To The Moon

In this article I have updated those 12 charts + provided fresh comments. $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ(.IXIC)$ $Invesco QQQ Trust-ETF(QQQ)$ $Nasdaq100 Bull 3X ETF(TQQQ)$ $Nasdaq100 Bear 3X ETF(SQQQ)$ $NASDAQ 100(NDX)$ $DJIA(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$

1. The Monetary Wall

A series of confounding factors (cost relief, fiscal stimulus, consumer cash, strong services) have out-blown the headwinds of monetary tightening. Recession clearly avoided for now, but headwinds remain.

“Talk of soft landings, mixedcessions, vibecessions, and things of that nature may soon turn to tradcession as looming large monetary headwinds raise the risk of a traditional-recession into 2024. Several upside surprises and spots of resilience ended up warding-off recession risk in 2023, but as motivational and inspirational speakers often tell us: “just because something hasn’t happened for you yet doesn’t mean it won’t”.”

2. Rise of Deflation

There has been an uptick in instances of technical deflation globally, but for now it looks contained (famous last words?).

“Adjacent to that, and along with multiple disinflationary drivers, the impact of base effects, and dissipating demand – raises the prospect of technical deflation risk (i.e. the CPI annual rate of change going negative). And it’s not just a vibe, it’s already happening in pockets of the global economy.  Deflation was an unthinkable term early last year, but I think by now more people are starting to entertain the idea.  It would almost be poetic for a deflation scare to follow the inflation shock and the higher for longer meme.”

3. Resurgence Risk

Inflation is no longer a problem. Or is it? Inflation resurgence risk is rising (thanks to apparent growth reacceleration). Keep an eye on Commodities.

“Not to hedge the previous comments, but we still can’t rule-out inflation resurgence risk either. A “no-landing” rebound in global growth (especially trade and manufacturing – which have been in recession) would mean commodities up, capacity tight, inflation HFL.”

4. The Story Can Change Quickly

Back on recession risk, when it comes to the labor market, things can change very quickly. And while both of these indicators are at strong levels historically, they have turned the corner and the travel of momentum is clear. Important chart for the Fed, which is now focused much more heavily on labor market data than CPI data (with Powell saying a weakening labor market is a key trigger for rate cuts).

“But back on the downside risks, and to caution on complacency – while labor markets are still tight, consumer strong, wages growing… note the history on this chart.  The jobs market goes up the stairs on the way up, and out the window when things turn.”

5. Yield Curving

When it comes to the yield curve, it’s not the inversion that gets you, it’s the un-inversion — the key thing to watch on this chart for the risk-minded is seeing all those 3 lines turn higher (as a coincident/near-time recession indicator).

“These 3 lines all measure the same thing – the maturity of the business cycle (**and turning points**).  On all 3 counts they say the cycle is long in the tooth, and turning.”

6. Bond Bargain

Bonds are cheap, stocks are expensive. It’s entirely possible that bonds get cheaper and stocks get more expensive, but over the medium/longer-term this chart sets the odds in favor of bonds vs stocks (especially when/if recession eventually comes). Key chart for asset allocators.

“As such, and while things have moved a lot since the brief 5% reading for the US 10-year treasury yield in October last year, government bond valuations are still cheap, and the macro downside risk scenario I outline here is bond bullish.  It won’t be a straight line, but bonds likely see further upside in the coming year following one of their worst bear markets in recent history. 

Stocks are a different matter though…”

7. Tech Perfection

Tech is priced for perfection — it would be arrogant to claim otherwise. This tells us about latent risk in the system. But it also tells us about how confident investors are in tech. And hey, maybe it *is* a new paradigm. Maybe perfection in earnings growth is exactly what we’ll get (and that is exactly what you now need to believe to be a buyer at these valuations).

“Tech stock valuations, while still not quite eclipsing the dot-com heights, have returned to 2021 peak levels.  Tech is priced for perfection, and untested by recession.

Indeed, big tech saw its big run from 2009 riding a wave of initial outright undervaluation, mostly accommodative monetary policy (including the ZIRP era), and importantly: a prolonged period of time where there were no recessions (albeit a few near misses, and p.s. the pandemic was a boon and a gift for most in the tech sector: delivering acceleration of existing trends, no real downside, and major monetary and fiscal tailwinds).

Maybe AI hype and exponential acceleration does see tech go on to justify these valuations, and maybe therefore these levels end up as a new normal. But if we want to think in terms of probabilities and risk management, keeping one foot out the door is probably a wise approach here.”

8. The Best and the Worst

When it comes to global equities, it’s basically US large growth (big tech/Mag7/1-tech to rule them all)… and the rest. The worst performers have been global/value/small — this chart shows the worst continuing to lag behind vs the best: no turning point yet. Long-live king tech

“Speaking of relative value, if you look at the flipside of big tech (aka US large growth), the best relative value opportunities are small vs large, value vs growth, and global vs US – the chart below basically explains why (a decade+ relative bear market for everything other than big tech).”

9. Defensive Doom

With stocks pushing higher, and tech triumphant, defensive stocks have lagged behind — investors now hate defensives, and allocations are at record lows. Contrarian signal?

“The roaring rebound in (tech) stocks last year left the boring old defensive sectors behind (healthcare, utilities, staples).  As such, investor allocations to defensive equities have dropped to record lows.  There is a signal here — contrarians take note.”

10. Real Estate Realism

Investors hate real estate — sentiment remains extremely pessimistic. Consensus also still sees commercial real estate as a major source of downside and/or possible credit event risk. The risks are real (higher rates, work from home changes, etc), but is it already in the price and minds of the market?

“There is also a signal here.  Investors hate real estate. The downside risks in the rising rates world (+work from home, cyclical downside risks, credit tightening, etc), are well understood, investors are already on board.  That means there are a lot of minds that can change if commercial property merely does OK, and hence an upside case can be made (especially if interest rates drop).”

11. Renewables Renewed

Even as renewables rebound, valuations remain reasonable — certainly much lower than the ebullient levels reached in recent years (and no wonder: some of the clean energy ETFs have dropped some 60-80% from the peak!!!). Deep fine value? or value trap?

“We just lived through yet another boom-bust-bubble cycle in renewable energy. Kicked-off by a steady rise of interest in ESG investing, and then the pandemic stimulus measures, along with a brief traditional energy price spike. But monetary tightening, ESG fatigue and falling commodities have taken the steam out: making valuations for the sector attractive again.”

12. EM Again

Sentiment is improving on Emerging Markets, and things are truly getting better (Fed peak, EM central bank pivot, relaxed risk sentiment, and global growth reacceleration). Meanwhile, EM equities are still cheap.

“It was every strategist’s favorite place to be at the start of 2023.  Naturally folk will be skeptical on it showing up again in outlook pieces like this, and maybe there is a sense of once-bitten, twice-shy.  But things are different this time.  The value story is still there (especially for China and LatAm/Non-Asia EM), however now we also have a peak in the Fed funds rate (possible easing later), a peak in the US dollar, a pivot by EM central banks from rate hikes to rate cuts, lingering pessimism on EM assets, and promising technicals as an inflection point appears to already be in place.

So as far as I’m concerned it definitely deserves a spot in the charts and themes to watch in the year ahead as multiple trends and macro cross currents come to their logical conclusion.”

https://entrylevel.topdowncharts.com/p/12-charts-to-watch-in-2024-q1-update