SEPT 11 - Risk on?

Levels of importance for the S&P 500, Nasdaq, Rates, US Dollar, Oil, Copper.  Is economic activity slowing or not?!

Episode Transcript

Speaker 1 (00:00):
Now here's your chair for my wealth guy, Chris klin. Oh.
Sort of a crazy day in markets, which is not,
I guess so abnormal, but nevertheless that I do a
very quick video slash podcast for you to get some
perspective on where we find ourselves, what it looks like,

(00:20):
and just some of the things that we're focusing on
here as we move forward. I'm going to share my
screens just because it's easier for me to point out
important levels of market movement and confluence that's going on,
not just inside futures and cash markets, but to get
a glimpse into what we continue to see happening in macro.

(00:42):
And when I say macro, I'm just talking about global
conditions as it relates to economic activity, inflation, things of
that nature, and how markets are reacting to it, things
like the bond market, the currency markets, ill commodities, things
of that nature. So let me share my screen here

(01:04):
very quickly, and I will give you some perspective on
exactly where we're at. So let's see here. If I
can get the technology just right, it will be okay.
So here we are with the this is the dollar.

(01:26):
I'll give you a view of the dollar real quick,
just because I talked about macro a moment ago. But
if we're looking at the US Dollar index symbol DXY,
what you can see is that it just continues in
its bearish trend. It is in a trend that over
the past three months, is in a it's just in
a downward movement. You can see it, right. Some of

(01:47):
that could be due to the effect of the Federal
Reserve expecting to cut interest rates. More likely than not,
that's the pressure that it's seeing. Some people would blame
it on them devaluing the dollar by antinuing to liquefy
the system with different forms of monetary easing, treasury buying, manipulation,

(02:08):
call it whatever you want. But at the end of
the day, what we're dealing with is just simply the
fact that we have a bearish dollar, and that's fine.
That doesn't worry me a whole lot, just because there
is also an inverse correlation. And I wrote about this
a little bit in one of my morning notes over

(02:29):
the last week or so, where a barish dollar is
actually not a terrible thing for both stocks and bonds
because it's developed this negative correlation on a very short
term basis and that tends to move into a longer
term cycle as long as the shorter term holds, and
so far it has. So what does that mean. It
just tends to mean that when you get a dollar

(02:50):
down move, it becomes a tailwind to both stocks and
bonds versus a headwind. That's really all that means. Does
it mean that if the dollar goes up, markets go up. No.
It doesn't mean if the dollar goes down, markets will
go up. No. It just taxes a potential tailwind behind
how this whole thing works. So let's flip over real

(03:11):
quick to the SMP just so you can kind of
see what happened today. And what was very interesting is
that intra day, like early right after the CPI report
came out, and the CPI was pretty much a nothing burger.
You didn't have a lot of activity in a lot
of the details. The highest degree of inflation actually came

(03:32):
from auto insurance, which is interesting and terrifying and terrible
all at the same time because most all of us are,
of course buyers of auto insurance, so we got to
deal with it. And intra day, the SMP was down
about one point six one point seven percent. And what

(03:52):
I want to point out is this spot right here,
This spot right here is trend. Right, fifty four four
hundred is trend for the S and P five hundred
cash market. And it got down to fifty four h
six spot ninety six. It couldn't get all that much closer,
but it hit it and it bounced. Now here's what's

(04:13):
interesting about that. That tells us there's some strength behind it.
This great big green bar that you see is volume.
This is a good amount of volume for the S
and P five hundred coming in right. There's nothing wrong
with that. That tells us that was a pretty strong move. Now,
we were one hundred percent invested going into today. We

(04:33):
were one hundred percent invested yesterday when markets were up
forty five bases points. We were one hundred percent invested
the day before that when markets were up one point
one six percent. So we've been invested one hundred percent
over these three cycle days. Our models cut us back
slightly today going into the clothes. Now, does that mean

