Market Briefing For Monday - May 2

The 'Crash of 2022'  has actually been an over-year-long process; delayed by the facade of 'buybacks' and institutional cheer-leading (ETF concentration as well) of 2021 (as the largest historical insider selling against that backdrop was ignored by most commentators) to become visible in the handful of most prominent mega-caps (the 'Generals' as I termed them); most recently. Most smaller stocks, 'Troops' I call them, have been in the trenches for near a year.

So this is not news having the S&P cave in; but finally money managers start to question the wisdom of concentrated in those pricey stocks; hence the panic especially if they are leveraged (most hedge funds are). That's capitulation; it can be a sign of washout lows; but coming from insane high; it's a process.

The only surprise in all this is that it hasn't happened sooner. Perhaps it took a war in Europe and cockeyed central bank policies resulting in beyond strong Dollar behavior, which we've been bullish on for years; but is parabolic to the detriment of many global economies at this point; even if their exports tend to be cheaper with these currency shifts.

The Amazons, Googles, Nvidias and so on were overpriced for a long time; and that includes the time cheerleading was dominant while insiders in all of them (including Facebook and even Microsoft and Apple) were busy selling. Although the majority of the market is just easing from an 'absence of bids', I have and again note the distribution structure of the S&P. In a sense this is a 'Head & Shoulders' pattern dragged-out over the 2021-2022 time-frame so far (thus things are not 'so bad that it's good'; although we've more that way).

It's easy to suggest the year's second half will be better than the first; because so much has been drained from markets, the action can reach for a low (possibly my oft-mentioned target of more or less ~ 3800 S&P wasn't outlandish). But it is essential to say that depends on the background, the geopolitics, and 'war'. If an 'event' (such as Russia going nuclear; as much as others dismiss it as a possibility) occurs; then there's nothing more than a technical measure for the idea of ~3800; such an occurrence by the 'thug' could take S&P lower too. For now there's not yet anything to take it sustainably higher; but that can change as well (like ceasefire; or serious rapprochement with China, as seems tricky.)

To be bullish or bearish here has less to do with the Buffett standard line you'll hear of 'don't bet against America' (and don't); but more to do with bet on how the war will go and what the increasingly crazed leaders in the Kremlin and in the 'Forbidden City' will do. Personally I was dismayed by China coming forth with a statement advising 'nations' to realize there are only two countries that 'rose above the trite politics of the post-WW2 era'; meaning Russia and China (of course that's ridiculous; actually they are closest to emerging us in a war).

Yes, I saw a plus (or a desperation move) by President Xi to 'free' about half of Shanghai's residents to emerge from lock-down; but a minus as rumors of a ramping-up to harass Taiwan, surfaced yet again. Even heard speculation a Chinese attack against Thailand could occur. Hopefully just alarmists; but you never know for sure. And that's almost core to this now; it's existential events or the proverbial 'black swans' I tended to use as a concern a year or so ago. We have is a flock of 'black swans' but Russians are acting like 'buzzards'. I'm actually stunned at the behavior of 'certain' Russians who were eloquent, are educated, and should know better than swallow 'gangsta' Putin's propaganda.

That's not to say the market, measured by S&P, will go up if it doesn't go down. It says the market could or should exhaust on the downside if given the backdrop to do so. Hence the idea of a '2nd half of 2022' better environment depends on how the geopolitical and global financial scene unfold. Absent that knowledge the technicals and charts, or even prior historical comparisons, are just that.

In sum: It doesn't matter if analogies to the past matter or not; or whether or not there's an equivalent to our 'Epic Debacle' of 2008 in the Nasdaq now. In a sense 'negative real interest rates' combined with the 'bubble in mega-caps' over the past year, not to take stocks too low among the big stocks; but rather they just got too high, which has been the theme of my 2021-2022 warnings.

The 10-year Treasury should be higher; and will be if we don't drop into worse economic conditions dramatically; and if we don't get into direct war with Putin and 'if' China behaves rationally (which watching Putin should enhance doing so). We would be reluctant to take on heavy commitments (have felt that way especially about selected metro real estate for awhile now; and it's crazy).

Of course the risk goes down with lower prices; but that doesn't help the funds or investors who were fully loaded and ignored building risk for over a year. In essence we finally have the much-trumpeted 'catch-down by Generals to join troops already in trenches'; however there's insufficient price discovery for the majority of big-caps to engage in buying such still-expensive stocks.. and that means especially expensive for the backdrop domestically and globally.

