In Case You Missed It: My Chart(s) of the Week

By Mark Masterson on April 27, 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…..

Charts from this past week:

Looking at the final data point I saw on Friday – Leading Economic indicators made it 12 in a row…..

US Leading Indicators (as opposed to lagging) have now fallen month-over-month for 12 straight months.

Pretty rare, and typical ahead of a recessionary environment

Bespoke.com 4 24 23 / The Conference Board  https://www.conference-board.org/topics/us-leading-indicators

By the way – it would be very rare indeed for the stock market to bottom ahead of  recession.

According to Strategas this morning…….

Historically, the market has never bottomed before a recession has started. This argues against the supposition that since this is the “most anticipated recession of all time” that investors will merely look through it to the other side of recovery. Naturally, the start and end dates of recessions are set by the National Bureau of Economic Research well after the fact. Still, it seems safe to say that with the unemployment rate still at 3.5%, that: a) the Fed has an incentive to keep monetary policy restrictive; and b) there are not strong signs that we are currently in a recession. All this, in turn, suggests that the market may be in for some tough sledding if the economy deteriorates. Looking through a recession may wind up being harder than it sounds if downward earnings revisions and layoff announcements pick up.

Strategas 4 24 23

My updated chart of the S&P below does suggest we may be heading to a weaker stock market ahead.  Of course, this pattern can change anytime, but through this bear market, each bear market rally has ended when the market was overbought as it is now today.

Despite all the bearish talk – it looks like investors keep adding.

Individuals bought a net $77.7 billion U.S. equities and ETFs in Q1 2023  (Vanda Research).  That sum trails only Q1 2021 and 2022, when they bought about $80 billion.

You see it below as well in the CNN sentiment index.  In blue – it is near the greed side of the fear and greed index…

CNN 4 24 23

Central banks are buying gold, and lots of it.

According to an annual poll of 83 central banks:

Over two-thirds of respondents anticipate increased gold holdings among their peers in 2023.

“Central bank #gold purchases hit highest level since 1967. “

1967 was a good time to be buying gold when the price was $35/oz. Over the next 13 years gold would rise more than 2,000% to more than $850/oz

Financial Times 4 23 22

I saw the below chart this morning.

As we know, liquidity is driving the market in both directions.

The below purple line highlights the overall liquidity in the system via Fed’s balance sheet, minus the money at the treasury (which is getting lower as they cannot borrow more right now), les the reverse repo from the Fed….

While this may not be a perfect measure of liquidity (none are), it certainly shows a close correlation to the market direction….

As of this moment, they are disconnected.  If this condition persists, its reasonable to expect a reconnect with equity markets moving lower again.

The “overall liquidity” measure (the Fed’s balance sheet, less the Treasury General Account, less reverse repos) is now making a new cycle low.

@TimmerFidelity 4 25 23

Goldman says quant buyers out of ammo:

Here is a visual of what Goldman is talking about.

Systematic equity positioning is the longest it’s been in over a year according to estimates by Goldman Sachs

It simply means a lot of buying power has been used to get the market higher thus far.

Goldman Sachs 4/25/23

I also saw this chart from Northmantrader.com.

It’s great because it overlays two narratives to show how they are both correct.

The first is the narrative about how deeply the M2 money supply is contracting.  That is true that the rate of change from last year is dramatic.  (it’s the red line)  Many are suggesting that this steep decline is rare and similar to other major economic contractions.

The second shows the longer term view of the M2 money supply in blue.  It shows the recent decline in money supply in the context of the massive expansion of money supply over the past few years.  Hint – you can barely see it.

So – which will win out?  Time will tell.  Perhaps both – with the recent contraction in liquidity leading to a recession, but the massive expansion leading to higher inflation over the next decade……

Northman Trader 4 26 23

Stanley Druckenmiller – one of the best investors of the past 30 years – spoke about the market and his highest conviction trade…..