(04:54):
that tomorrow's a down day? No, it doesn't mean that
at all. It just means that the modeling was signaling
that something was happening within options flows that suggested perhaps
we could see a bit of a sideways to downward
reaction Tomorrow. Tomorrow's the PPI data producer prices. Maybe we
see that producer prices have ticked up a little bit,

(05:16):
and so maybe the expectation that inflation is dead is
not there now Could markets react positively to that? Maybe
maybe markets think, well, the Fed's going to cut rates
harder if we see some inflation. Maybe if we don't
see that inflation, markets don't expect the same rate cuts,
and then you don't get as much of a response

(05:37):
or reaction. A little maddening, right, I don't, frankly care
about any of that. To me, that's just noise. That's
all that is. It literally is just noise, and I
truly just don't care about it. I don't care about it.
I say that flippantly to some extent, but it's not
the overarching perspective that we use to try and position ourselves.

(06:00):
This is what we use to position in our position
ourselves behind the fact that our modeling and coding, machine
learning and everything that gets built into the systems are
what drive the portfolio allocation decisions. And so the fact
that we hit trend on the S and P five hundred,
held it and moved higher under higher volume is a

(06:22):
good sign. Now, this whiteline here, this is what we
call trade. Now. These levels, again, just as a reminder,
are nothing more than the rate of change calculus here
the rate of change of price, volume, and volatility combined
over a period for trade less than a month, for
trend more than three months. And why that's important is

(06:44):
because the rate of change of those things is really
what generates the followers of both trend and momentum. And
so therefore, when we have something like a market that
busts above this trade level, that's a huge indication that
something more likely than not good is happening with price
as it moves higher. Now, that trade level, which you

(07:08):
can see right here, is literally like fifty five hundred
fifty four ninety seven fifty four to ninety eight, call
it fifty five hundred for round number purposes. Right that
now is support. And so if markets pull back to
that support level, it would give us an opportunity for
our more aggressive accounts to add back some leverage. So,

(07:29):
while we were one hundred percent invested into today's move
as far as allocations for equities are concerned, our more
conservative to moderate modeling is never one hundred percent allocated
to equities. Ever, the most that will allocate would be
maybe seventy five percent, and I think going into today

(07:49):
we were about seventy one percent on those more moderate
modeling systems that we use for clients and the most
aggressive accounts. Of course, we'll use leverage when appropriate according
to what we see happening within the confines of the
options market, the flows, the machine learning, all that stuff
that goes into it, right and so ever, since the

(08:13):
S and P five hundred broke down from this trade level,
you know, we've been in a position where we've just
been very very careful about attempting to add any leverage
back in. And the fact that we hit trend bounced
back above on strong volume now increases my confidence that
more likely than not, this market's going to hold up.
But September is a crazy month, you know, September's September

(08:37):
historically just well sucks, especially the back half of September.
It's just seasonally, it just has a terrible, terrible return profile,
and so we want to be cautious with that. The
other thing that has kept us out of leverage is
this here, This is our volatility indicator, and ordinarily when
it spikes like this, it gives us an opportunity to say, Okay,

(09:00):
here's a good spot for us to add back some
of that risk. This is an over sold indicator. It
just is a confirmation of this volatility of increasing some
of our risk. We didn't get up to that spike
and we didn't get an oversold signal. So that's what's
holding me back from our more aggressive, most aggressive accounts
in terms of adding back some of that volatility, or

(09:22):
excuse me, adding back some of that leverage to increase
potential returns. We still have in this bull market months
like October, November, December, which seasonally speaking tend to be really,
really really good. So there's an awful lot of opportunity
for us to do some catch up, for us to
increase returns in portfolios and just put us in a

(09:44):
good spot going into the end of the year. And
so therefore we're just going to be patient and make
sure that we're not jumping the gun or chasing or
doing anything goofy. We're going to be careful about how
we handle the day to day activity in these marks.
Real quickly. I'm going to show you the NAS deck,
And what's different about the NAS deck and tech in

(10:08):
general is the fact that it has not broken above
this trade level. It's close. It literally closed right on it. Right.
It closed at seventeen three ninety five fifty three. The
trade level for today is seventeen four h five eighty nine.
Didn't close above it, right, didn't get an over sold signal,
don't have a top end spike in the volatility metric.

