Forward Note - 2024/03/03
Two months in 2024 already, and we start to sound like a broken record: VIX is below 14, new all-time highs in the equity market — nothing new under the sun.
Last week had the potential to shake up the market a bit, though: with plenty of economic figures and important barometers for the US economy, many expected volatility to pick up. Yet, in the end, no major surprise came out of it.
Orders for durable goods dropped more than expected, declining by 6% against forecasts of a 4.5% decrease. This dip, however, didn't overshadow the US's robust GDP growth of 3.2% in Q4 or the inflation figures aligning with predictions at 0.4%. By week's end, further data pointed to a contracting manufacturing sector and a slight dip in consumer confidence.
Despite these mixed signals, the SP500 managed to gain an additional 1%, and the Nasdaq advanced by 2%, setting a strong closing note for the week. Invariably the same question resurfaced: will this trend ever stop?
It is hard to tell, and as long as the US economy stays strong and the AI revolution continues to captivate the market participants, this regime can go on for a while.
Yet, the bullishness fatigue is real now in some major financial outlets, and the Economist is the perfect example.
Let’s be honest - for a lot of content creators, this rally is not good for business: how do you keep your readership engaged if there is nothing exciting to report on?
We don’t have access to audience statistics for Bloomberg, but when we used to sit on a trading floor, and the market was as boring, TVs were broadcasting more on ESPN than CNBC. Just saying.
Therefore, it is amusing to see how everyone is looking for zee story or zee statistics to shock the public (you) a little bit more, until something big hit the news wire again and gives them (well, us as well in all fairness) something more substantial to talk about.
For instance, our favorite AI skeptic accounts were quick to note the disappointing earnings from Snowflake and the resignation of their CEO as the final proof of the AI bubble. To show such a deep misunderstanding of what Snowflake does and deliberately put under the carpet the innovation in data storage (to better prepare the adoption of AI technology at scale, by the way) is fascinating.
Another example: 16 weekly candles out of the last 18 were green for the SP500. Such a series is so rare, you should bet against it now and not miss that generational wealth opportunity.
Game theorists will recognize in these statements a classic case of gambler fallacy: the equivalent of betting on red at the casino because the last 9 figures came out black. Basic probability tells you the next round coming black still is 50/50, the future being independent of the past. Despite what all technical analysts and tape readers want you to believe, the market follows a similar pattern: at any point in time, it has a 50/50 chance of going up or down. And to make things worse for sensationalists, on the long run, it tend to drift up, not down.
We certainly encourage you to question the motives of those crying wolf, and as the serious trading publication we are aiming to become, we will gladly take the risk of sounding like a broken record over making a big fuss of non-event. VIX 14 is a clear enough signal, and as they say on the floor: trade the regime you are in, not the one you could potentially be in. Even when it’s boring as hell.
That being said, let’s move on to next week where the combination of the job reports and Jay Powell semiannual testimony to the congress, incite us to cautious. Let’s start by stating the obvious - we don’t expect something drastically different and only the destruction of jobs could challenge the narrative around the strength in the US economy and lead the markets to readjust their views for 2024.
We also expect the Chairman’s speech to be along the lines of “The inflation is still too high; we are monitoring it very carefully and will do whatever is necessary to maintain our dual objectives of full employment and inflation below 2%.” However, the real market focus will be on the expectation for rate cuts in 2024.
No rate cut for March and April is priced in, but if the Chairman opened the door to no rate cut in 2024, the markets would certainly not like that. They’ve been promised some rate cuts, and they have been patiently waiting for two months now. They even gave the Fed a pass after an odd FOMC press conference in January. But now they need answers and clarity on the monetary policy path.
But if you were the Fed, would you cut rates?
The debate is raging among economists and one can legitimately argue that despite the interest rates at 5.25%, the economy remains strong. Moreover, the earnings season didn’t show any alarming signs of financing deterioration, so why the rush?
We are leaning more on the side that the FOMC still has plenty of room to wait and see, and that is not the scenario currently priced in by the market. Could that be the beginning of the next bear market? Probably not, but fund managers will start recalibrating their positions accordingly.
Therefore, like many other professionals, we will hedge the book before the event, just in case: the equivalent of a “check” at a poker table to see the next card at no extra cost and decide the next course of action after the reaction of the other participants.
And if nothing comes out of it, we will gladly go back to the tune of 2024 because even if it is broken, it still sounds good, doesn’t it?
In other news
Elon Musk is suing OpenAi. Why? Tesla CEO accuses Sam Altman of running a nonprofit designed to benefit humanity while conducting it like a regular enterprise, driven first and foremost by profit.
Some American figures love the publicity with trials, and one can’t ponder if the legal fees accrued over the years by Musk were not marketing expenses in disguise.
There is also another motive for the owner of Twitter - a couple of months ago, he was on the list of people calling for a slowdown of artificial intelligence. You have to admit it is a smart move - what a better way to slow down your competition than forcing them to prove to a judge, that they are acting for greater purposes and force them to explain why it is keeping the code for its newest GenAI products a secret?
We obviously have no proof whatsoever of what we are stating, but we have too much respect for Musk's intellect to follow those who claim he has lost his marbles.
Thank you for staying with us until the end. As usual, here are a couple of great reads from last week.
The Finance industry is supposed to reward those creating wealth, and sanctioned whoever destroys it. What to make of Cathie Woods, then? In this article,
points towards the leniency from major news media.A few weeks back,
published a long-form about why bonds were an attractive investment again. You don’t want to miss the part 2.Finally, this week at Sharpe Two, we discussed why selling 45DTEs was not guaranteed success despite popular belief.
That is it for us — we wish you a great week ahead and happy trading!
Ksander
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