SEPT 28 - Is this market really bullish?

Amidst all the election and war negativity, there are some very big issues likely to propell this market higher.

Episode Transcript

Speaker 1 (00:00):
This is Care for My Wealth with Chris Kline of
Capstone Wealth Managements, your fee only investment firm. Now here's
your care for My Wealth guy, Chris Cline, Well and
happy Saturday. I figured I would give you a quick
video tutorial Hereskeu's the technical difficulties with camera typical for me,

(00:24):
technical difficulties any rate. There's not a ton going on,
but there are things happening underneath the surface that I
think continue to either surprise or confound a lot of people,
especially those who are hyper fixated on the current economic

(00:45):
the current economic conditions that people see right, so inflationary,
unemployment starting to tick higher, all sorts of stimulus that's
hitting China. Of course here in the United States with
interest rate cuts, and most of the time when we
see stimulus starting to get pumped into the economic cycle

(01:08):
from various central banks, has a hint that maybe something
isn't awesome, and that's usually true. I mean, if they're
loosening up economic conditions by cutting interest rates or in
Chinese instance, cutting reserve ratios and lending requirements and things
of that nature, plus putting money into the system, then

(01:29):
something's wrong. And I think that's probably true. In China,
I think that they are experiencing, at least based on
the data that we have available, some serious problems with
their real estate market. And while their pockets of problems
here in the United States, inventories of course continue to
accumulate in places like Florida, some pockets of Texas. So

(01:50):
of course, you know, like anything, it's not without its problems.
It's not without conditional issues along the way. But we
need to remember that stock market it's function a little
bit differently than sometimes what we can see. And so
what I wanted to do is just kind of go
through some of the very basic things that we're seeing
and then more importantly the things that our flow models

(02:12):
are continuing to identify. And you know, as you know,
we look into deep market cycles on a day over
a day basis. We've got algorithms built that helped to
speed up the recognition of what's going on inside market activity,
specifically within the options market, and how that is affecting
the cash market, which of course would be things like

(02:34):
the S and P five hundred or the Dow Jones
Industrial average, things that people see when they look at
quote the market every day, and of course things that
we see are a little bit different, not too uncommon,
but it is what it is real Briefly, on Friday
of this past week, my email had to do with

(02:55):
a few basic things. One cash on the sidelines, two deficits,
and then three margin debt. And I know those might
seem fairly obscure and perhaps not connected in any way,
but stock markets look at things different, and I would
just caution anyone who's overly concerned or worried at least

(03:20):
currently about the election cycle. You know, that's a big
deal right now. It's on everyone's mind, and I mean,
you couldn't have two different candidates for a presidential cycle
than what we have right now, and I think that's
hugely important for us to recognize and understand specifically how
it might affect the economic cycle, the taxation cycle, the

(03:45):
job cycle, the immigration cycle. I mean, there's all sorts
of things to consider, and they're both extremely different. But
markets are more concerned with flows of money. What's happening
to the money, where's it going right, how is it
affecting the cash positions? And so I'm just going to

(04:09):
share my screen with you, like I tend to do,
to try and give you some glimpses into exactly what
I'm looking at and exactly what I'm seeing. And so
I'm going to just start out with Friday's email that
I sent, and you can. I don't want to belabor it,
because you can go back and look at the email
if you missed it, and I would encourage you to
do that. But this is just a brief picture of

(04:31):
money market funds, and you can see from twenty twenty
one through today, it's a massive increase of cash on
the sidelines, right. And so one of the things that
I often say is that a hedged market rarely boils over.
And that comes in a few different forms. It comes
in cash in the sidelines, and it comes in something

(04:52):
called premiums that exist in the options market. Right. Implied
volatility is something that you'll hear me say a lot
implied volatility. Premiums suggest that there is a lot of hedging.
In other words, put buying. Someone would buy a put
if they want to buy insurance on a position that