(10:31):
So the NAS deck looks different, right, The NAS deck
is acting different. And some of the biggest players within
the NAS deck continue to be n Video well you
know the mag seven they call them, right, Apple, Microsoft, Netflix, Google,
right on downline. And so therefore we're just continuing to

(10:51):
look at this and say, okay, well maybe we should
continue to be just a little bit cautious. One other thing,
this is an equal weighted S and P five hundred fund.
In other words, it takes out of the equation an
overload of names like Navidia or Apple or Microsoft, things
like that. Right, Obviously, the biggest companies control the S

(11:13):
and P five hundreds movement, and the biggest of the
big is, of course Navidia. So as Navidia does to
the S and P five hundred tends to do. And
so therefore, just a real quick look before we jump
back to RSP. This is Navidia. Navidia was up eight
percent today. That's a lot, right, and it's it closed

(11:36):
above trade. Hey, great news, huge volume today, Hey, great news.
Volatility metric didn't get to the August five bottom but
it rolled over. That's good news. We didn't get an
over sold signal, but it's close also good news. Hmm.
Could Navidia be on the turn now and ready to

(11:58):
spike itself higher? It could, absolutely it could. If it
does that, the S and P five hundred is going
to get drug up with it. But for the time being, RSP,
which is again the equal weighted S and P five
hundred fund, this thing didn't move much. It was up
five basis points point zero five percent. Okay, that tells

(12:18):
me that there were a lot of other companies in
the S and P five hundred that were down today. Okay,
what do I make of that? Nothing yet, right, nothing yet?
It closed at one seventy two twenty eight, barely above
trade at one seventy two ten. Volume wasn't bad, as
you can see here, no over sold but hey, we

(12:41):
didn't get an over sold signal on August fifth either,
when when markets bottomed and it came right down, as
you can see, tested this trend level and bounced higher.
Those are all good indicators for a probability that markets
start the march higher a little bit. Now, could that
go against the seasonality trend of a bad September or

(13:04):
a bad back half of September. Yeah, all that is possible,
to be sure, and so we're gonna be watching very
carefully the S and P five hundred to see do
we continue to stay above trade, do we pop back
down and test this trend level. How do the daily
ranges of price, volume of volatility on a rate to
change basis shift? Will they shift higher? If they shift higher,

(13:27):
then that gives us some confidence that for our most
aggressive accounts, we could potentially add back some of that
leverage and take advantage of the expectation that we get
some higher moves. All that is possible. The big thing
that's happening is next week, and it's the Federal Reserve
deciding what are we going to do, and the expectation

(13:49):
is they cut rates twenty five basis points. I don't
think a fifty basis point cut would be a good idea.
They don't call me and ask me my opinion, but
I think that would tell the market that, whoops, something broke. Now.
Something may have broke anyway, but the Fed's admission of
it would be a really bad signal, I think for
markets in general. So I think we get twenty five

(14:11):
basis point cut and then probably another twenty five basis
point cut at the next meeting, and maybe another twenty
five basis point cut before the year ends. Either way,
declining interest rates into the end of a year cycle
could pop markets higher into the first quarter of next year,
and maybe this gives us a heck of a run

(14:36):
and before it tops out. I mean, look, there are
some serious structural problems in the United States today, and
I think everybody recognizes that, and I don't expect them
to be going away in just the next six months.
We have a debt problem, we have a deficit problem.
We're starting to have an employment problem on the edges, right,

(14:57):
so we've got to be careful of that. So nevertheless,
one day at a time, one thing at a time,
and the one thing at a time right now is
that the SMP five hundred has broken back above trade.
It stayed above trend after testing it. Volume was good.
I just want to see this volatility metrics start to
give me some indication that prices will move higher, and

(15:18):
that tends to happen when it rolls over and heads lower.
You can see here rolled over heads lower, prices go up.
That tends to be what that is. And again, these
are just proprietary pictures of what we deal with every
single day as we try to analyze markets and analyze
what's happening inside global macro at the same time volatility.

