• February 1, 2023

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Walmart is laying off and slashing its growth forecast. Oracle is laying off. Securities trading platform and app, Robinhood, is shrinking before our eyes. The list goes on. The technical recession is here, that much we know. But the market has corrected to the upside. Should investors holding short S&P funds keep holding, or for those who came late to the bear market – just cut their losses?

Right now, S&P 500 momentum is strong. How can that be during a recession?

“If you should be on any side of the market right now, you should be on the short side of the market,” says Vladimir Signorelli, head of Bretton Woods Research, a boutique investment research firm in Long Valley, NJ. Why is that? Because the Fed always stop raising rates too late and usually maintains elevated rates for too long. That’s the standard rule. “The only reason why we are seeing this rally is because of the decline in oil, and that is not a good enough reason. How can that be a good reason? The data we are seeing is that people are driving less than they did last summer…that’s not the kind of signal that gives you more confidence about the economy. It’s the kind of signal that should give you less.”

What to look out for? Oil falling below $90 and then some. That’s good for those holding short SPY (mainly the ProShares UltraShort S&P 500 – SDS). The magic number is $75 and under. That will likely cause the Federal Reserve to step off the brakes on interest rates, unless inflation goes above 9%. And that is unlikely if oil is falling. Commodities have been the big driver of inflation, as everyone who puts gas in a car and eats real food knows.

Putin’s price hike (remember that) may as well have been called the Trumpflation or Biden’s price hike.

The main cause for inflation was not Ukraine wheat farms and Europe’s energy policy genius when it comes to Russia, but instead it was the supply chain woes caused by lockdowns in the Western world and China, and massive stimulus in the Trump-era Covid support bills and Biden’s American Rescue Plan, which combined injected around $5 trillion into the U.S. economy, an increase worth over 20% of annual GDP. The New York Times called it “the largest flood of federal money into the United States economy in recorded history.” It was the first-ever Main Street bailout with “stimmy checks” going into stocks, hot tubs and other home improvement projects as people were stuck at home.

Now we are where we are today. The market is clawing back, bored to death by the Ukraine war and Covid and believing the Fed will stop hiking, merely months after they just started.

It seems like a pretty ridiculous call with inflation so high. The Fed would literally have to discount food and fuel from its inflation figures to get us down to five and change.

Growth stocks have rebounded from their mid-June low thanks to oil taking a brake; the Putin price hike has become the Putin price plunge.

Nasdaq and FANG indexes have rallied by 19% since mid-June, shoving the bear back in its cave. And the MSCI All Country World Index, which lost 28% in total returns during the first half of the year, has rallied 12.7% since mid-June. It’s outperforming the MSCI value index by 9.4 percentage points, UBS noted in a report to clients on Thursday.

Over the same period, the yield on 10-year Treasuries has fallen from a peak of 3.48% to 2.71%. But short-term rates are higher. That’s bearish.


For UBS, even though the recent rally helps ease the pain of double-digit losses everyone sees in their stock portfolios on E-Trade, Mark Haefele, CIO of UBS Global Wealth Management says it is too soon to get into growth stocks. That doesn’t mean he’s short, of course.

“Our analysis, stretching back to 1975, shows that when inflation has been above 3%, value stocks have outperformed growth stocks, regardless of the stage of the economic cycle,” Haefele says. Plus, growth stocks are still too expensive, especially related to value stocks. Basically, if the Relative Strength Index is over 60 right now, stay away. If it’s under 50, you better know what you’re doing, or roll the dice and hope for the best.

Investment research firm Macrolens isn’t bearish. If they are right, short sellers beware.

Macrolens founder Brian McCarthy thinks the Fed can soft-land the economy. But if they are hell-bent on getting the funds rate to 3.5% this year, then they’re going to crash the economy, and the market right along with it.

“The Fed is talking tough, but that might just be an attempt to dampen financial conditions,” McCarthy says. Everyone is betting on the Fed right now. Bears see an economic slowdown and high inflation. Bulls, even tepid ones, think the Fed isn’t going to tank the economy, and will pause even if inflation is over 7%.

“I suspect the Fed thinks that if they talk tough about taking rates to 3.5% and it tightens financial conditions, then they won’t really have to hike that much,” McCarthy says. “The idea that they intend to hike another 100 basis points between now and the midterm elections strikes me as fanciful.”

On July 28, the day second quarter GDP showed a technical recession, President Biden boasted of increased investments in semiconductor batteries through the CHIPS Act, now a law, saying it will create 613,000 jobs. By the way, some of the companies that would benefit from CHIPS, are over bought. Advanced Micro Devices (AMD) has an RSI of 71. And a price to earnings ratio of 37x. Stay away. Intel (INTC) has lost momentum and has an RSI of only 38. This is over-sold. Their price to earnings ratio is under 8x. Taiwan Semiconductor’s (TSM) relative strength is around 56. Their p/e is a little over 20x.

The same day Biden tossed aside the idea of a recession and more subsidies for semiconductor fabs, New York City Mayor Eric Adams refuted Biden, and said – even in the turnaround we are seeing in the equity market right now — that, “Wall Street is collapsing.” (Correct: it is moving to Florida.)

Brian Deese, director of the National Economic Council, took heat after insisting that “two negative quarters of GDP growth is not the technical definition of recession. It’s not the definition that economists have traditionally relied on.”

Actually, it is. Two back-to-back quarters in the red is literally called a technical recession.

A new CNN poll found 64% of Americans think the country is in a recession.

A CNBC poll showed just 30% approve of Biden’s handling of the economy.

A Wall Street Journal survey found more than eight in 10 Americans think the economy looks “bleak,” a level of dissatisfaction with the economy last seen during Obama’s first year in office, just after the housing bubble popped.

“I think you go long any equity that is benefiting from legislation coming down the pike from the Biden administration, like what companies that will benefit from the CHIPS Act and the Inflation Reduction Act,” said Signorelli. The Inflation Reduction Act will benefit U.S. solar companies and perhaps automotive, like Tesla, as well as companies involved in building electric vehicle charging stations. Again, here it is going to be best, if you believe we are in a real recession, to stay clear of stocks with RSIs showing strong momentum. Tesla is off the charts, for example.

“As for the S&P 500 overall, you want to be be net short that because the Fed is committed to raising rates and holding rates higher for longer,” Signorelli said. “They want growth to slow in order to reduce inflation. They will eventually succeed.”


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