(05:13):
they own or a market that they're investing in, like
the S ANDP or something like that. If that market
goes down, that put option becomes more valuable. And so
put options create an environment where dealers have to in
essence do the opposite, right, And some of that has
to do with how all sorts of Greek letters in
the options market function. And you've heard me talk about
gamma and things like that before, so I don't want

(05:36):
to go there, but I just wanted you to see
and understand the amount of cash that's on the sidelines.
Some would say, oh, well, that's all an effect of
the election. Everybody's afraid. Well, I don't know if that's true.
Then that had to have started in December January of
twenty twenty two into twenty three. I mean, you can
see a pretty big jump in that cycle here, right,

(06:00):
so you know, I mean March was a huge jump
in twenty twenty three. And nevertheless, you can't blame this
on China, you can't blame this on the election. You
can't blame this on much of anything other than for
whatever reason, people accumulating a tremendous amount of cash in
the sidelines. And so again you hear me say, a

(06:20):
hedged market rarely boils over. Well, this is one of
the reasons of hedging lots of cash. Another form of
hedging are those implied volatility prems that I talked about.
The other issue within Friday's email was deficits. And you know,
obviously we have huge deficits, and civilly speaking, that's a problem,

(06:41):
and I recognize it. But spending seven percentage points of
GDP more than you take in is actually extremely bullish
for the stock market and for businesses. And again, as
I wrote in my email, that doesn't mean that it's
a good thing. It just comes to recognize that when
you have that much of a deficit situation, it tends

(07:02):
to push markets higher. And I mean, you can see
what happened all the way back into the forties. You
can see how these bumps in deficit spending popped up
and created an environment where markets took off. So I
would suspect, and I would suggest that we are entering

(07:22):
into one of these global liquidity cycles. And you can
go back and review one of the emails that I
sent a number of weeks ago, and it actually showed
you a global liquidity cycle scale of what's actually happening
right now and where the trends tend to move. And
we're literally just starting a global economic expansion cycle or
a global liquidity expansion cycle. And no more clear is

(07:47):
that scene than what we've got going on right now
with the Federal Reserve cutting interest rates and with the
Chinese literally throwing the kitchen sink at everything. And I
do think there are some serious differences between China and us.
Their real estate market is a train wreck. Their one
child policy that they held for years and years and
years is creating a massive demographic problem, and they're recognizing that,

(08:13):
and I think that they're taking steps to try and
correct it. But you know, that doesn't happen overnight. That
stuff takes a long time. And so China is a
very very different scenario than we are here. And also,
one of the charts that I shared this week in
my morning emails showed the difference just as an example,
between India and China in terms of investing in their

(08:35):
market since nineteen ninety three, and the difference is stark.
I mean, it's dramatic. China is well has been a
terrible place to invest compared to either India or in
fact the United States. So that's that the last thing
that I wanted to point out, just in terms of
how a market structure is structuring itself or pushing itself

(08:55):
into a situation where there's a lot of bullishness underneath
the surface of what we see going on, So a
lot of cash in the sidelines, hedge markets rarely boiled over.
We've got implied volatility premiums on major markets. We've got
a situation where there is serious deficits bending, which again
has problems of its own, but the problems don't manifest

(09:15):
themselves in stock markets. And the last one's margin debt,
and what we can see in margin debt is a
dramatic drop. Now what is that called. That's d risking.
That's a situation where investors, hedge funds, major institutional investors,
people that invest with a tremendous amount of firepower have

(09:39):
d risked, have slowed down, and margin risk coming down.
D risking, as we call it, that has gone on
here recently is actually one of the largest since October
of twenty three last year. Now, what's interesting about that, Well,
what's interesting about that, of course, is that October or

(10:00):
twenty twenty three happened to turn out to be the
low in the bear market cycle. And so I think
that that's an important thing to consider for people who
are concerned, worried, or nervous about how the election may
or may not be affecting things. Remember, markets don't necessarily
get too wrapped up in the election process, and I

