From relentless gains to sustained pullbacks, after five consecutive winning months without a 2% decline, three consecutive weeks of declines followed, with the S&P 500 losing six days in a row and losing 5 intraday gains last week. It was characterized by consecutive failures. Like all market contractions from all-time highs, the S&P 500's current 5.5% decline has a series of proximate causes, beyond the simple “pre-planned” catchall. It comes with an excuse, a plausible cover story. . Sticky inflation and the Fed's patient theme pushed the 10-year Treasury yield from 4.2% to over 4.6% in three weeks, but pushed hopes of a possible Fed rate cut to the outside of traders' time horizons. . After a strong first quarter that began in April of the election year, the typical seasonal headwinds appear to have arrived on time. A geopolitical conflict that is difficult to handicap will never help, even if it is rarely a significant driver of market trends. .SPX 1Y Mountain S&P 500, 1 year and its valuation rise and overly optimistic sentiment accumulated with its 28% rise in five months, culminating in late March . The dominant momentum leadership, which lost momentum a few weeks ago (and was previewed here when it peaked), continues to loosen and is a self-reinforcing process in the short term. Friday's risky rotation from big tech winners to less popular value sectors (semiconductors down 4%, regional banks up 3%) was particularly notable, with extremes underway among systematic trend-following strategies. It appeared to be part of a reversal of positioning. We enter 2024 in a market where the most crowded stocks also happen to be some of the world's largest and most expensive, commanding a hefty premium for the predictability and scarcity value of strong long-term growth strategies. I did. This brings us to the moment marked by every pullback. The question then becomes whether the tape extends far enough down to at least expect a strong rebound attempt. Bounce coming? At least things are starting to move in that direction. The Nasdaq Composite Index has doubled in a tough test, dropping nearly 8% from recent highs, below its previous high in November 2021, and below its 100-day average. In the process, it has become significantly oversold, with the 14-day relative strength reading (a measure of price relative to its long-term trend) quite close to levels seen near historical trading lows. Some market breadth readings (e.g., a lower percentage of S&P 500 stocks above their 20-day average), increased put option volume, and a reversal in the volatility index (VIX) relative to VIX futures prices are all similar. It suggests the following. Tightly wound markets become susceptible to fast snapback attempts over time. There are some points to note here. Extreme markets can always become even more extreme, and severe liquidation-type declines tend to start with oversold conditions, exacerbating pullbacks when stressed trading mechanics are at risk among quantitative players. There is always a possibility that reduction mode. Nothing works every time, and such oversold indicators, while prescient, are not always timely. Perhaps the decline so far has been a little too methodical, at least until Friday's ferocious purge in the semifinals. And while indicators of trader mood are showing increased caution, most sentiment indicators are only emerging from extreme bullishness and not yet in full fear mode. Over time, approximately 40% of market declines of 5% deepen into full 10% corrections. According to Warren Paiz, co-founder of 3Fourteen Research, after the global financial crisis, “the odds of buying a 5% push…improved.” From 2009 to 2021, buying the 5% push was a “consistent winner.” On average, markets recover to new highs within three months of a 5% decline, with “only 35% resulting in a 10% correction.” Still, Pais backed away from his previous bullish view of the market last Thursday, noting that the pattern may have changed again from 2022 onwards, with an upward trend in U.S. Treasury yields that is now in line with earlier declines in yields. He pointed out that the pattern is not that of promoting stock price adjustment, but rather that it is promoting stock price adjustment. As the stock price fell, the buffer fell, and most of the 5% decline compounded into his 10% haircut. While that's tangibly true, it's important to note that yields don't have to fully return to their pre-price-adjusted levels for the stock to feel safe. They simply needed to stop rising and settle down to some degree. Recall that since 2022, stock investors have had successive fears that 10-year Treasury yields of 3%, 3.5%, 4%, and now perhaps 4.6% will be tough on stocks. I want you to. However, under the right conditions, stocks can tentatively settle once the economy shows that it can absorb such yields. A correction of around 10% from the S&P 500's peak of 5,254 could send the index below 4,800, its all-time high since early 2022, a test for a breakout in the first quarter. right. (In 2013, the S&P 500 index hit its highest in more than five years, then briefly doubled to test its former record level within a few months before restarting its rise.) , we go back in time to an earlier point in time where we can assess current fundamentals and ask whether anything substantive has changed. A week ago, I noted that the S&P closed at exactly the same level as March 8th. The “we can have it all” sentiment is at its peak on this day, with Fed Chair Jerome Powell hinting at a rate cut on the 7th, and just…ample jobs data for the day. It emphasized the resilience of the economy, and the buying of AI stocks was a tailwind. Last week's 3% drop brought the index back to February 21st levels, narrowing the “Nvidia Gap” that saw the S&P 500 index drop to 100 points the day after Nvidia's fourth-quarter earnings release. Nvidia stock itself closed slightly above its February 22nd level, but the P/E ratio has fallen by several points due to higher earnings estimates (31.5 times forward earnings at the time versus 29 times forward earnings now). Valuation Check When it comes to the broader market, the S&P 500 futures multiple is down to 20x from 21x a month ago, and while no one defines it as cheap, the equal-weighted index remains the dominant version. It's clearly discounted in comparison. Betting on whether the broader sector of stocks will do well relative to the dominant market capitalization of more than $1 trillion is a good bet, in part due to rising bond yields, and recently rising bond yields have led to any expansionary measures. It is difficult because it is a hindrance. Mega-cap stocks with deep cash reserves and long-term growth expectations not only withstand higher funding costs, but are also generally considered to be more protective against macro fluctuations. Not to mention the fact that Big Tech dominates the earnings momentum scoreboard and has seen significant upward revisions to earnings in recent quarters. On Friday, U.S. Treasury yields took a breather from recent projects exploring the economy's pain threshold, with energy and traditional defense groups being key leaders along with financial groups. Whether this reflects healthy rotation in response to economic resilience or unstable flight due to crowded bets by fast professional players is a question to keep in mind until next week. be. Regional banks rose 3% on Friday as credit and deposit pressures appear manageable for now, four quarters after the mini-crisis surrounding Silicon Valley banks, and group-wide stocks are at book value for most banks. It trades at only 90% of the total. They now claim that the economy is growing rapidly. Next week, the PCE report, which shows the market's inflation rate relative to the Fed's target, will be released, but it will likely be less hawkish now that the market has shifted to the assumption of resilient consumers and higher interest rates. There remains the possibility of new narrative changes. Longer rate assumption. On a trading basis, aside from oversold indicators starting to build up, this pullback will at least clear out aggressive positions and improve investor expectations in time for the busiest week of large-cap earnings releases. It seems to have helped alleviate the
