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In this issue
A balancing of the Buffet Indicator
Bearish now, bullish when it matters
Risk Index
Under 50 = accumulate, over 70 = defensive, over 90 = distribute
The Risk Index is a combined read of the trends of 68 intermarket spreads and indicators, from credit spreads in the US to car sales in Spain.
The Risk Index keeps stubbornly improving. If it remains this way, improving as equities move lower, this is an encouraging sign for dip-buying nearer the end of Q3.
Any key inputs?
German CPI Tuesday
US CPI Thursday
US PPI Friday
Inflation pressures continue to come down and although this is a good thing (inflation needed to come down), we are only just starting to see the effects of Fed (and other central banks) tightening cycles.
And they are still tightening.
‘Soft landing’ has become the expected outcome, even though it will be another 4-6 months before the effects of tightening are embedded. Let’s revisit the ‘soft landing’ idea then….
A look at el Buffet Indicatorio
The Buffet indicator combines stock market valuations with GDP. It was at extremes at the start of 2022, and the sell-off hasn’t made much of a difference so far.
The Buffet Indicator since 1950 (from here)
Note the three peaks, two of which I’ve shaded.
Why two?
A criticism of the Buffet Indicator is that it doesn’t take stock market valuation against interest rates into account.
I.e. if interest rates are 15%, why would you risk money in stocks rather than buy bonds with a better yield? That thinking should influence the indicator.
So, it’s worth looking at interest rates as well.
S&P valuations v Interest Rates (from here)
Those same two peaks shaded. We can see that the market is fairly valued at present relative to interest rates.
But it doesn’t mean anything without looking at what we are actually trading.
Let’s have a look at the S&P in relation to these two peaks.
Both times, it took over a decade to make and keep new highs.
SPX monthly with the start of the two boxes showing the dates of the two peaks identified in the previous charts.
So, when the two have coincident extremes, it’s not been a pretty sight.
While these are only two occasions, so not valid for an outright statistical statement (i.e. 100% of the time this happens, that happens!), given the underlying economic reasons for these extremes, there’s a decent argument that similar weakness will be seen if the two combine again.
That’s not what we have today. If we’re back here in 12 months and interest rates are around 15%, we may be…
So, all signs currently point to this being seasonal weakness combined with stupidly valued stocks that were the leaders in the last bull market (Apple, Amazon, Tesla, etc), creating an expected period of weakness.
Things will get interesting if the megacaps pulled back significantly, which would create a crash in the stock market, but all other indicators remained strong. That would be a classic buy-the-fear moment and make the start of a new bull market more likely.
A look at SPX
All indices reversed last week, many at key areas.
European equities mirroring what most did over the last two weeks - attempted to push higher out of recent consolidation, and above their 2021 highs, but then quickly rejected.
The S&P could have a garden variety 10% pullback and hit a plethora of support.
SPX monthly showing a lot of support coming in around 4200 - weekly 100MA, daily 200MA, re-test of the breakdown (that has now become a break-through), 50% retracement of 2022 price range.
The better buy would be if price broke through this support and headed below the right shoulder of the H&S (three green curved lines).
Bet you’ll smell the fear by then.
Like a fine ragù, everything takes time. Then it’s perfect all of a sudden.
There are some good trades sitting around just now on the short side, but the real juice will be in seeing if this is setting up a substantial buying opportunity for Q4.
Quote to Self
Anyone else having a busy year? Me too.
"Opportunity is missed by most people
because it is dressed in overalls and looks like work."
~ Thomas Edison ~
Have a great week.