In Case You Missed It: Key Charts of the Week:

By Mark Masterson on October 26, 2023

It has been said “a picture is worth a thousand words.”
 With that in mind, below below are a few of the most important or interesting charts from the past week…..

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With these rate moves – its important to keep an eye on the yield curve.

I have stated several times that the inverted yield curve is undefeated in predicting recessions.  It’s always a challenge to predict the timing. 

Yet – each recession began when the inverted yield curve started the process of “de-inverting.”

Pay attention as it is doing that now.

As per Tq1alpha this weekend…..“Several months ago, the curve was inverted to -108 basis points. Today, we have steepened dramatically to -21 basis points,” Tier 1 wrote in Friday’s note….

“The steepening has historically meant the wolves are at the door, and the recession is here.”

Tier1alpha 10 23 23

Take a look at the Price to Earnings ration of the 7 largest stocks in the S&P 500……

There’s a lot of discussion about the S&P 7, the 7 largest stocks in the S&P 500, are carrying the entire market as we all know.

Even more important, the P/E ratio of the S&P 7 is 46x, more than DOUBLE the S&P 493.

Since the start of 2023 alone, the P/E ratio of the S&P 7 has gone from 29x to 46x.

The Kobeissi Letter 10 23 23

Keeping an eye on the banks.

They have been under pressure.

The blue line below is the KRE regional bank ETF.  It is now pressing lower again towards those lows from April before the Fed rescued them with the Bank Loan program.

The S&P 500 is in black.  Interesting that it has tracked the banks historically, but has disconnected since the banking crisis earlier this year.

One of the positive catalysts yesterday was a bond rally.

Why did bonds rally?

First – yields hit 5%.  That is a big round number, and acted like a magnet for yields.  Once it gets there, it is natural resistance.

Perhaps a larger catalyst was the tweet by Bill Ackman letting everyone know he covered his bond shorts.  I always laugh when I see these tweets.  These billionaires can move markets with their tweets, and you know he positioned himself ahead of the tweet and likely went long the 10 year treasury bond.  When Ackman tweeted he covered his short, he knows algo’s are going to cover their shorts by buying the bonds back – pushing up prices and down yields.

• Billionaire investor Ackman says ‘covered our bond short’ http://reut.rs/45LK8Gh
• Bill Ackman said earlier today that he covered his short bet on US Treasuries, sparking today’s Treasury rally off earlier weakness that saw 10Y move above 5% for first time since 2007.
• Ackman also said economy slowing faster than recent data suggest, and comes after the Pershing Square founder disclosed in August a short bet on 30Y Treasuries, arguing structural changes like deglobalization and energy would add to upside risks around inflation, while supply dynamics would also push yields higher (Bloomberg).

You can see the drop in yields yesterday.

Is it the start of a trend lower – or just a one or two day pop in bonds as traders cover their shorts in bonds?

Time will tell.

If yields can pull back, that could certainly take some pressure off of markets.

Of equal importance is the US Dollar chart.

You can see it has stopped rising – but it has not started any meaningful decline either.

In fact, it is “flagging” as it moves sideways.  Often these flags are more of a pausing pattern and that does indicate there is risk the dollar could push higher.

A lower dollar would be a positive catalyst for markets – while a higher dollar will likely weigh on markets.

Bill Gross is the latest in a long list of billionaire investors sounding the alarm over the next quarter or two for the economy……

He joins the list of Ray Dalio, Paul Tudor Jones, Jeremy Grantham, Stan Druckenmiller, Jeff Gundlach, and others….

• ‘Bond King’ Bill Gross sees a recession in the 4th quarter and reveals what he’s doing with his money  https://t.co/npA9U4eUUg

Perhaps they are just looking at the below chart showing the yield curve inversions – and the de-inverting going on – which happens right before a recession…..

Ted Oakley – 10 24 23

Market is getting a bit oversold here.

Yesterday 71% of $SPX stocks are back below their respective 200-day moving averages. This is the lowest level seen this year and falls within the 12%ile over the past decade.

Oversold conditions do present the opportunity for a bounce…..

Tier1Alpha.com 10 23 23

Another chart showing the commodity undervaluation to stocks.

Below the Goldman Sachs Commodity Index versus the S&P 500.

When it is at these low levels, it often comes before an extended period when commodities outperform stocks. (when it is rising, commodities are outperforming stocks.  When falling, stocks are outperforming commodities)

Bloomberg.com/ Investinbest.com 10 23 23

All of this going on while the US government continues to pile up the debt and deficits……

• The US government had a $2 trillion budget deficit for the fiscal year through September, a gap that’s $1 trillion more than the prior year. https://bloomberg.com/news/articles/2023-10-24/us-budget-deficit-rising-as-economy-grows-shows-why-yields-are-at-5?utm_source=website&utm_medium=share&utm_campaign=twitter

But – no worries – Biden is looking for even more “aid” to distribute.

• WHITE HOUSE EYES $50B DOMESTIC, $100B FOREIGN AID PACKAGE:WAPO

What gets me is the domestic aid.  We all know they are going to support the Ukraine war effort and Israel with the foreign aid – but what exactly is the “domestic aid?”  Student loan forgiveness?

With those deficits, bond yields have been rising steadily.

I saw the below chart and found it interesting and a bit alarming.

“An unlikely aberration has taken place in global bond markets for the first time on record: yields on emerging-market bonds in local currencies have fallen below US Treasuries.”

So – emerging market bond yields are lower than US Treasury yields?  Are emerging market bonds being viewed as safer than Treasury bonds?

Bloomberg Markets 10 25 23

I posted yesterday how the market was oversold and due for a bounce.

Well – today I see that yesterday’s equity put/call ratio .52, lowest since July.

That is interesting as the put call ratio typically will imply fear in the mind of investors.  Yet, a low Put/call ratio suggests there is no fear.

Hmmmmm

Helene Meisler 10 25 23

Yes, we know the S&P 500 is up year to date as the 7 largest names carry the index.

Here is what the equal weighted S&P 500 looks like.  (includes the big 7, but equal weighted to the other 493 names in the index)

Equal Weighted S&P 500 is almost 6% below its 200 Day moving average, the most over the last 12 months.

Yes, negative on the year…..

Again – just shows that the market remains weak under the hood.

Barchart.com 10 25 23

I do like what I see here in energy stocks…..certainly no love.

Hedge Funds sold energy stocks at the fastest pace this year and are now the least long they’ve been in 3 years according to Goldman Sachs

This implies upside potential in my eyes.

Barchart.com 10 25 23

Still watching those banks versus the S&P 500.

Regional banks index in blue continues to fall back towards the lows in March before the Fed bailout.

The S&P remains resilient.

Interesting that they typically flow together (highlighted) but have disconnected.

Will they connect?  If so, how?

Bankruptcy filings are on the rise……

We are now nearing the 2020 levels during the Covid shutdown year.

h/t

@albertedwards99

We all know by now that a few large, big tech names have held up the S&P this year.

The below chart of the The Bloomberg #magnificent7 index does not look particularly healthy at the moment.  It clearly looks like a head and shoulders pattern.

If this breaks lower, it will no doubt weigh on the broad S&P index.

Bloomberg.com 10 26 23