Coiled Spring Capital Mid-Week Report 7/11/24

We must acknowledge the relentless bearish community, always ready to predict the stock market's imminent collapse and the onset of the next bear market. However, we prefer a simpler approach: unless there is clear evidence of a deteriorating trend, despite the market being overbought, top-heavy, or expensive, adopting a bearish stance is premature. The SPX is up 18% year-to-date, meaning there will be ample time to turn bearish if the market peaks tomorrow. While timing the exact top of any market is impressive, it is often a futile endeavor in practice. This is why we prioritize following price movements.

At the end of June, concerns arose regarding the structure of the indexes, as we detailed in a previous report. However, these issues appeared to be tied to end-of-quarter rebalancing, and no further deterioration was confirmed. In our last report, we outlined straightforward methods for assessing such trend change potential; please refer to it for more information.

Fast forward a week and a half, and the SPX has surged nearly 200 points, reaching a new all-time high today. We've highlighted the historically bullish pre-election seasonal patterns, which have proven valuable in maintaining our position with the trend.

Tomorrow the CPI will be reported and by the way the stock market is acting, it seems a favorable soft print could be in the offing. If the report demonstrates similar softness as May, the core PCE deflator (due July 26 and the Fed’s preferred inflation gauge) could be consistent with their 2% target. This would likely cement the first-rate cut coming in September.

Here is CPI Ex-Food/Energy:

And disinflation momentum continues to improve.

We will get the PPI on Friday which also looks slated to come in softer than expectations.

As we pointed out last weekend the 2-year treasury has been signaling lower rates. Did the bond market figure it out before the reports are made public? It seems so. The 2-year treasury chart (a proxy for interest rates) shows a classic bear pennant formation, which is a continuation pattern. The measured move of the pattern break is right around our 4.47% target (61.8% Fib).

Friday is also the official start of earnings season, with the mega banks reporting. The biggest question is, will earnings be robust enough to support a red-hot stock market? Earnings and company outlooks better deliver, or the market could see a reversal of its current enthusiasm.

Adding an element of risk to the earnings season is that profit estimates have been rising. And with the benchmark trading at a P/E of almost 22x compared to the long-term average of 16x, earnings performance needs to impress.

The good news is that earnings and stocks have been rising in tandem, which should offer some buffer if we do see the market revert after a disappointing earnings performance.

So that begs the question. Is it time to take the foot off the gas and harvest recent portfolio gains, or should we remain overweight in equities?

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