Coiled Spring Capital Macro Report 3/3/24

When the stock market offers up clues for how money is flowing into various instruments, what do you do with that information? Do you have a specific way of identifying those moments? Can you measure the upside? Can you profit from those movements? Do you have a plan if the assumptions made lead to the wrong outcome?

If you can answer this question confidently, and accurately, then you are on the right path. The issue for most, is identifying enough datapoints to formulate a worthwhile hypothesis. The right recipe is not written in some cookbook, nor is there some quantitative equation in a textbook going to give you the right answer. The reality is understanding what moves global markets is really taking the approach and admitting that we really don’t know anything. The market is ever-evolving, ever changing, which means the reasons you are right one day may be the reasons you are wrong another. This is why most people fail at correctly timing and exiting the market profitably and consistently. There is simply not one-size fits all for dissecting and predicting market movements. Analyzing markets are complicated, and since when do complicated questions have simple answers? Typically, they do not.

When we sit down to write this report, it does not free flow from our mind to our computer. The process for thinking about what matters is an ongoing one that begins every time we open a news story, read research, or look at a chart. That process never ends. It takes years to understand what’s important and what’s relevant.

But even when those answers seem as clear as day, they have to be supported by various factors and most of the time confirmed with action. Factors that include the macro and internal picture to support risk-taking, and action being confirmed price movements.

Why are we telling you this? Because we think it is important for our readers to understand how we derive at our conclusions. Our conclusions are essentially trying to predict the future, thus need to be comprehensive in their approach. Like a good statistician, in some sense, we need to prove the null hypothesis.

Let’s use the most recent example provided in our mid-week report. We specifically stated that we did not know how the PCE would get reported, and that any massive outlier was likely going to be met with extreme volatility. What we did hypothesize, and correctly we might add, is that the market was set up to look through the report even if it showed a re-acceleration. This was expected, and for reasons that are unbeknownst to us, the market was ok with it. It’s not the “why” we are concerned with, it’s the “what.” The “why” should never be a concern for most people that are not professional managers. But for some reason millions of hours are wasted trying to anticipate and correctly call the “why.” Very smart people listen to even smarter people to try and understand and rationalize why things are happening. Our question to them is, “why?”

“Why” doesn’t help you make money in the markets. It’s a nice academic exercise, and we can appreciate the effort and thoughtfulness that goes into their reasoning, but the reality is, only the “what” is what’s makes money.

Back to our example regarding the PCE we discussed in the mid-week. How many wall street strategists and economists expressed incredible concern over a potential hotter inflation report? We venture to say too many. We had our doubts as well.

We phrased these questions in that report:

The reality was, the PCE was already contemplated by billions of dollars, of very well resourced, professional investors, with potentially privileged information, leaving their footprints all over the market. Those footprints were expressed in price.

From our mid-week report:

And so, guess what price was telling us last week into the PCE?

That the market was already looking through the ensuing PCE print. We illustrated many different charts in our report that were showing incredible resilience and power behind specific instruments’ moves that would likely not be taking place if the powers that drive flows and move markets, weren’t already taking a very strong view. These weren’t outliers, these were all occurring in unison. Retail does not have the heft to move all of these instruments. This is the power of major institutions making big money bets. Who would you rather bet your money with? The Wall Street Economist who dissects the PCE number 8 ways to Sunday, to derive at a very thoughtful conclusion, or the massive capital pushing into a direction? We know our answer.

2 weekends ago we identified that rotation was occurring under the surface but had not manifested in the major small cap indexes. This week, that confirmation we were looking for was cemented.

The Russell Small cap Index closed at the highest level in almost 2 years.

Things that don’t happen in bear markets: the small cap index breaching multi-year highs. If you are paying attention (if not just for comedy) to anyone that is insisting this is a bear market rally, our advice is to run. Run as fast as you can away from their absurd advice. They have no process, they have no understanding of markets, and surely, they know nothing about price.

This past week the clear winner remains the Russell, outpacing the SPX by over 200 bps, and the Mag 7 by 100bps.

While we are never going to be fully invested into a binary event, we were exposed to multiple SMID cap stocks into the PCE, and something we alluded to in our last weekend macro report.

Last week was a good week.

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