(10:22):
know the pundits will tell you differently. I know it
will feel different from time to time, and certainly when
you have a difference in candidates like what we're experiencing
right now, there is a fairly large potential economic impact
between the two. So I'm not saying that the election
doesn't have an effect. It can and it probably will. However,

(10:45):
these things are bigger, right, lots of money coming into
the system from FED rate cuts, lots of money coming
into the system from China literally flooding their market with
cash and rate cuts and lending capacity and all that stuff.
And then of course the reduction in margin debt, the degrossing,
the implied volatility premiums, all the stuff that I've talked about, right,

(11:07):
deficit spending, YadA, YadA, YadA. So how does it manifest
itself in markets today? Well, this is a picture of
the S and P five hundred and very quickly, I
just want to show you where important levels of support lie.
And again, when you hear me say that it's price
volume and volatility over a period of time that is

(11:27):
viewed via rate of change. Right, So this white line
is price volume in volatility on a rate of change
basis for less than a month, and this big green
line here is the same thing but for a period
of time of three months or more. And those are
important levels because this is where momentum tends to pick up.
So momentum players and markets tend to be buying at

(11:49):
this level, and then trend followers tend to be buying
at this level, which is why when that level breaks,
it becomes well pretty important and in many cases problem
for markets. And so that's where our flow models on
a day by day basis tend to pick up some
risk levels and will either gross up or gross down
around those areas, depending upon how the flows are coming

(12:12):
in and how the options market is functioning around it.
Right now, what we can see is that the market
is not over bought. We would see big green bars
down here if it was. Momentum is strong, but it's
starting to get a little potential topy. If I see
a red bar with this little plus here, our systems

(12:34):
would suggest that we could see momentum slow and if
that were to happen, Then we could see markets pull back.
Where would I expect it to stop this first level
right here, fifty six to twenty five ish. The next
stopping point would be fifty five forty right down in here.
Will that happen? No idea. Obviously, there are some catalysts

(12:55):
that come up economically. There always are. We have a
situation right now where GDP is not decelerating. In fact,
it was actually revised higher on a quarter over quarter
basis recently. GDP now projections from the Fed are not decelerating.
Inflation is very very slowly starting to come down. We're

(13:16):
experiencing some changes in some of the commodities. So we
could see a situation with past September. So the October
November data would not surprise me to see inflation start
to re accelerate. And that's a function of what we
see happening in things like oil and copper. And so

(13:36):
I'll show you real quickly oil And you might remember
emails that I was writing back in here on September
tenth and eleventh that it wouldn't surprise me to see
oil bounce up to this trade level again. Rate of
change of price, volume and volatility on a period of
less than a month, and at that time that number
was about seventy three seventy four, And look what happened.

(13:59):
It's not magic, just math, and it's just how markets
work when there are momentum players in the system. And
it came right up to that level and it failed,
and it failed pretty hard. So that's interesting. Now it's bouncing.
Wouldn't surprise me to see it hit this level again,
which is now down to seventy one and a half
per barrel. And if it does and it falls, okay,

(14:21):
that tells us that not necessarily that the economy is weak,
but it's not telling us that the economy is strong either.
If it breaks above that, then it's reading inflation is
starting to reaccelerate again. And so far oil is not
saying that. Copper, however, is saying that. And you might
remember again in previous emails, I said that, hey, if

(14:43):
copper breaks up above, sorry, I'm going to give you
the futures number here. If copper broke up above this
level of about four twenty seven, we probably are seeing
copper starting to identify that there's potentially a reacceleration of inflame.
And it's interesting that it popped above that level right
here mid September, and it's moved up pretty hard, you know.

