Que Sera Sera

Mid-week market update: The words of the day seem to be patience and uncertainty. As the old Doris Day song goes, “Que Sera Sera”. No one knows what will happen.

I’ve been monitoring the progress of major averages. Both the S&P 500 and the NASDAQ 100 staged brief breakdowns of support, though the NASDAQ 100 recovered. Most averages remain in their wedge patterns. One hopeful signs is the ability of non-U.S. markets to rally through their falling trend line, with the caveat that the sign of strength may be a fakeout much like the S&P 500 and the NASDAQ 100 late last week.

Much depends on the length of the war.

The stock market began the day with a risk-off reaction to the hotter than expected PPI report. That said, the FOMC decision and Powell’s subsequent comments were mildly dovish. Rate projectsions were surprisingly unchanged, though the level of confidence on that forecast was low. One surprise is the upward revision in real GDP growth, which Powell attributed to better productivity.

 

I was also surprised at the language of the rate guidance. While Fed officials acknowledged that both inflation and employment risks were elevated, they refrained from signaling that there is a possibility of a rate hike in the near future, which would have really rattled markets. That’s the reason why I chracterized the FOMC decision mildly dovish. I could see that Powell tried very hard not to give any guidance on the future of rate policy, because they simply don’t know the effects of the oil supply shock.

There is also uncertainty about how to interpret the current sentiment backdrop. On one hand, I had highlighted on the weekend the level of panic shown by the NAAIM Exposure Index sentiment survey. Historically, readings below the bottom band of the 26-week Bollinger Band were extremely accurate tactical buy signals.

 

In addition, I also observed on the weekend that the Zweig Breadth Thrust Indicator had become oversold and the market is due for a relief rally (chart not shown). The 10-day window to ZBT buy signal began on Monday, but I am not holding my breath for such a rare bullish outcome.

On the other hand, my former colleague Fred Meissner and other technical analysts pointed out that other sentiment indicators, such as the put/call ratio, were elevated but they weren’t at panic levels. These readings open the door to another major downleg in equity prices before the decline is over.

Similarly, the latest BAML Global Fund Manager Survey shows a pattern of

If I strictly put my chartist’s hat on, I am leaning slightly bullish, but it’s a low conviction call. In addition to the stabilization of non-U.S. stocks, I am seeing signs that the animal spirits have returned to the market. This is not the sort of thing that happens when investors are worried about a oil-driven recession.

Consider, for example, that IPO stocks are outperforming the market.

The relative performance of speculative growth stocks, as measured by the ARK Innovation ETF (ARKK), and Bitcoin prices are also recovering.

 

In the end, much depends on the length of the war and its aftermath. President Trump floated a trial balloon today about declaring victory and abandoning the Strait of Hormuz in light of the lack of support he received from allies. On the other hand, the White House announced several days ago that it was sending two marine units to the Gulf, and they would be unlikely to arrive for two weeks.