Coiled Spring Capital Macro Report Feb 26th,'23

The SPX is coming off its worst week since Dec 9th. This after some disappointing economic data: Purchasing managers’ index came in stronger than expected, personal income and spending surged in Jan, consumer sentiment rose to its highest reading in a year and the PCE on Friday was higher than expected following an upward revision to Dec’s report.

Fortunately, we were positioned mostly out of the market and tactically short the indexes. We wrote in our Feb 2nd report that we exited most of our tactical long exposure:

Here is that excerpt from Feb 5th highlighting our position change:

Here is the performance of the indexes since that Feb 2 report:

The biggest issue facing the market continues to be the path of rates. Recall what we said in our Jan 2, first of the year, report:

The unusually strong recent macro data has completely spooked the markets and rightfully so. Repricing’s occur when something material changes, and the future becomes less certain, which it has. We wrote this in our Feb 5th report to prepare our readers for this potential reality:

In fact, it was both of those predictions. Inflation reaccelerated and terminal rates moving higher (of course, they are inextricably linked). Terminal Rates now stand up near 5.4% vs 5% at the start of Feb, with cuts now not expected until Nov.

Simply put, the stock market cannot sustain any advance if the terminal rate forecast keeps getting nudged higher. Does this mean we have to trade back to the lows? We don’t necessarily think so as we still seem to be closer to the end of the rate cycle vs the beginning. That implies the Oct lows should hold. But we could certainly be wrong should inflation meaningfully re-accelerate and the terminal forecast get pushed much higher than expectations. We could also see the market making new lows should the Fed rate cycle get pushed too far, causing a major recession. But for now, that’s above our scope of analysis. The reality today is the SPX is not that cheap (17.5x FTM earnings), and with the risk-free rate approaching 5%, stocks are just not that compelling.

We have been saying all year that the market could just be stuck in a trading range, frustrating bulls and bears. That seems to be playing out currently, with macro headwinds continuing to knock the wind out of the stock markets sails.

Here is another excerpt from our Feb 5th report discussing this:

It’s been a year since the fed started raising rates, which is typically when rates visibly start showing their impact. There are certainly pockets where the impact is already being felt (Autos, Housing) but it hasn’t happened in earnest yet. The bigger question is when do we see the bigger roll in the meaningful inflation components (shelter, services, etc.)? The Fed can’t conceivably take their foot off the gas if the trajectory of inflation remains flat to up. If the recent uptick in inflation is being driven by China’s re-opening, then we can assume it will normalize once the initial demand impulse recedes. When that happens is not for us to determine. We prefer to use our proprietary market analysis to uncover when underlying market shifts are occurring. These typically get expressed in real time, through the instruments we track.

We know Feb is typically a tough month for the markets, which means we could be setting up for a possible reversion into March. But in trading/investing, timing is everything.

If you want to learn more about our timing signals and enhance your performance by learning when to enter and exit the market, we believe our analysis is an ideal complement. Consider becoming a premium subscriber below, to read more of our work.

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