- Coiled Spring Capital Macro Report
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- Coiled Spring Capital Macro Report Jan 22, 2023
The stock market has been on a blistering pace since the start of the year when most prognosticators were calling for a 1st half wipeout. The calls for such were pervasive. We on the other hand took the opposite tact and were buying late December weakness. Those bets have profited nicely.
Year to date performance has to have the bears cringing. The best part of the outperformance is that tech and growth are leading. We said to our members in December that we thought this would happen as inflation has peaked and rates were coming down. The entire trade last year was for long duration assets to see multiple compression because inflation seemingly wouldn't stop going up and thus the FOMC would have to keep raising interest rates. When that peaked, and rates peaked, it opened the door for regime change. Guess what? It changed.
The Nasdaq is now leading the major 3 indexes by quite a bit (+280 bps vs. SPX and +550 bps vs Dow Jones). This is significant outperformance. We haven't found one person touting this trade, and if they are out there, they are few and far between.
What's also interesting about this year's outperformance is that the bears are digging in even further. Trying to convince people that the stock market rally is foolish and will revert. Maybe, maybe not. We are agnostic and why we have been on the right side of every major inflection over the last year (short and long).
Even last week we thought the market would see some reversion, and it did. We also said we thought it would get bought, and it did. Our inflection calls in the indexes are based on a proprietary system of signals, technicals and fundamental considerations, and then weighted to make a forward-thinking prediction. Money does not enter the market all at once and typically investing cycles happen over a period of time. Money flowing into the market leaves footprints, and we work hard to uncover those footprints.
Remember, opinions don't move markets, money does. Anyone who is trying to will the market lower using squiggly lines on charts, is trying to convince you of their bias.
We have had numerous interactions with people on Twitter about why the bulls are wrong. The arguments they use are the same arguments that were driving the market lower all of last year. Now the media has entrenched itself in the minds of the masses and they all believe the market has to go lower because, we are heading into a recession, EPS estimates are too high, the Fed has to keep raising rates to squash stubbornly high inflation, the market never bottoms before a recession starts, etc., etc.
What most people, who haven't been doing this long enough, don't understand, is that when everyone is contemplating the same thing, the stock market has already discounted it. For the market to revert lower, something has to change with new information. What is that new information? All I see is recycled reasons for the market to go lower. We have been discussing these reasons since Jan of last year. RARELY, do the same things in the market work twice.
We have our opinions on the macro, and they are not very bullish, but what if we are wrong. What if the bearish prognosticators in the media, Wall Street, and Fintwit are also wrong? What if by some chance the market bottomed in Oct because the stock market overly discounted a nasty recession. What if the Fed really can pull off a soft landing? What if the NBER actually says the recession started in the fall of '22. Guess what that means? The stock market is repricing for a better future and the rally is real. This is what anyone who is a serious student of the market must contemplate. The stock market is the ultimate arbiter of truth and will reflect these possibilities, long before they are visible and reported in the media. Mark our words, all of these bearish opinions will change if the market continues its ascent. If that occurs, we will grow more worried. Fow now the skepticism is tangible and real, and that's good if you are positioned correctly.
We now have 7 trading days left in Jan. This implies the bears have their work cut out for them if they are going to stop the January Barometer from completing. Recall our note from last week, where we discussed this, which states that the stock market generates yearly positive returns, 75% of the time, if January closes positive. And even more so, should it post a greater than 5% return. If January closes positive, then it would complete the trifecta of positive calendar effects (Santa Claus Rally, first 5 days of year, January Barometer). While there is no guarantee that this leads to a strong '23, it certainly improves the probability.
Please review last week's report where we discussed this in more detail and also the breakaway momentum breadth thrust that occurred and a reminder of the 3rd year of the Presidential Cycle:
Coiled Spring Capital Macro Report Jan 16th, 2023 | Coiled Spring Capital Macro Report (beehiiv.com)
While last week was a down week for the indexes, is it enough to warrant pulling back from our current stance? Let's dive in deeper.
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