Coiled Spring Capital Mid-week report 1/24/23

Quick correction. In our weekend report, we mentioned the CPI was on Thursday. It is actually being reported on Friday, 1/26.

Another reason to make it hard to be bearish on the US economy was released this morning in the composite PMI’s. US business activity expanded the most in seven months, with PMI’s coming in at 52.3. Readings greater than 50 indicate expansion. The group’s measure of expected output in the coming year climbed to the highest since May ‘22.

This is important because the recent ebullient rise in the stock market has more substance then what the naysayers will tell you. The stock market is a discounting mechanism, and thus the strength of the recent rally is simply being supported by underlying economic momentum.

Tomorrow we will get Q4 GDP. This is a lagging indicator and doesn’t have much use for future stock market direction, but a robust number further solidifies what we have been writing about for over a year, that the stock market rally was discounting a better future, not a dire one. We didn’t see it at the time, the media didn’t see it, nor did the incessantly bearish. But you know who definitely saw it? The stock market. This is why we follow price first over our opinions. Opinions don’t make money, price direction does.

Q4 GDP likely comes in quite a bit from the unusually strong Q3 report of 4.9% to 2%, according to the median forecast. This is hardly recessionary.

The bigger question for our purposes is, where is this headed? The answer is, we have no idea. We are not economists, and our expectations are for a continued macro slowdown on the backs of lagged interest rate hikes. But as we’ve mentioned before, we will let price be the arbiter of how we trade/invest, not our opinions.

Last weekend we suggested that the stock market would likely push higher this week into our identified resistance zone. That so far has occurred. But is the stock market now running out of gas?

We know statistically that election years are positive. Even more so when the pre-election year is up more than 20%, according to BofA. In fact, the market has been higher 100% of the time.

But as you know, markets do not move in a straight line.

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