Coiled Spring Capital Mid-week post

The stock market continues to impress even us and stonewall the prominent and stubborn bears. In the last week alone, we have received a hotter than expected CPI, a very strong employment report, an increasingly hawkish Fed, higher terminal interest rate expectations, blistering retail sales, yet the stock market will not relinquish the massive gains we’ve recorded since the beginning of the year.

How do you explain to your portfolio manager or your investors when YTD numbers look like this, and you are still sitting underinvested?

The bears will have you believe a number of reasons for the continued stock market ascent, from ODTE options, dumb bullish buying, FOMO, OPEX positioning, EPS numbers are still too high, the market is expensive, blah blah blah. The excuses are plentiful, yet they fail to see the unfolding bullish repricing that has occurred since the beginning of the year. This reluctance to change when the market changes is why professional and retail investors perennially underperform. They believe in a bias so much that they cannot see the forest through the trees. We’ll admit, we were bearish on the macro and the fundamentals coming into ‘23, and to some extent we still have our concerns. But we follow price and our signals before our opinions, and both were telling us our fundamental view was wrong at that time. When we are wrong, we change. Fortunately for our readers and our team, we have designed a system of indicators that puts us in front of market moves before they happen. Is it perfect? Of course not, nothing is. But it’s pretty darn accurate in time and price.

These same bears will also have you believe that a bullish view is wrong and that it will all come crumbling down soon. Maybe it will. But what if it doesn’t?

The new narrative is a “no landing,”" from a soft landing. Is this possible given the level of interest rate rises? Sure, why not? Probable? No, but timing is everything, and the market clearly overcorrected the recency of any slowdown. This is why the market is screaming higher and “left for dead” heavily shorted stocks are repricing higher. Most of these companies were discounting Armageddon. But if Armageddon isn’t coming, then miserable earnings and outlooks are likely transient. This implies a re-rating higher needs to happen to discount a different view of the future. This is how markets work. They discount the probabilistic future and the market is sending those signals. The bigger question is, are you listening?

We have been writing since last year that the stock market started discounting a recession in 2021, much earlier than in previous cycles. If that’s true, then why can’t the opposite also be true? Why can’t we be discounting a recovery much sooner as well? This would explain why most of the weak earnings and guidance’s given this earnings season are getting bought. Maybe stocks are starting to price in a recovery in ‘24. Maybe any slowdown in the economy will not be as bad as stocks had been discounting. Maybe that’s why the stock market has recently repriced higher. See our recent report where we discussed this theory of repricing.

We still have daily discussions with people on why this is another bear market rally? The reasons they give are the same reasons we were bearish all of last year. Tired and stale rationales in the stock market rarely work twice.

Is it possible the economy takes a turn down sometime in the future as the Fed is forced to raise rates much higher than anyone is expecting? Of course. But that’s not what the market is telling us today. We invest/trade for today, not in 6 months to 2 years.

If you are comfortable waiting for something that might or might not happen, be our guest. We will continue to be involved in those swings, long or short, profiting handsomely along the way…we welcome the volatility, as it gives more opportunity to do what we are good at: identifying market inflections.

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