I hope you enjoyed the bear market rally. Because it’s over now.
Or at least according to Morgan Stanley’s Mike Wilson it is.
“While Q1 was rough for most stocks, the second half of March was exceptionally strong,” Wilson wrote, in a Monday note. He called the rally “predictable from a technical perspective,” but said it was “always a bear market rally” in Morgan’s view. “Now we think it’s over.”
On Friday, I suggested that if one was comfortable comparing apples to oranges, the ISM apple has now fallen a considerable distance from the equities tree. In the same linked article, I noted the obvious: The inventories gauge moved higher, while new orders plummeted, a potentially inauspicious development.
Wilson underscored both points. The figure on the left (below) shows the new orders gauge now below the inventory component for the first time during the post-pandemic expansion. “This book-to-bill proxy for the broader manufacturing sector suggests meaningful downside to the headline ISM over the next few months,” Wilson warned.
The catch-down implied by the left-hand chart “does not bode well for the S&P,” Wilson said. His annotations (figure on the right, above), suggest the benchmark “should” be at 4,000 today and could sink as low as 3,600 over the next two months.
As regular readers are well apprised, the rally was predicated on flows and positioning. “The equities recovery has been ‘funded’ on three fronts,” Nomura’s Charlie McElligott wrote Monday, describing the bounce as the product of, “i) the liquidation of crowded, short-dated index / ETF option downside hedges as spot rallied [and] vol was hammered into a massive ‘positive delta’ thrust around and out-of March OpEx, ii) the ensuing impulse re-allocation of longs from systematic funds, and iii) the resumption of highly-speculative retail ‘YOLO’ing’ behavior via the options complex.”
Some of that may have run its course, although as McElligott went on to note, the S&P “remains relatively stable from the options dealer hedging flows perspective.” That matters. In fact, there’s a sense in which it’s one of the only things that matters, depending on the circumstances.
For Wilson, though, the situation admits of little ambiguity. “[The] differential between the ISM orders and inventories components leads the headline index,” which in the current conjuncture, “suggests the S&P 500 has another rough month(s) ahead,” he wrote.
The “bottom line,” he went on to say, is that although “the rally in stocks over the past few weeks has been remarkable,” Morgan’s view is that it “had all the characteristics of a bear market rally.” Wilson called month- / quarter-end “the perfect spot” for the rally’s demise.
There’s no doubt that absurd volatility will be part of our whipsawed lives going forward, and thus no shock whatsoever that a financial analyst would sprinkle a trail of honey laced cocaine in front of fearless speculators that are addicted to pandemic jolts.
Broken markets and broken metrics will fuel this age of information overload and misinformation and the concept of valuation will obviously become more and more irrational and exuberant.
In this world of alternative liquidity there’s no better place to look for weird clues, than the tip of the DTCC iceberg, where one can examine US Treasury settlement fails.
Settlement fails during the Lehman failure were about $2.7 trillion. Essentially, all these financial gurus misplaced or hid their collateral and ended up in a panic searching for cash as fire sales overwhelmed global liquidity.
It’s utterly stupid to put out the massive surge in settlement fails going on lately, but, as a footnote, it’s interesting to point out, that after the GFC, the Fed created some structural limitations to how to manage this instability.
The Fed won’t allow their trading desk to conduct agency MBS coupon swaps during periods of “prolonged fails”.
This is a plumbing issue better left to plumbers like Zoltan, but he’s busy with engineering new solutions for next generation toilets. Maybe he’s already examined the tip of the DTCC iceberg and the magnitude of what lies beneath?
These mysterious fails are sorta like a car title that’s been duplicated on a high speed copy machine, and 1000 different people each think they own a car, which never existed. The world of repo collateral is as insane as this analyst that’s screaming for people to buy…
This Bermuda Triangle from Fed is too fun to not post. Maybe it means the market is either a buy or sell?
https://fred.stlouisfed.org/graph/?g=NTN9
Ask Jeffrey Snider what he thinks.
Rarely do we get such a clean prediction as indicated by the article. I like clean breaks. I took long strides toward the sideline Friday, and was honestly perturbed to see the Tech rally this morning. That AAPL increase of 2.37% in particular grinded my gears.
What, is Musk going to run for prez now.