(15:39):
I try to mention volatility every day in my morning emails,
and one of the things I try to let everybody
know is that the term structure of volatility is normal
for at least the front month VX one and the
second month vx two. That's this and this so front
month seventeen forty five, second month eighteen seventy it's in

(16:02):
a positive slope. That positive slope is what we call
contango no fun words, right, which tells me that we
are just in a normal relationship for volatility. What I
don't want to see is front month higher than second month.
I'm not worried about third and fourth month being lower
than second month. Right now, that's not something that I

(16:22):
get as of right now worried or concerned about. What
would concern me in the very very near term in
terms of market health is if this thing went into
what we call backwardation, where front month gets up higher
than second month. And so we'll watch it, We'll pay
attention to it. I write it down every day at
the open, every day at the close. We continue to

(16:43):
monitor it through our systems, continue to consider how they
might affect markets, along with our modeling systems and things
of that nature. So jumping over to Vicks real quick,
you can see that it is in a bearish trend
month or more, trending lower on a rate of change basis,
staying below this trend level up here of twenty six eighty,

(17:06):
staying below this trade level here of twenty one to
forty five. That's good. This blue line here and this
blue line here that you see is a day by
day rate of change price volume of volatility indicator that
tends to contain the movement of anything that we're looking at,

(17:26):
in this case volatility. So if it got down to
this level, I'd expect it to pop up some. If
it got up to this level, i'd expect it to
drop some, right, and just kind of trade that way.
So what I want to see is this blue corridor
if you will start to roll over and just head lower.
And then if it does that, it just tells us
volatility is more and more contained. Volatility continues to trend lower.

(17:49):
That usually is giving us some good price action in
global markets. And so we'll again continue to pay attention
to that day by day yield curve. You hear that
a lot these days. Well, it's positive again, right, it's
at seven basis points. You can see it's been trending
higher for a while. We've been in an inverted yield

(18:12):
curve up until this last week for the better part
of two years. That's a long time, longest in history
as a matter of fact. So the fact that we've
had that length of time and now we're out of it,
there's all sorts of noise in the system telling you, yeah,
but when that happens, recession is imminent. Recession is imminent. Well, okay,

(18:32):
I'm not going to believe it until we see it.
And I sent out in my morning email this morning
something that I thought was interesting on what's called the
Psalm rule SAHM, and the Salm rule takes into consideration
unemployment and when it ticks above a certain level historically speaking,
that has indicated beginning of a recession. Well, somebody decided

(18:53):
they were going to look at a different cohort of
employment and they looked at it from the aspect of
the twenty five to fifty four year old age group,
and that age group is not experiencing an increase in unemployment.
In fact, they're experiencing the opposite. So that's interesting and

(19:13):
I think important because those are the higher income earners
of the cohorts of total employment. Okay, interesting, So just
because the traditional Psalm rule has triggered, so to speak,
I'm not so sure that we are in fact headed
towards a massive recession or anything like that. Could we be, yeah,

(19:36):
we could, but so far markets are not telling us
that that's the case. And one thing that tells me
that is junk bonds. So this is a picture of
junk bonds, high yield bonds. However, we want a column
bonds whose issuers have to issue debt at a much
higher interest rate, high yield or junk because they are riskyer, risky.

(19:59):
Your businesses tend to really take it on the chin
when recession kicks in. And so therefore, when we see
a recession really starting to ramp up, how you bonds
do terrible? Well, this isn't terrible. I mean I don't know.
This chart is up into the right. Hmm. Up into
the right means better. Up into the right better means

(20:21):
how you bonds are doing? Okay, So therefore I'm just
gonna look at that and kind of well, move on right.
Interest rates, well, they continue to tell us that the
economic cycle is slowing. Could we have a slowing economic
cycle without a recession, Yeah, absolutely, we still could have
positive GDP data, but on a decelerating basis. So the

