
(This is not a recommendation to buy or sell any security and is not investment advice).
2. Too Little Cash?
Source: Bank of America. Through year-to-date 2024.
The chart above shows the net percent of Fund managers that are overweight cash relative to the a 60-30-10 (equity, fixed income, cash) strategic portfolio based on the Bank of America Fund Manager Survey (FMS).
The net % overweight cash (light blue bars) is the most negative its been in the history of the survey.
In addition the cash in portfolios (dark blue line) is the lowest outside of the pandemic recovery period.
Although the current volatility and shift in macro expectations (Fed, growth outlook, inflation and Middle East) has likely had some portfolio managers refine their allocations, we do not yet expect a significant move to cash.
Yesterday, I highlighted the the January 2022, 4800 level on the S&P 500 as “critical.”
This is where, in my view, that despite the likelihood of a near-term pause or bounce the current correction could go.
As I am not the only person looking at the 4800 level, there may be some front running before the market drops to that level and the correction ends at 4850.
On the other hand, if the S&P 500 drops below 4800, in my view, this is where allocators will begin to meaningfully raise cash. If my view is correct, this could accelerate selling below 4800 level - this is why I called it critical.
Often buyers live higher and sellers live lower.
(This is not a recommendation to buy or sell any security).
3. A Good Place for a Pause: 10-Year Treasury Yields
Source: TradingView. Through year-to-date 2024.
Our view of higher 10-Year Yields has been counter to consensus (here) all year.
We have had a strong belief that the 1982-2022 bull market in fixed income (lower yields) had ended
In early February (here), we wrote that a move above 4.3% would re-open the possibility that 10-Year US Treasury yields could revisit their October 2023 peak around 5%.
Three weeks ago, after 10-Year Yields had been turned away from the 4.34% level, we noted the potential for a reverse head and shoulders pattern that, if confirmed, would lead yields to 4.65% (here).
While we continue to think that 10-Year Yields can move back towards 5%, we wouldn’t be surprised to see a pause in their ascent around the 4.65% level.
We continue to believe that higher 10-Year yields will put pressure on equity markets as they did from August through October 2023.
(Past performance is not indicative of future results and is not investment advice).
4. A Good Place for a Pause: Commodities
Source: Savvy Trader. Through year-to-date 2024.
We showed this chart three weeks ago (here) when the Commodities Index was at the middle blue line.
At the time, we wrote “We believe that if the commodities index has a meaningful move above its ceiling level, this may lead to higher 10-Year Treasury Yields and be a headwind to equity markets.”
While our expectation has, to a certain extent been met, the Commodities Index is now at a level that has acted as a floor and ceiling in the past.
We believe that the upward pressure on commodities will pause in the near-term and that this will provide relief on 10-Year Yields lower and equity markets higher.
However, over time, we see the elevated level of commodities dragging on corporate earnings and maintaining the inflation challenge.
(This is not a recommendation to buy or sell any security)
5. Consumer Discretionary vs. Consumer Staples: a Key Barometer
Source: TradingView. Through year-to-date 2024.
We consistently follow the relationship between Consumer Discretionary and Consumer Staples.
Although it’s not shown on the chart above, in late 2019, Consumer Staples began to outperform and provided an early warning prior to covid.
In December 2022, Consumer Discretionary shares rallied and provided confirmation of a rally that many (including myself) questioned.
As the relationship is sitting on a level that has acted as a floor in the past, we are waiting and watching to see the next move.
(This is not a investment advice and is not recommendation to buy or sell any security).