(15:07):
And again our systems are suggesting some cell levels here
for copper momentums getting a little toppy, not overbought. Momentum
has slowed dramatically. So you know, that's what you get
when you have this big of a run in a
futures contract like that. And you know, so it is
what it is. Let's look at interest rates real quick,

(15:27):
because those are valuable for those of us who are
bond owners and think that the bond market will continue
to do well. The bond market is signaling economic slowdown.
And here's the yield cycle. When yields are falling, it's
telling us, at least in the long term yields ten year,
twenty or thirty year, it's telling us that more likely

(15:48):
than not, the economic cycle could be slowing a little bit.
Now here's what's interesting. The ten year treasury yield is
now four days above this trade level. I like to
give it three before I say there's potentially this is
a big potential a potential phase transition. The phase transition
would be that it hits this trade level again. Down

(16:09):
here for the ten year treasury at three sixty seven
and then bounces higher. If it bounces higher and stays
above this trade level, there's a really good chance that
all of a sudden, the bond market is reading economic
growth is starting to happen. And that's interesting because it
would be consistent with what fed GDP now data is saying.

(16:31):
It would be consistent with what some of the earnings
numbers are saying out of a number of pretty big companies,
and you can go down the list of those, but
Micron is just the most recent example, simple mu that
had some really good things to say about their earnings,
and of course the important semiconductor cycle, and of course
the all important big Navidia, which interestingly just moved back

(16:53):
to bullish trend this past week. And so those are
all things that only happen when you tend to be
on the cusp of a phase transition for economic growth.
The twenty year treasury looks like the tenure same thing
right now. It hit trend and failed, so it's still bearish.
The bias for the tenure and the twenty year treasury
yield is still to the downside. So we're just gonna

(17:16):
We're gonna do what it says. It says bearish yields,
that means bullish bonds. So we're gonna maintain our bond
position until yields are no longer bullish. That's just the
way you do it. Same thing with equity markets. You
stay with the trend until the trend is no longer
your friend, right until it moves into a bearish condition.
And right now it's a coin toss, it really is.

(17:38):
So the market's trying to figure out is inflation really
decelerating or is inflation reaccelerating. Is growth accelerating or is
growth decelerating? And right now we've got kind of a
Goldilocks where we've got inflation decelerating and we've got growth
slowly accelerating. Now it's not burning the barn down, but
it's happening. And so when you look at the data,

(18:00):
count the beans on a week over week, month of
a month basis, you're finding a situation where you have
this sort of a Goldilock scenario. Now, now, if growth
we're starting to roll over or slow down and decelerate
on a noticeable basis, will that be stagflation? And it
wasn't that long ago where it very much looked like that.

(18:21):
But oil failing where I showed you is interesting. That
starts to cause me to believe that maybe stagflation isn't
the more probable outcome, but maybe this Goldilock cycle is
more of a probable outcome. Through Q four, the thirty
year yields, which of course are very important to mortgage holders,
and of course ten year yields too. The fact that

(18:42):
all of these fail that trend is important and valuable.
And of course volatility for the bond market is bearish.
So when volatility is bearish, when yields are bearished, that's
bullish for bond prices themselves. And when you have that,
like I said, you just stay with it and you
just keep moving forward. And that's that volatility. Volatility just

(19:06):
keeps getting squished. Now, this is the VIX index. You
want to look at the VIX index in points. You
don't really want to look at the index in percentages.
And I know most of us would look at things
in percentages for market purposes, and that's true, you typically
want to do that, But with the VIX index, you
look at it in points. Right now, the trade levels
at nineteen spot forty three, what do I think, I

(19:28):
think it hits that and fails and we see volatility drop. Now,
the volatility structure is going to change this next month.
It's been like a wet blanket holding volatility down throughout
all of September, and you can see that manifested itself
here as it just hits trade and falls and hits
trade and falls, and it just keeps going. If it

(19:49):
pops above trade, then the first stop is going to
be trend at twenty six. Could the market go up
with volatility up? Yes, it could. Can we be in
a situation where we get a spike in volatility that
causes a bit of a freak out like what happened
on August the fifth, which is back here, or on

(20:12):
September the sixth, which is right here. And the answer
to that is yes, both of those situations could happen.
And the main reason why that's possible is that the
vic's term structure is in what we call backwardation. Front
month is above next month. Now is that a problem?