(20:45):
bond market has just given us an indication that two things.
One they expect the Federal Reserve to cut interest rates,
and two it's anticipating a slowing economic cycle. That's all
it's saying. It's not saying recession, depression, blow up, market
crash or anything else. It's just telling us things maybe slowing.
So rates continue to be in a bearish trend, signaling

(21:07):
lower lows over a period of three months or more,
and it just keeps trending that way. We own seven
to ten year treasuries. These are seven to ten year yields.
You can see both are in an a bearish trend.
And for our more aggressive accounts, we own twenty year
treasuries and this is the yield for a twenty year treasury.
So it's all telling us the same story. Bears trend,

(21:30):
bear's trade both on a short and intermediate term cycle.
Lower lows continuing to kick in for the rate cycle,
but they're coming off the low end of the daily
trade spectrum, which just tells me we could see a
bit of a bounce, not a big deal. It's still
a bear market in rates. Bond market is still telling
us it's safe to own bonds. And the reason that's

(21:53):
telling us it's safe to own bonds is that the
volatility for bonds continues to pull back and is now
back into bear's trend. So I think that's a good thing.
Last two things and then I'll jump on or jump
off this video and this podcast, and one of them
is oil. I commented in my most recent morning email

(22:17):
that oil continues to be in bear's trend. It's signaling
a decreasing degree of economic activity or demand on a
global scale. Oil is always an extremely good indicator of
economic activity because you can't have economic growth without energy,
and windmills aren't going to cut it. No matter who
wants that to happen, it's not happening. Pay attention to oil.

(22:39):
Oil gives you the best indicator of whether or not
we are in an economic increasing scenario or decreasing scenario.
And oil has been telling us the economic cycle is slowing,
but it's over sold. Volatility metric has ramped to it's high,
it's rolled over, and we got two buy signals. So
I said in my morning email, would not be surprised

(23:00):
for oil to give us a counter trend bounce, maybe
up to this seventy four dollars or barrel level. If
it does that, I still expect it to fail. Now,
if it doesn't fail, guess what we think of something new?
And that's something new would be huh. Maybe there's some
real economic demand happening now on a global scale that

(23:21):
has shifted so far that's not the case. We're just
continuing to see negativity within the oil market, negativity within
within copper. Copper is another great indicator of economic activity.
It's bear's trend, it's signaling lower lows, it's trading below
its trend level, and every time it's gotten close, it's failed.
This is just a picture of copper futures here. So

(23:44):
that basically is the thirty thousand foot view maybe all
the way down to a thousand foot view of what's
happening in global macro and in the specifics of US equity,
bond and commodities markets. And so there's some conflicting data,
there's some conflicting perspective, if you will right. You got,

(24:06):
on one hand, some growth happening inside equity space that
suggests maybe things are better than the data is suggesting.
And then you have things happening in the bond market
and in commodities market that continue to suggest economic slowing.
So can you have both? Yes, you can have economic
slowing without a recession, because remember, a recession would be

(24:28):
indicated by quarters back to back quarters of negative GDP.
We're not signaling that, at least not based on the
being counting that goes on day over day over a week,
month over month, in the landscape of economic data. That
would be enough to bore to tears anyone, And I
don't want to do that I don't want to bore

(24:48):
anyone at all. So that being said, if you have
any questions at all about how we're positioning, what's happening
inside global macro, or what is taking place inside both
domestic and foreign markets, let me know. Shoot me an
email Chris at CAREFROMIWILF dot com. You can call, of
course toll free eight six six five six, or you

(25:10):
can text or call me direct on my direct line
whatever would suit you best. I'm always open for questions.
I'm a terrible mind reader, so please if there is
something on your mind and you want to chat about it,
or if you want to get more detail about what
we see happening and why, by all means, please let
me know. Until then, I hope you have an amazing

(25:30):
remainder of you week, a very blessed weekend, and enjoy
what looks like a little bit more summer for us
northerners up here in the Wisconsin' zip codes. For all
of our southern friends, grinn and bear the heat. I
guess right. Okay, won't be too long and I'll be
wishing that we had that up here. All right, we
have a great day, God bless take care,