• BILLIONAIRE INVESTOR STANLEY DRUCKENMILLER IS BETTING AGAINST THE US DOLLAR AS HIS ONLY HIGH-CONVICTION TRADE
• ‘Billionaire investor Stanley Druckenmiller is betting against the US dollar as his only high-conviction trade in what he believes is the most uncertain environment for markets and the global economy in his 45-year career.’  https://t.co/VatepWkwYv

Here is the summary:

• Billionaire investor Stanley Druckenmiller is betting against the US dollar as his only high-conviction trade in what he believes is the most uncertain environment for markets and the global economy in his 45-year career.
• Druckenmiller, who as George Soros’s right-hand man helped break the Bank of England in an assault on the pound in 1992, said he felt confident taking a negative position against the greenback because of his dim view of US policymaking.
• The US dollar, which rallied strongly last year, has already declined by 10 per cent against a basket of other leading currencies since a November peak, but Druckenmiller believes it has much further to fall. “One area I’m comfortable is I’m short the US dollar,” he said at an event hosted by the Norwegian sovereign wealth fund in Oslo on Tuesday.
• “Currency trends tend to run for two or three years. We have had a long [run] higher.”
•  Druckenmiller racked up one of the hedge fund industry’s strongest winning streaks with legendary trader Soros and then at Duquesne Capital Management, before ejecting investors from the $12bn hedge fund in 2010 and turning it into a family office to manage his own fortune.
• He said he had missed the 2022 dollar rally “because I could not bring myself to buy Joe Biden and Jay Powell . . . It was probably the biggest miss of my career”.
• But Druckenmiller said he suspects US policymakers would respond to an economic downturn with a fresh wave of interest rate cuts — typically a move that drags down a currency. “The Fed has shown some mettle over the last year but historically I would not say [Federal Reserve chair] Jay Powell is a profile in courage,” the 69-year-old billionaire said in conversation by video link with the Norwegian oil fund chief Nicolai Tangen.
• In addition, Druckenmiller said the dollar had been “weaponised” over the past year — a reference to the freezing of Russia’s dollar reserves after the full-scale invasion of Ukraine in February 2022. “And you have [Brazilian president] Lula running around asking why we have to do trade in the US dollar, and he’s right to,” he added. Druckenmiller also said he had been a little “unnerved” by the Fed’s response to the failure of Silicon Valley Bank in March, particularly because of the speed at which the US central bank responded by expanding its balance sheet, unwinding a large part of the balance sheet reduction it had conducted over the previous few months.
• Druckenmiller also reiterated his view that big asset classes like equities were likely to show little if any positive direction over the next 10 years. “I think we will have a lot of swings.”
• However, the investor expected a US recession and is shying away from “old economy” small and midsized companies. “I’m in the ‘hard landing’ camp,” he told the conference.

Just five stocks make up 21% of S&P 500 market capitalization.  That seems fine, right?  Answer: Typically not. 

Source: Goldman Sachs 4/25/23

The banks were in the news again yesterday pressuring the markets.  It seems the problems have not been solved yet by the massive emergency loan program.

• White House, Fed, and Treasury officials have held talks with First Republic in recent days amid fears bank running out of time (FT)
• First Republic Bank exploring sale of $50-100B of long-dated securities and mortgages (Bloomberg, Reuters)

In particular, First Republic fell by 50% yesterday (and is down over 10% again today)….

Washington officials in touch with First Republic amid more questions around bank’s stability:

• FT cited sources who said that First Republic (FRC) has been in touch with US government officials from the White House, the Fed, and the US Treasury in recent days amid concerns that the bank is running out of time to reassure depositors and investors.
• While the article said government officials are not concerned about contagion beyond First Republic, the bank has been reportedly struggled to generate enthusiasm over its plan to sell parts of its business in recent weeks, with potential acquirers concerned over taking on too much risk.
• The report also followed First Republic’s Q1 earnings yesterday, which showed customer deposits down 41% to $104.5B, well below the $145B consensus, while the company confirmed that it is seeking strategic options, though Bloomberg. noted that its sizable unrealized losses would make any potential sale difficult.
• Bloomberg also noted that the selloff accelerated after the company didn’t take questions during its earnings call, though CEO Roffler detailed plans to cut headcount by as much as 25% in an effort to cut expenses.

Keep in mind – its not just First Republic.

Look at the Regional banking ETF over the past 5 years.

You can see that it has not bounced – despite the emergency bailouts.

That suggests another wave lower is possible, and likely probable.

Remember that these regional banks are major lenders to commercial real estate markets and consumers…..

When lending contracts, the economy contracts…..

Quick sentiment check….

The “smart money” according to Sentimenttrader.com has become quite pessimistic here after this rally…..

Note  the highlights….they show when the smart money optimism levels were low (below) and where the S&P 500 was at that time (above)

Sentimenttrader.com 4 26 23

I have highlighted the market concentration lately.  Its very high.

The other side of that coin is that only 32% of S&P 500 components are outperforming the broader index, the lowest levels we’ve seen since 1999.

Source: Jefferies 4 27 23