(20:35):
Not right now? But if that goes on for another
three or so days. Right now, this is the eighth
day of backgradation for markets. This isn't normal, right, It's
like a yield curve that's upside down, where short term
interest rates are paying more than long term interest rates,
which we were in for the longest of time, longest
in history. In fact, we're out of that now. Is

(20:57):
this a problem? It's not yet, but if we get
enough three or four days of this, then it could
be a scenario where this VIX index pops higher, scares
the pants off of people, hits trend, and then falls
apart again. If that happens, and I don't know that
it will, and you just never can tell what markets
are going to do, but if that were to happen,

(21:19):
I would suspect our flow models would see it coming
for what was happening in the options market, and we
would start to degross a little bit, which we did
slightly on Friday, and then we'd be able to gross
up on a sellof and the first stop I think
would be again this trade level for the S and
P five hundred. If it came down to this trend level,
we would definitely put leverage back on for our more

(21:41):
aggressive accounts. This is an area where we would absolutely
want to buy into it in a fairly heavy way,
I believe, at least based on all the other things
that we were seeing, Like I said before, you know,
implied volatility, implied volatility, premiums, the cash and the sidelines

(22:02):
that you know again, with interest rates getting cut, that
cash is going to get treated less well. And look
at I've always said money goes where it's best treated.
If interest rates continue to drop, which we know they will,
the Fed has tipped their hand, They've told everybody what
they're going to do. In fact, the FED fund's futures
markets are now at a sixty chance of a half

(22:23):
a point cut in November. That's way higher than what
it was right after the last fifty basis point cut.
So we'll see how that goes, right, We'll see if
whether or not that happens, But that cash is going
to start getting treated less well, and that's more likely
not going to force people into the market. It's going
to force them somewhere other than sitting in cash. And

(22:45):
that's not a good or a bad thing, it's just
what it is. And so we're going to wait for
our flow models to tell us what's actually happening underneath
the surface of price. And then lacked on it and
again the margin debt issue, the deficit spending going on.
Of course, all the uncertain that is existing currently and
continuing with Russia, Ukraine, Iran, Israel, has Belah, the Whostas,

(23:08):
the you know, you name it. I don't even know
how to pronounce some of these things, but they're out there.
And then, of course, of course the massive uncertainty that
is rolling about like crazy here in the US with
the election. A wall of worry is important for the
equity market, always has been, always will be. Markets climb
a wall of worry doesn't mean you don't have some

(23:30):
days to create worry for people that are hyper focused
on nothing but all those worries, but those tend to
be buying opportunities, and those tend to be situations that
we can take advantage of. And so we're going to
see if it is a buying opportunity. We're going to
rely on our flow models to pick it up, identify it,
and we'll move on it, and we'll pay attention to
these levels that I just got done showing you a

(23:52):
moment ago, and with that I will sign off and
wish everybody a fantastic remainder of your weekend. Again, if
you have any questions about any of these kinds of things.
If you have any questions with regards to your accounter portfolio,
then you reach out to me. I've commented a million
times if I've commented once that I am the world's
worst mind reader. So if you want to chat, please

(24:14):
reach out to me. Chris at Carefromiwealth dot com. You
can call us toll free eight six six five nine
six ninety eight eighty six. Each of you, who I
am blessed to work for as clients, have my cell phone,
feel free and use it. If there's something on your mind.
I want to get it answered for you and help
you work through what's happening in this current cycle. So

(24:35):
that's that, and again, thank you for tuning in, thanks
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(24:57):
as well. Care for my Wealth dot com. Thank you
so much for let's I mean work for you. I
appreciate it. God bless you have an amazing, beautiful remainder
of your week