In this week’s Dirty Dozen [CHART PACK], we look at changing cyclical leadership and explain why this risk-on rally has some legs. We then discuss inflation dynamics, small-caps, gold, homebuilders, and more….

Unsplash

1. We’re in the midst of change. A new budding cycle, new leadership, new winners, new losers… Bubble rotation and Capital Cycle dynamics mean the next ten years won’t look anything like the last ten. Highlights from BofA’s latest Flow Show (emphasis by me).

2. I shared this chart of small-caps two weeks ago, writing how a move above 1,900 would confirm a risk-on rally is clear and underway. RTY close on Friday at 1,874, so we’re getting close…

3. This tape is being confirmed by the internals. Keep an eye on yields, but I expect this rally to run for a few weeks.

4. CPI paths assuming various MoM numbers via BofA.

5. This chart from BBG shows the median time between a peak in CPI and the first Fed cut is 22 weeks. For reference, CPI peaked back in June. Though I wouldn’t put too much emphasis on this chart. Levels matter, and the Fed is still a long way off from pivoting.

6. Via BBG “After a seemingly never-ending skein of upside surprises to CPI inflation reports, the October reading came in much lower than forecast across both headline and core aggregates. The natural conclusion is that the inflation genie is beating a retreat back into his bottle thanks to the Federal Reserve tightening.

“While there is certainly an element of that, the October inflation report was also flattered by some adjustments to medical care that generated the biggest monthly decline to those prices in more than half a century. Whether that tells us anything about the future trajectory of inflation is an exercise left to the reader.”

7. And more from BBG “Financial conditions continue tightening for about five quarters after the first Fed hike. In the current cycle, this would take us until the second half of 2023. Secondly, there’s a still greater squeeze in liquidity to come. The Global Real Policy Rate is still extremely negative and close to the all-time lows of -6% it reached in 1974.”

8. Bridgewater’s recent report titled “How Conditions Today Compare To Past Equity Market Bottoms” also throws doubt on whether this is a cyclical bottom. They write, “The equity bottom typically does not come until 1) there is a meaningful period of easing sufficient to offset the negative economic momentum, and 2) equity prices fall enough that investors are incentivized to move back out the risk curve and buy stocks… When we look at conditions today, the typical markers of an equity market bottom are not yet present.”

Our take… this is a bear market rally. Not a bottom. Rent ‘em, don’t own ‘em.

 A major bear trap has been completed in gold. The measured move target on its large cup-n-handle pattern is 3,000, or 70% above current prices (h/t @PeterLBrandt). You can read about how we analyze precious metals here.

10. Net spec positioning (adjusted for OI) has rarely been more short. And every other time has either marked or shortly preceded a major bottom…

11. Homebuilders (XHB) have been showing impressive relative strength since Spring. This is interesting, considering the perfect storm of negative developments; sky-high mortgage rates, frozen housing market, falling home prices, etc…

12. Typically, when you see things that “Make No Sense” on the surface. It’s a valuable signal to dig in, as there are likely a lot of people positioned on the wrong side of something.

I don’t know what will drive Homebuilder stocks higher here. But I do know that BXC has traded sideways (not down like the rest of the market) for a year. It trades for 3x trough earnings. Debt is termed out until 2029. And the company is buying back a bunch of its stock.

Thanks for reading.

Stay frosty and keep your head on a swivel.

More By This Author: