Mid-week market update: Today’s market action looks rather ugly today, but I believe that stock prices are poised for a short-term bottom as the S&P 500 tests a key rising trend line on the weekly chart.
Here’s why.
A market bottom signal
Two of the components of my market bottom model have flashed buy signals. The VIX has spiked above its upper Bollinger Band, and the term structure of the VIX has inverted. Historically, two or more buy signals have been good indicators of short-term bottoms.
Breadth also appears to be constructive. Despite the large -2.3% decline in the S&P 500, net NYSE and NASDAQ 52-week highs-lows remain positive.
Trust the Great Rotation
The market is rotating away from growth to value, from large caps to small caps. That rotation is continuing. A rotation from growth to value is apparent across all market cap bands.
Besides the usual suspects (high valuation of the Mag7, etc.) there were two noteworthy events today:
1. The unwinding of the yen carry trade which has long term implications.
2. 2/30s getting dis-inverted.
It is beyond my pay grade to analyze what it means but I would keep an eye on it.
Small caps are dominated by industrials and financials. People have been front running them since June/July, e.g. PSCI and KRE. Obviously data always leak out for connected people. Joke aside, small caps are cheaper. But economy is sluggish and small caps rev growth will be limited. It is sort of a mean reversion trade. For SPX the other 493 are projected to have 10-15% EPS growth YOY next two Q’s. So at the indix level SPX might still move up nicely, after today’s drubbing. Ultimately it all depends on money flow. If people decided that the small caps are the place to be I just follow.
DBB and DBC are weak. Lumber is at inflation-adjusted all-time low. Copper is very weak. EV sales trend is not encouraging. Precious metal are strong. But ITB and XHB are at decades’ highs because people anticipate lower rates, but on the other hand market also is into Trump trade of higher rates and lower bond prices. All of these are in conflict in part or by the whole. In theory Trump trade should be bad for financials because of higher rates, but big banks are going nuts. One thing I recognize is that M&A investment banking is starting to be very active which helps big banks. All in all it is fuzzy. So I’ll go fishing and boating. Does Trump trade hurt small caps? Or market is not so sure about his chances.