Moon Top

The Beaver Blood Moon in full eclipse lived up to its expectations this morning. I awakened earlier than normal to view the otherworldly sight of a rust-coloured full moon hanging just above the horizon, closely followed by Orion, Mars, and the Pleaides, all shining brightly just above the spectacle. It was worth the viewing, even through my blurry, age-diminished eyes. But as the daylight obscured this glorious but fleeting celestial show, it was suddenly gone. The fun was over. The 'top' was in.

Can I extend this analogy to the stock market? Just watch me. Often, market players will ascribe short-term price action of the stock market to any number of random factors that seemingly have no bearing on the derivation of equity prices. The January Effect, the Presidential Cycle, the Summer Rally. These are all researched to death and have a decidedly mixed track record of success in predicting market direction. But they persist in the 'lore' of the markets.

Even the 'Tuesday at 11' effect, has been posited as a driver of investor behaviour. Oh. yeah, sure buddy, and I've got some swampland in Florida to sell ya, too. No, really, Ron DeSantis is looking there too!

In my past iteration as a Bay St guy, I would hear these hoary maxims from time to time, mostly from the sell side traders who constantly barked indications into my trading desk phone. These 'market truisms' often originated from veteran floor guys who grudgingly moved upstairs after the exchange went digital. One of my favourites was one broker who would regularly (every 28 days) call for a "Moon Top" for any market that had run ahead of itself. Although armed with 6 years of post-graduate education in finance and economics, I was still unable to objectively process that statement.

But I never forgot the times that it actually did work. Sometimes he was right! The market did occasionally top out on the day following the full moon. Could he be on to something? Is there actually a link between celestial bodies and stock prices? You all know that I have a soft spot for non-intellectual analysis, given my disdain for the EMH and its exclusion of behavioural bias effects. Efficient Market my ass - have any these guys actually run money? But the moon? Deck, the CFA Institute called, they want their Charter back.

But is it possible that human behaviour is at work here? Could our thousands of years of prehistoric conditioning have anything to do with the mechanisms that drive human expectation? Does a hunting cycle that culminates in a successful full-moon 'kill' correlate with the peak of a buying surge from 'hunting' investors? It's a theory, isn't it?

But so is Cold Fusion.

Ok. ok, I know what you're thinking. Time for the old folks home, Bobby. Put down the Bloomberg terminal and walk this way to the waiting ambulance. No really, You'll like it there. They have free cookies after your nap! But I digress.

These spurious correlatives have always been at work in shaping people's expectations of the future. By its very nature, the future is a murky dark place, prone to wild-eyed theories and wacky predictions from less-than-credible sources. But it doesn't stop humans from trying. If I told you I had a "system" to pick the winning Powerball numbers, wouldn't you at least listen? (pssst - they're my favourite guitar's serial numbers)

So let's just sit back and relax now that the moon has worked its magic spell on us. The market will most likely peak this week after the election run-up and the CPI print. The falling earnings estimates, combined with a market now 'expensive' on a risk premium basis (chart below) should cap the bounce. We can buy some good, cheap stocks at lower levels in the next few weeks. But it's not because of the moon -I think.

EQUITY RISK PREMIUM - S&P 500

Chart: J Aitkens, TD Securities

The "Sentiment/Positioning" rally that has driven the market since the September low seems a bit frothy. When a story about the Dogecoin rally based on the Twitter takeover by Elon Musk makes the Globe, I get a bit nervous. Especially as I expect the Tesla chart to crack hard here, now that their hapless Twit-in-Chief Musk is being distracted by Valerie Bertinelli.

Maybe this moon theory has legs????

Risk Model: 4/5 - Risk On

I love how the Model is such a pain in my ass when I wanna get all bearish. The positives are - a tame VXV, bullish Copper/Gold, improved AAII Sentiment, and prices near their 200 dma. The only negative is a slightly overbought RSI that actually looks like it could still move higher. So I guess you don't always get the market you want. That's why we play the game.

I still hold to the notion that we are in the early stages of a market-bottoming process. Unfortunately for the hurry-up bulls, the linchpin of a durable bull market is a positive monetary backdrop. That has yet to actually show its face yet. The inverted yield curve is not something to be dismissed. Fed policy will stay on the brakes until such time as they can grind the current slowdown to more of a halt. The lagged effects of the tight Covid-Quit jobs market are still working through the system. Until the front-end loaded recovery in employment, like a wave that fully washes ashore, abates, we should expect a protracted Fed fight, and I don't fight the Fed.

Cuts in Big Tech such as Facebook, Twitter, and Google are just the start of a pink-slip trend that should provide the fodder for a Fed pivot soon. How long before Main Street's heavyweights Walmart, Amazon and GM get that memo? That is when the pivot should happen. Then it's to the moon!!