Hello everyone, I am Giorgio, and welcome to a new episode of Weekly Market Talk, brought to you by Avanguardia Investment Media.
- Economic Calendar (Important events coming up this week)
Let's start by looking at this week's economic calendar. Wednesday, November 30th will be a big day, with the eurozone CPI year-over-year number expected to be 10.4%.
The markets will be watching closely both the ADP Nonfarm employment change and the JOLTs Job Openings. If they come stronger than expected, the market will likely plunge as it signals that the Federal Reserve needs to tighten more aggressively to cool down the labor market.
As Powell previously said over and over, the US labor market is very tight at the moment, with about 2 job openings for every unemployed person. This dynamic is inflationary as companies are forced to raise wages to attract labor. So the goal of the Fed here is to bring Job openings down and unemployment up.
With this in mind, if Job openings had to decline significantly, we could see a rally in the market as investors would expect the Fed to loosen financial conditions sooner as they are getting closer to their goal.
Moving on, the other two important events this Wednesday will be Powell speaking and the third quarter GDP results. Watch out for Powell, as his speech at the Jackson Hole meeting this august, brought the market lower.
On Thursday, December first, we have three important events,
first, we have the Core PCE price index for October, which if it comes higher than expected will again tank the markets as it signals that the Fed is not getting closer to its goal of lowering inflation.
Second, we have the initial jobless claims. A number higher than expected would be bullish for markets as it means that the economy is slowing and therefore the Fed might stop tightening earlier. And finally, we will have the ISM manufacturing PMI which will give a good idea about the US economy.
On Friday the most important event will be the Unemployment rate data for November, if it comes higher than expected it may be bullish. Always remember what the Fed wants right now. They want lower inflation, and to do so they need higher unemployment and lower job openings. If they get what they want, they can stop hiking rates and hurting the economy earlier. If they don't get what they want, they'll be forced to tighten aggressively into a recession.
- Upcoming earnings reports
Moving on, here are the earnings reports for this week, big Canadian banks report between Wednesday and Thursday, apart from them, I am going to watch for Ulta Beauty, Hormel Foods, Kroger, and dollar general to get an idea of the state of the US economy.
- Current stage of the cycle
Now, talking about the current stage of the cycle, as I have said in previous videos, bear markets usually go through 3 stages. The first phase is a valuation compression, in which investors realize that their growth expectations are unsustainable, so valuations come down to more reasonable levels. I think that we already got through stage one in this cycle, and we are currently at the beginning of stage 2. Which is the earnings recession, in this phase, earnings decline and so stock prices go down.
We have seen both amazon and meta getting slaughtered after reporting earnings, and this is just the beginning of stage 2.
I believe it could easily last until the second quarter of next year.
Then we might enter into the last phase of a bear market, the liquidation phase, in which unemployment rises and people sell stocks to raise cash. Everybody rushes to the exit and panic selling occurs. And that's usually when we could see major bankruptcies and bailouts from governments.
But now I believe we are still in stage 2, which is full of bear market rallies, so it can be tricky both for bulls and bears.
- Equities: SPX, DJI & individual notable mentions
Moving on to equities, let's start with the S&P 500, this bear market rally may very well be near its top, as you can see the market got rejected by the 200-day moving average. And the recent rejection is very similar to the one we saw in august at the end of the previous bear market rally. even though I wouldn't be surprised to see the market have a last rally towards 4,100 I think we will see new lows pretty soon. In my humble opinion, the risk/reward of being long the S&P here doesn't make sense. I have no position on it, but if I had to choose between being long or short, I'd sleep better being short the market right here.
Now talking about the Dow Jones, it looks like a really good short in my opinion. Full disclosure I am short the DIA at the 330-dollar level. Why am I bearish? First of all, it just did an almost perfect double top, just after it had the best 2-month rally in the last 50 years. Additionally, the MACD is giving a sell signal, which has been very reliable during this year.
If we want to add another reason to be bearish, we can look at the VIX. throughout this year, if you followed a very simple approach you would have nailed almost every major move. If you bought the DOW when the VIX was above 30, and then you sold the DOW when the VIX was below 21, you would have been on the right side of the market every single time.
And now the VIX went below 21 again a few days ago, which, if the past is prologue, would suggest the end of this bear market rally.
Now let's talk about some individual honorable mentions. First of all, I would love to express my bearish view on CAT, Caterpillar. It's currently sitting at less than 5% from all-time highs. It's a cyclical stock that is very sensitive to economic downturns. Knowing that we are entering a deep recession and that the housing market is slowing fast, next year is not going to look very bright for CAT.
