What goes up...
These days and this PA are always a little scary because they are the TYPES of day/PA that could mark tops.
Retail sales data Tuesday was very cold, which bodes well for rate cuts but also heralds some level of recession.
The newsletter writers are all saying this is it, this is the top, it's so over, etc.
They’ve been saying that for about 2 months now.
The Lay of the Land
QQQ gapped up on the open today and then promptly bled out. We’ve reverse the week’s gain.
The thing is, we have now seen a pattern of the market reacting like this, and then shrugging it off and continuing up only all year now. So I'm not ready to try to call a top just yet.
What will REALLY start to matter now is if the Fed is willing to adjust their stance based on this latest crop of data. If they keep trying to 'wait and see' then I think bad news is bad news.
Fed officials have been out and about this week talking about how data dependent they are and how the data is unclear.
Is the data really unclear? I don’t think it is anymore. But the Fed has a history of being late to cut rates.
We know people are long. Below is a chart from
quantifying just how long they are.
What It All Means
So, let me sum up the situation:
We are looking at cooling economic data, which paves the way for rate cuts but also raises the probability of recession.
The Fed is still saying hawkish things, and they have a history of being late to cut.
We are seeing worldwide that central bankers are eager to cut, and we have to assume the Fed feels similarly. Central bankers don’t get any benefit from sending the economy into a recession.
People are positioned historically long. Positioning can tell us where there is asymmetric upside/downside. Therefore the bearish tail outcomes are likely to have a bigger affect on the price than the bullish tail outcomes.
It’s hard to read that summary and run out and buy stocks.
Still, I’ve written before about how your default position should be to be long. I’m not seeing enough evidence to run out and sell our equities.
Probabilities
I created a matrix of outcomes here with my probability of each. I’m assuming there’s roughly a 70% chance the economy continues to soften, and a 30% chance that we kinda chug along in this middle ground or get better. From there I assigned some fed reaction probabilities to get these outcomes.
This is my rough assessment of the outcomes.
I think most of the time we will be happy that we kept our risk. The problem is that the red box, soft economy and slow cuts, is getting scarier and looking like it will cause a bigger and bigger correction. Every long that gets added makes that outcome even more painful.
My gut is still optimistic. But as I’ve said before, we will keep watching and evaluating.
Good luck out there.
Please also always remember... none of this is financial advice. I’m not a professional. I quite literally don’t know what I’m doing. I’m just a guy, with a keyboard, who scored high enough on some standardized tests to think I can beat the market.