Huge mega-cap disappointments were the trigger to accelerate lower Friday, in the continuing process of alternating rallies and purges for S&P / Nasdaq. Amazon set the stage; Apple talked (only logical) of China-related short-falls due to the supply-chain issues; and really all of this shouldn't be surprising; it is just that most big players were loaded at high levels in both issues and very similar extended stocks; so trap-door effect. Next week could be different; but again beware (as this past week) of relief rallies that are no more than that.

The ingredients for washouts and rebounds are presenting going into the new week; but they were present before now. I think our observation of a probable series of these moves is not surprising; nor our thinking S&P ~ 3800 realistic for now with intervening bounces; nor defensiveness ahead of the Fed next week; with a lot of stocks just slightly bleeding lower as this pattern evolves.

Pundits may speculate about Americans abandoning Chinese internet & tech stocks; but actually the PBOC is joining with the BoJ to try to stabilize policies that have weighed heaving on their markets (and currencies); while maybe it's now the USA, where investors have abandoned first the pandemic theme and then gradually the 'grand dames' or our markets; reducing most of them down to mere trading vehicles; not anything investors feel comfortable in.

This is what we've tried to warn against for over a year. Now; few well-known major companies are attractive to own for those who bought them 'too high' in the former bullish cycle. However some creamed sizable companies are now getting into price areas that 'should or could' make them attractive and allow a greater focus. I've identified a few that may fit the bill.. Intel, Ford (we already own but as it gets closer to the entry of 12 new readers may eye that one too) and Texas Instruments will be among those; probably Qualcomm too. As for an Apple or AMD, which we own these from dramatically far lower levels and sold tranches on strength (again proving that it's hard to nail a high but not so hard to recognize excess); so might be inclined to add back portions; not yet.

Think back to themes I described year ago; S&P price-excess was engaged in an 'overrun' above fair valuation at the time. Well if that was an 'overrun' at the time; the big stocks are not really back to what might be called normal or fail valuation yet; much less any resemblance to a true attractive or oversold valuation. That's the major rub for now; we had a solid decline that engenders bounces; but is there real value in mega-caps? We think not, at least not yet.

S&P and NDX gets smacked aside-the-head because is not real capitulation; just trading-basis capitulation. All the arguments abound; but the fact is these remain generally overpriced stocks; and that's why rebounds lack traction. So that will change; but unless we crumble hugely before FOMC, not just yet.

Half the Nasdaq was down over 50% 'before' this week. Keep that in mind as you hear how brutal today was, or the week, or the month. True nonsense I say to the pundits proclaiming this 'as if' it were new; because these were the 'grand dame' stocks the Street was 'hiding in', from a lack of confidence, not because those pricey stocks were invincible. They thought they could get in or out with ease; and that's why I noted how so many had similar patterns; many were vulnerable to the 'trap door effect'; and the traders use similar algorithms which also created the nearly-simultaneous breakdowns and relief rebounds. It all culminates (or should) with understanding the world change; and most of those big stocks were never worth nearly what they were priced at. Sill so in a great many cases, which means.. more price discovery action is needed.

One more thing: Energy. Companies like Chevron are doing fine; but despite analysts suggesting Oils are 'cheap'... they are a crowd that got into Oil late. I note Chevron has production up 10%; guidance was good and that's fine, but it is the reward for those of us in it from at least a year ago. Short-term energy stocks are acting a little toppy but it can remain a continued investment longer term; provided an investor owns it from considerably below current prices.

Of course multiples look good with insane WTI over 100/bbl. Fine; however it likely won't stay there really long-run; that's why the multiples aren't relevant. It has doubled in a year and taking something off the table is reasonable; so a buyer a year or longer ago plays with house money. But the dividend is good; the profits may go up more for an odd reason (insurance on production going away next year or at least fewer underwriters... that will curtail drilling more if it happens... Allianz stated today 'they' won't write coverage starting in 2023.)

Bottom line: there are plenty of impediments to earnings and optimism going forward. However the 'nothing but hawkish' views of the Fed can shift rapidly, 'if' situations in terms of domestic recession; or for example 'an urgent military mobilization', necessitate the Fed moderating the presumed path belatedly set.

Too many technicians and pundits are measuring this market by percentages off the highs; but those highs were never logical for the S&P or most big tech stocks. If just looking at the behavior it's reasonable to say one more flush-out after the FOMC might be the set-up (or like last time a day before the Fed); at the same time the problem remains 'if' things remain globally in quandary; we can also see lower S&P levels that would make more sense.

This is an excerpt from Gene Inger's Daily Briefing, which typically includes one or two videos as well as more charts and analyses. You can subscribe for  more

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Alpha Stockman 2 years ago Member's comment

Good market review.  Covering everything I need to know.