The SP500 has hit 3800 points in short order.
Our expectation was to see a correction after hitting the 4100-point target and see a resumption of the uptrend off the 3800-point support level.
The correction over the last couple of weeks has been strong and has not yet shown signs of reversing yet on the shorter time frames. While the recent weakness could be a mere gap fill and counter-trend move, the violence of the weakness could delay the short-term upside.
While the market could very well reverse off current levels (3800 points is strong support), our tactical buy-the-dip strategy revolves around waiting for momentum to slow before considering the current posture an objective buy-the-dip entry.
We’ll be watching if this type of setup appears in the coming days.
Downside momentum remains too strong to make the call of a short term bottom, however, there are some signs that the correction in stocks is likely to reverse.
The VIX (volatility index of the SP500) has been coming down over the last few days despite the market also moving down. This is typically a positive sign for stocks.
Volume on SP500 futures has also been coming down during this recent correction. This is unlike previous down moves we’ve seen.
The recent market weakness have been primarily a product of yields moving higher, similar to previous declines we’ve seen throughout 2022.
This move in yields is being fuelled by recent announcements from the Bank of Japan regarding a shift in their yield control policy. Japanese yields have moved higher significantly leading to more competition across global yields.
Yields are in short-term bullish momentum which could contribute to some additional weakness in equities. That said, we don’t believe this significantly impacts the general macro environment, we expect yields to reverse down soon and bond prices (TLT) to resume their uptrend.
The BOJ announcement has also contributed to a weaker USD this week.
This is within our expectations as the Fed’s runway for hiking rates is much smaller than other developed markets like Japan.
A weaker USD over the next few months should be a tailwind to corporate earnings and should relieve pressure off non-US stocks.
We expect lower bond yields to continue driving valuations higher in the coming months as the market begins to price in a more dovish Federal Reserve looking past their recent comments.
In their last meeting, the Fed reiterated their hawkish stance despite the recent cool inflation data, this has contributed to the recent market weakness. However, inflation coming down rapidly (as we believe it is) should make the market look past these comments.
As long as SP500 earnings hold up, it leaves room for the stock market to continue appreciating.
The recent weak retail sales release has led to some concerns regarding earnings contracting (potentially contributing to the second phase of the bear market). While this is not our base case, we are on the lookout for when the “window of opportunity” closes and our allocation to TLT represents our hedge against this type of event.
In the event that an earnings contraction does occur (as a result of a recession), treasury bonds (TLT) should appreciate significantly.
TLT has been pulling back as yields moved higher over the past few days. Investors expecting a recession to occur imminently can look to use pullbacks on TLT as opportunities to accumulate the hedge.
The treasury bond portion of the model portfolio gives us a cheap hedge in the event that unemployment begins to move higher and SP500 earnings contract (recession)
The USD’s recent weakness has contributed to an outperformance of Silver. The metal has already seen quite an impressive run and could be vulnerable to a short-trerm pullback off resistance.
Silver is one of our key bets on the USD’s weakening in the months ahead. So far, this bet has outperformed the SP500.
Our macro target remains around $27.
As we’ve previously highlighted, we prefer Silver over Gold in this current macro environment.
The Gold/Silver ratio continues to trend lower.
Copper miners (COPX) also represent a cheap bet on a weaker USD. Free cashflow yields (valuations) of COPX make it an attractive bet to make, more so than Copper itself.
Copper miners have outperformed since their addition to the model portfolio.
Similar to Silver, they’ve had an impressive run over the past couple of months and could be vulnerable to a short-term consolidation to retest its key moving averages.
The technical structure on COPX has significantly improved as price has moved back into the 2021-22 trading range. We expect that pullbacks should prove to be attractive buying opportunities for investors looking to take advantage of a weaker USD.
Copper’s appreciation also depends on the success of the Chinese reopening. So far, the reopening has been successful leading copper higher.