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The Waiting Game - One Eyed Deer 31st October 2023

Equity markets are inherently optimistic beasts. Negative sentiment does wander in from time to time, but it doesn’t seem to stay long.

There is a feeling after a few weeks of working lower that any let up in the current moribund attitude will surely launch us quickly higher. The volume of open interest in bond call options paints a similar picture.

It feels to me like the markets are looking for a “go” signal.

There, may however, be a more realistic set of expectations that should first look for a signal to simply stop going down. If expectations are too high, then any bounce we do get will burn a lot of energy, and we will race away, but only to another lower high.

Bear markets are a series of lower lows and lower highs and that may be exactly what we are looking at.

Consider the SP500 charts below.

This is a daily chart over the last few months. A very clear pattern of lower highs and lower lows is evident, along with some telling behaviour around the 50 and 200 day moving averages.

The 50 and the 200 are my favourite MAs to use together, and there is clear resistance at the 50, with only cursory support provided once by the 200, which then failed convincingly a few days ago.

If we zoom out to a longer timeframe we can take a look at the following chart..

This is again a daily chart, but back to 2019. The first thing I note is that the July high was, indeed, a lower high.

A LOT of energy (think AI hype) was injected into the market and we raced up to unspectacular levels.

This leads to the obvious question.. Do we next see a lower low? If so then that will be 15% lower.

Not the end of the world, although I’m sure it will feel like it.

S&P 500

The SP500 has now gone sideways for two and a half years. Even the most optimistic personality is going to start to be tested after that length of time. And remember that this stock average is NOT the average stock. Most participant’s realities at the moment are way worse than this. As 5% cost of funds continues to lay it’s lead blanket over everyone the excitement for shooting for new highs is going to be hard to muster. The most constructive thing the index can do here is consolidate. It needs to stop going down, and not worry about going up for a while. Do some work here. See if it can absorb the current rate regime. Somehow, I don’t think that will eventuate.

Aftermath of bond capitulation.

The high volumes we saw trading in TLT that I suggested were extreme and capitulatory have not been bested in the days since, so it looks (tentatively) likely to have been a good entry point.

The TLT/QQQ spread we entered at the time has closed by about 6% to this point. I am certainly not calling this a victory as that amount of performance can disappear before I finish writing this note, but nevertheless, it has closed a little, and didn’t really widen at all after that point.

This trade now stays in place to best realise the opportunity of the equity leg making that lower low.

Has gold regained its positive structure?

I noted two weeks ago that Gold was starting to feel the weight of higher yields and that its price action was being compromised. This was on the eve of events in the Middle East, and so a geopolitical bid returned to Gold virtually overnight, pushing it back into the middle of its range, and then over the following week to the top of its range.

Gold weekly chart below..

This weekly chart was never compromised. I admit to fixating on the daily chart at the time and honestly getting a little too cute about reducing our Gold position before it started breaking significantly.

This weekly timeframe is still one of the most constructive charts I have ever seen, and the chart comes with no attempt to find any reasons for price action. You don’t need to second guess politics, have an opinion on rates, or the Fed, or the state of any economy.

Just let the chart sum all that up for you.

Significant consolidation at all time highs, moving averages forging ahead, and spot price leading the MAs. The shorter MA having drifted sideways into the longer, glancing off it and heading higher, all just paints an almost perfect technical picture. Famous. Last. Words.

Spit roast.

A quick catch up with our Harley Davidson call (sell). They released earnings. They were not received well. And NOT due to our highlighted issue of crippling debt servicing around the corner.

Interest expense for the quarter was locked at the same levels as previously, so they are still magically paying about 65 basis points total on their 5.5Bn net debt. Must be nice.

The story is getting murky and all that awaits is debt refinancing. Look forward to Harley Davidson becoming just another brand owned by private equity, bought out of administration.

Trade/Position Summary

One-eyed deer: Buy TLT / Sell QQQ.

Runner up: Sell GSR @85 (yes, it’s still there). Stay short HOG.

Consider: Picking up gold and gold miners.

Wrapping up.

We can play the waiting game while we are paid to do so.

Long bonds/ short equities is a positive carry trade.

There is still not enough risk premium available in equities to justify owning them, so to own them is to trade a bounce or short squeeze. Fair enough, but don’t wait too long.

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