Never Moven

Now that the world's biggest choking hazard has been Heimlich-ed out the way, the Ever Given can go on its merry way and the global economy can start moving again. All it took was 18 more inches of water, courtesy of the moon.

Too bad we can't say the same for the stock market. It seems now to be stuck in the mud and I don't see any extraterrestrial forces changing that. It will most likely be very obvious in hindsight, but with the passing of quarter-end window-dressing, we should soon see a break in the equity log jam.

The markets have paused after last week's quarter-end rebalancing gyrations in bond/stock allocations. The slow unwinding of the previously frenzied Growth leadership group has been orderly, cushioned by a series of bottom-fishing counter-trend moves. Most importantly, the Financials are stabilizing after surviving the sudden Achegos Fund margin call blow-up, with only Nomura and hapless Credit Suisse seen as prime dealer bag holders. The U.S.-centric press would have made it a bigger deal had it been Morgan Stanley. Wall Street is ignoring the threat, for now.

The recent bullishness won't go down easily. Equity fund flows have been mostly positive, as heaps of low-yielding cash are grudgingly being deployed, albeit late to the party. And what's the over/under on how much of the $1.9Bn 'stimmy' cheques turn into equity options trades in Robinhood accounts this quarter? Bitcoin still has the bit in its teeth, as today Paypal joined others in accepting payments from cold wallet holders. I still don't see it. How anybody holding Bitcoin as a store of value can be convinced to part with it for a car destined to be worthless in less than seven years is beyond me. But there I go, confusing a bull market with brains again. And a Bryson DeChambeau NFT? Oh, pleeease!

In the aggregate, the ageing bull run, created mostly by the Fed, is churning sideways now. The last of a three-course financial asset meal is currently being devoured, spurred on by the Fed's relentless manipulation of investor risk appetite. First was the Credit appetizer, then came the Growth main course, and now it's time for the Value/Cyclical/Speculative dessert. And before we retire to the library for cigars and cognac, let's consider the impending 'morning after' for a moment. Yeah, that never goes well.

The 'mud' currently impeding stocks is composed of extended valuations. The markets, however, are still floating on ample Fed liquidity. The elevated valuation levels are now tenuously balanced on the incongruous combination of expanding earnings expectations and simultaneous low discount rate assumptions. We are grudgingly coming to grips with the prospect of 'normalized' (read higher) interest rates, whatever that means. That's bad news for valuations. On the positive side, central bankers are still promising continued support of asset markets and openly professing a 'behind the curve' strategy (read a steep yield curve), and stock players have a one-way bet to take risks. Is anybody other than me getting uncomfortable with this?

At the macro level, the puts and takes are currently balanced, hence the sideways rotational tape. No big market move, either way, just a 'market of stocks' as opposed to a stock market - as I have been calling for. One last-gasp push to the upside is shaping up now, with a rising 10yr as the drum major out in front. The parade looks like it is still moving past the reviewing stand, but I can see the last float in the distance.

What will break this impasse? A cyclical melt-up into reopening mania? A disorderly move in the 10yr yield above 2% triggering a sell-off? A suddenly Covid vaccine phobia from the Astra Zeneca mess? A rate-induced economic deceleration that threatens current rosy growth expectations? Conversely, soaring earnings expectations, resulting from an 8% Q2 GDP economy? Good questions all. Answers are hard to come by.

Now that we have just seen the full moon do what the world's best salvage companies couldn't, I couldn't be more uncertain about the answers to such nebulous questions. Sometimes, forces behind a stock market move seem unexplainable, driven by a celestial force, as yet unseen.

But sometimes they're right in front of you. It only took a 75 basis point move to take down Archegos. I see that.

Risk Model 3/5 - Risk On

Stuck again.

Low volatility stands as the primary line of defence for the bulls. It aligns with the complacent optimism from the AAII Sentiment indicator and the Copper/Gold ratio in a positive, although stretched condition.

We have over-bought prices being held up by positive market fundamentals yet again this week. Oh, bother!

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