Warning: volatility ahead.
Paid subscriber analysis
Well, as we said on Wednesday, the signal was short-term bullish.
But we also said this:
“…we didn’t get the clear signal we were hoping for - either up or down. The Treasury slammed the breaks, but the Fed came to the rescue. So for now, the short term trend should be positive, but in the longer term the headwinds are still there.”
In other words, we didn’t quite get the buy-the-dip clearance. Quite the contrary, we are looking at more uncertainty ahead. The Treasury will need to increase long term bond issuance, and this will, over time, add to a significant headwind for all assets. But the impact will be gradual, not abrupt. Which makes the uncertainty greater, as there is no telling of when the bond market will start to translate the negative impact of rising yields onto all other assets.
This basically means that in the equity market we can expect more sharp sell-offs followed by strong bounce-back rallies - a jumpy market that might as well be gradually trending up, before some significant correction like this April. There is no clear direction like after July 31s last year (when the medium-term signal was a clear sell), or after November 1st last year (when the medium-term signal was a clear buy). This is not particularly good for our fund, as we strive on strong directional moves, and hate jumpy markets, but that just means we won’t be amplifying our risk exposure for the time being.
To see what I mean by uncertain price action, just have a look at what happened after FOMC:
First a relief rally following a dovish Powell presser, then in the final 45 minutes of Wednesday, an immediate reversal of 1.5% back to where the market opened that day, wiping out the entire rally. Then after a strong open on Thursday (+0.7%), again a complete reversal down to negative, and then a gradual push back up to +0.9% for the day. Friday was driven by the jobs report (more on that below), and finished +1.3% for the day, but was still quite jumpy in the first half of the day.
This is how I think markets will react over the coming weeks and perhaps months, absent some other major shock (either positive or negative). Do keep in mind that these kinds of markets are very sensitive to negative shocks (like geopolitical shocks, for example). It’s probably not going to be the same buy-the-dip environment like from Jan-Mar, but much more sideways. Options expiry dates will play a role again, so we will pay particular attention to those. And of course, the earnings season is still not done.
Earnings
We got 6 out of the Mag7 earnings last two weeks, and almost all have been a pleasant surprise:
APPL - beat, buyback, and rally ✅
AMZN - beat, and slight rally ✅
GOOGL - beat, dividend announced, and strong rally ✅
MSFT - beat, and rally ✅
META - beat, but punished ❌
TSLA - missed, but rally ✅
Only one left - NVDA, the biggest mover, with the highest expectations attached to it (coming up in two weeks, on May 20th).
Don’t forget who disproportionately moves this market. With results like these, it’s hardly surprising to see the market moving up, despite what is starting to feel like an inevitable sell-off.