To The Moon

Highlights + key points from this week’s charts:

• The macro is not market friendly as geopolitical risk boils over and higher-for-longer risk comes back into focus.

• Buybacks are set to rise as CEO confidence rebounds.

• Energy stocks are breaking out, and allocations to the sector are light.

• Older people own a greater share of stocks (while 40-54yr olds get squeezed).

• Stocks are expensive, commodities are cheap.

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $NASDAQ(.IXIC)$ $Invesco QQQ Trust-ETF(QQQ)$ $Nasdaq100 Bull 3X ETF(TQQQ)$ $Nasdaq100 Bear 3X ETF(SQQQ)$ $NASDAQ 100(NDX)$ $DJIA(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$

1. Risk Check

I’ve recently noted the complacency in risk pricing set against the backdrop of rising (geo)political risk and reacceleration/resurgence risk. Last week was a shot across the bow on both fronts. The strong jobs data + PMI readings along with rising oil prices have reduced the likelihood, speed, and magnitude of any Fed rate cuts. Meanwhile geopolitical risk is bubbling over as Iran looks to respond to the Israeli airstrikes on its Syrian embassy early last week.

As always, markets know, and the key things to track will be oil/energy stocks and bonds (and the chart below shows them heading in the wrong direction*).

Here’s the short-term predicament: if geopolitical risk boils over into a larger Middle East conflict, that sends oil prices up, risk off. If nothing major happens then bonds likely selloff as resurgence risk and higher-for-longer narratives come into focus. Macro is not market friendly at the minute..

2. Less Bad Though

Having said that, reacceleration risk comes against a backdrop of recession averted and at least expectations of rate cuts. This has helped bolster CEO confidence. And interestingly enough, it seems when CEOs are confident they do more stock buybacks.

3. Supply & Demand

One thing to remember amid all the variables and calculations and prognostications on the stockmarket… is that it is after all, a market. And what does ECON101 tell us about markets? Price is the balancing factor between supply and demand. The chart below shows what’s been happening on the supply side of the equation (in other words: more buybacks and less IPOs/issuance = shrinking supply, shrinking supply ceteris paribus = higher prices).

4. Energetic Hedge

Over the time period in the chart below, the market cap weight of energy stocks has been inversely correlated with overall stockmarket PE ratios. This reflects that fact that energy stocks tend to do well when oil prices go up, and when oil prices go up — generally speaking so does inflation and interest rates (and that tends to push down valuations one way or another). The takeaway is that energy stocks can be thought of as a defensive/hedge.

5. Low Energy Hedge Funds

Interesting follow-on, hedge funds are running fairly light allocations to energy stocks (they are probably all-in on tech stocks/Nvidia — as sometimes you just have to go with the momentum flow). By my metrics, retail is also fairly light on energy stocks, so if energy stocks really get going it could see a bit of chasing and band-wagoning.

6. High Energy Stocks

And, well, energy stocks are making a break for it. And it’s worth noting that energy stocks had already begun their breakout *before* the Israeli airstrikes on Iran’s embassy (and breadth had already been steadily pushing higher). So this one may have legs even if things pan out OK on the geopolitics front. Afterall, global crude oil demand continues to tick higher…

7. Who Owns Stocks

Switching gears, this is an interesting chart. We should probably expect the red part to go up as life expectancy goes up (went from about 75yrs to almost 80yrs over that period — that’s about 5 more years of compounding!). The younger crowd made a bit of a comeback as the pandemic stimulus made stocks cool again. But the 40-54 years cohort has been squeezed the most — perhaps due to rising house prices meaning mortgage payments take priority over saving and investing (maybe also people having kids later in life).

8. Where’d You Get Those Returns From? 

Over the long run most of the returns come from earnings growth, while dividends have tended to provide the most stable component of returns, and contribution from valuation changes gyrate significantly. If you catch the wrong part of the cycle then earnings growth will be a detractor, if you get in with high starting point valuations you might take a hit on valuations in the future, meanwhile dividends ain’t what they used to be. Important to be cycle and value aware to maximize returns.

9. Best Stocks in 30 Years

This table is interesting for a few reasons, it shows the benefit of picking the right stock or small concentrated group of winners e.g. if you had just bought $10k of Amazon when it IPO’d. But it also raises the point that if you did buy $10k of Amazon at IPO, you probably would have sold when it doubled to $20k, or bailed out when it dropped 90% in the dot com crash. Very few would have held all the way, and even if they did, if they didn’t sell along the way they probably aren’t selling now either. It also ignores the many that delisted/merged/zero’d.

https://www.chartstorm.info/p/weekly-s-and-p500-chartstorm-7-april-005