Weekly market review Nov 6 – 10, part 2 ( inflation preview, case for 2024 economic growth, hedge fund positioning, NAAIM sentiment “thrust”, Trend following model)
Nov 14 inflation preview
There’s a inflation release on 14 Nov. Barring any surprise, Inflation especially core inflation is expected to gradually trend down again( gradually then significantly ).
According to Zillow rent figure, its starting to fall and fall significantly in the months ahead. Majority of Core CPI is shelter (rent ), therefore one can imagine how far it will fall in the days ahead.
Stock market is forward looking, hence market participant risk being left behind if one buy after Core CPI has fallen to 2% due to CPI being a lagging indicator ( lag real time economy by 8 months ) and if you’re basing your investment thesis on Fed outlook, then you are more than 1 year behind on your stock investment timeframe, because stock market is 2-4 months ahead of real time economy in current cycle according to GMI data.
Core CPI which fed is currently targeting could take sometime to come down, 40% of Core CPI is in shelter/rent, which lags the real time economy by 18 months.
Here’s an interesting charts of CPI YoY potential path based on constant CPI MoM data print. ( source Bespoke invest )
Bottom line : Stock market has been pricing in an expected fall in CPI print since end of last week.
If CPI drop drastically, stock rallies.
If CPI fall according to consensus, SPX may rise then consolidate or fall on profit taking for the short term.
If CPI rise unexpectedly, then stock will fall.
Case for 2024 Economic growth
Economics/market Crash/boom is the single topic dividing many in experts, pundit and everyone. I am here to make the case for economy turning out better than many expected in year 2024.
One might be asking what about the fed tightening/financial tightening condition that is strangling the economy?
According to GMI, the worst in tightening is behind us and credit standard is becoming less tight.
According to BofA, bank loan flow is turning positive again after miring in negative territory in 2022, and is turning up sharply from the Q3 Dip.
What about PMI ?
According to GMI, ISM new order minus inventory lead real time PMI by 3 months and has been successfully predicting the pivot in ISM PMI going back to 1985.
Hedge fund positioning
Hedge fund has been net short US stock, majority of them in financial sector. If financial sector stock does achieve a turn around, then we could see financial sector becoming an additional engine to power SPX into further positive territory in year 2024. ( Although financial relative performance will still lag behind techs, communications and consumer discretionary in the year ahead. )
Earning qualities and net profit margins of S&P 500 companies
According to Barclays research, there’s a mark improvement in current earning seasons ( Q3 2024 ), in terms of YoY growth, Earnings surprise and 3M revision.
Of the 81% of S&P 500 company reported earnings, Net profit margins are around 12.1% getting very close to post pandemic boom era ( Q1 2021 – Q2 2022 )
NAAIM jump, sentiment “thrust”
According to Carson group research, 30% jump in NAAIM exposure index within 1 week ( change from 29% in previous week to 61% in Nov 9 ) is usually followed by goods odds of positive returns and median returns of 6% – 12% 6 to 12 months ahead.
Trend following model
I have preliminarily develop some simplified, short term, mid term and long term trend following model to anticipate the turn in CTA equity positioning, these are just very rough approximation.
As majority of CTA model tend to be mid to slow tempo which aim to capture longer lasting trend, proof ? Notice the positioning has just pivoted from bottom as of 10 Nov.
Therefore, I have roughly developed 1 fast turning Trend model, 2 mid and 2 slow tempo. These are work in progression. Will fine tune and add more as we go along. ( note: these are not meant to be timing, trading signals, they are nothing more than just a weight of the evidence approach )
Trade preparation and management
I expect some consolidation this week, consolidation may last till early next week. ( or it may only have very shallow pull back , or simply drift upward slowly )
Regarding the swing trading in NDX position in 31 Oct ( in my Daily market review Nov 1 ), I am confident that Q4 rally could go much further than most anticipated. Therefore I will move 50% take profit target to 16750 ( 2021 Dec high ), while leaving remaining 50% open.
As always, we will continue to monitor the charts, assess the bullish/bearish evidence day-by-day to make appropriate capital allocation and investment decisions.
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/