And what's most interesting is that the current price action is very similar to what happened in 2008. After an initial 30% decline, the stock rallied 40% almost to new all-time highs. At that point in time, the economy was already slowing and people knew that a recession was incoming. Which is what then killed the stock, which had a 74% decline to the 2009 lows.
Now it's doing the same thing, it declined 30%, just to bounce 40% to almost new all-time highs. If the past is prologue, we could see a devastating move down in CAT in the next 12 months. Full disclaimer, I am short CAT with long-term options.
Another honorable mention is Apple, even though I am not currently shorting it, I have enjoyed shorting it multiple times this year. The current problems that they are facing at their Chinese factories, coupled with the coming recession and the fact that the stock is trading at very overvalued levels, make Apple one of my favorite short ideas. What people don't realize is that if you buy apple shares now, you are paying a higher valuation than in 2015, plus you have a lower expected growth rate. Why would you ever buy apple shares at these valuations, knowing that we are heading into a recession? My 2023 price target for apple is below $100
- Precious metals GOLD, SILVER
Now, moving on to precious metals, I don't think we have seen the lows for gold yet, and the same goes for silver. Precious metals are a hedge against central banks' largesse. So when they print a lot of money, precious metals tend to rise, but when the central banks shrink their balance sheet and raise interest rates, precious metals suffer. I don't have any position on precious metals, but I will be more than happy to buy exposure to them once the Fed starts to inject liquidity back into the economy. But until then, I am not going to touch precious metals.
Moving on to oil, I believe that it is a tricky one. On one side you have the end of the SPR release, and the possibility of China reopening the economy, which would be bullish for oil, but on the other side you have a big recession incoming, which could affect demand.
Additionally, oil is a very political commodity, and the US clearly wants lower OIL prices to ensure that inflation cools down. So it's easy to get burned both on the short and on the long side here. For this reason, I have no positions on it at the moment.
Something that I want to point out however is the major divergence between oil stocks and crude oil. While crude oil is now back where it started at the beginning of the year, oil stocks are much higher. I believe this divergence will ultimately fall back in place, which means that either oil goes higher or energy stocks come down. Let me know in the comments what do you think is going to happen.
- Forex & DXY
Moving on to the dollar, while many are calling for a peak in the dollar, I don't think we have seen the top yet. The dollar index just bounced off the 200-day moving average which is a pretty good sign. But most importantly I believe that the US is the best house in the worst neighborhood. Meaning that I believe that the US is better positioned than other developed economies to withstand a recession. For this reason, I believe that the Fed will be the last central bank to pivot. If the ECB pivoted while the Fed was still raising rates, we would see a strong rally in the dollar.
- Current forecast
Now let's talk about my current forecast and then we will go over my current portfolio. As of right now, I believe that we are still in a bear market, particularly, that we are in the second stage, which could last until the second quarter of next year.
I think that the dollar is still the best currency to hold and it will be until the fed pivots. Currently, I think that we are experiencing a bear market rally, which could be very close to its ending, so I expect the markets to make new lows in the coming months.
- portfolio update
My portfolio reflects my forecast in the following way. I am holding a very large 75% cash position in US dollars, which is currently earning a nice interest of 3.33%. The reason is simple, the best way to withstand the increased volatility is to hold a large cash position. That's the only way I am able to hold onto my short positions.
With the remaining 25% of my portfolio, I am shorting the following:
I am short the DIA at the 330 level
I am short the XLF at the 35 level
I am short the XLI at the 95 level
I am short CAT at the 200 level
I am short DE at the 310 level
Now, I have already explained why I am bearish on the Dow Jones and industrial stocks like CAT. Let's now dive deeper into why I am short the financial sector.
First of all here is the industry composition of the XLF ETF, as you can see, banks account for 33%, capital markets 27%, insurance 20%, diversified financial services 14% and consumer finance 4%.
Banks usually borrow money at the short-term interest rate and then lend out the money at the long-term interest rate. Which is all good when long-term interest rates are higher than short-term. But when you have an inverted yield curve, like right now, short-term rates are higher than long-term rates, so it becomes a problem for banks.
Additionally, as the recession starts and unemployment rises, people start to default on their mortgages and loans, therefore impacting the banks.
The financial sector is deeply vulnerable to recessions, and it is among the worst-performing sectors during the past recession along with the industrial sector.
So here it is guys, this was the weekly market talk with Giorgio, let me know if you liked it in the comments below. And I'll see you next week.
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