Stocks have more room to fall

Thursday 1 September 2022

The perverse world of equities relies more on what other traders are doing than discounting the future! The Market Ear shows there is more room to fall as markets catch-down to the underlying macro.

QT – say hello to September

With everybody back from vacations soon, the mighty QT can kick in “for real”. Equities are down from all time highs, but do you keep it simple and follow the path of QT?

Barclays

Remember the “4th squeeze” analogy? Now let’s do the 5th sell-off…

The 4th bear market squeeze was more vicious in both the 02-03 and 08-09 bear markets. And it turned out to be the same in the 2022 one. Now look at the 5th sell-off. Both >25%…..Hello SPX 3200….

Kantro

Very bearish update from the GS trading desk

So bearish it is almost bullish….(along the reasoning that it is darkest before dawn…). GS from post-close Tuesday: “Our ETF desk was VERY active today with desk activity +200% vs MTD avg… client flows ~3x better for SALE from a diverse mix of institutional and ETF dedicated accounts de-risking across the domestic equity complex. CTA supply continues to gain momentum the lower we trend. Several asset managers who typically don’t pay attention to CTAs asked us plenty of questions about them today. The supply is real and has outsized impact in an illiquid tape. S&P Top of Book Liquidity opened today at ~$7.6mm (25th percentile on a 5-year lookback). This has HALVED since last week. 3 of the top 5 lightest volume sessions of the year have occurred since last Wednesday…expect this trend to continue” (Goldman trading desk)

This is not a floor valuation

S&P500 P/E sits above where it was at the end of all 11 previous bear cycles.

Bloomberg

Risk Appetite: room to fall

Risk appetite indicator level and momentum factors according to the Goldman model are far from extremes and have room to fall much further.

Goldman

Sentiment: room to fall

Average percentile of 16 sentiment indicators show that it can get worse, much worse.

Goldman

Risky assets flow: room to fall

Risky vs. safe assets fund flows also indicate room to get worse.

EPFR

Will FOMO become FOSI?

Will “fear of missing out” become “fear of staying in”? The chart that shows cumulative fund flows across assets shows that equity flow has not even started to break down.

EPFR

RIP TINA

The 2-Year Treasury yield is now more than double the S&P 500’s dividend yield.

Bespoke

Where does PMI go in a depression?

After resilience earlier in the year, PMIs have stepped lower in the last three months, into an outright contraction territory. Consensus seems to be that it does not really matter / it is already “all in the price”…. Maybe it will get much worse and actually surprise to the downside?

JPM

The Jackson Hole ghost – still haunting the crowd

Consensus regarding a non event was huge, but we got the inverse…and it seems the ghost has continued to haunt people. As Barclays show, this was the biggest reaction in SPX since 2010, but even more interesting is the reaction seen in the HYG, which has continued to puke (here).

Barclays

THE what if chart

The 2008 SPX analogy chart continues following the path…

Refinitiv

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About the author

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.