The Melt Up Narrative
Dear Reader,
I get a lot of questions from people about how this market makes any sense.
There is a wall of ugly economic data right now. Consumer debt is soaring. Housing prices are tumbling. Industrial production is taking a hit. And layoffs are starting to pile up.
Meanwhile, this is happening with the S&P 500. The PE Ratio for the S&P 500 is expanding to start the year – from roughly 20x to 21x.
This means that investors are willing to pay nearly 5% more for the same earnings payout over the long term… in just three weeks time.
That’s absolutely insane. But I don’t take it personally. Why?
Because momentum turned Green on January 6, 2023 – and we’ve been making a lot of money on the way up without any emotion or beating of heads against walls.
The music is still playing… so we are still dancing.
The Algos Don’t Care
Algorithms have no emotion. They don’t read the jobs reports. They don’t do anything except try to arbitrage the emotional swings of this market. So, I don’t have any level of surprise when these wild swings are transpiring.
I’ve been saying that the economy is not the market – and the market is not the economy.
But at some point – we have to keep our focus on the disconnect between earnings expectations (and what people should pay) and the underlying state of the consumer economy.
The GDP number for the 4th quarter was 2.9%.
That number was built on the back of four rather confounding elements.
One, inventory build was very large, which doesn’t bode well for future durable goods orders (Intel noted a massive glut in the chip supply chain and challenges at factories with little to do).
Two, housing collapsed.
Third, consumer spending is still being driven by negative real rates, and consumers’ real wages are still underwater.
And the fourth is a wildcard. Louis Navalier pointed out that in the third quarter, a massive amount of the gains in GDP was linked to the U.S. government’s sale of oil from the Strategic Petroleum Reserve. We don’t have the updated figures on EIA numbers, but the administration didn’t seek to stop sales until December – right in the middle of Q4.
When we remove non-core items (inventory build, government spending, and exports), we end up with a core GDP of about 0.6%.
According to EPB Research, recessions are driven by one or more of the following factors: A drop in durable goods purchases, weak housing investment, or weak business equipment investments.
Those three things represent about 20% of GDP – because they’re so vital, the argument should be made that recessions start and end there.
Those three elements saw a -3.2% drop during the quarter.
But pullback even more – and focus on housing and durable goods consumption – and EPB Research noted a drop of -5.5%.
Now – let’s go out to the first and second quarters. If this situation accelerates and we have big moves down on housing and durable goods orders – we’re dealing with a deflationary environment with a tapped-out consumer. And that’s with the Fed still raising rates in the months ahead.
There is a staggering disconnect between this market and the economy – and it’s a reminder that one is not the other.
The music started playing again for this market on January 6.
It’s been a rally that has brought back valuation expansion above 21 on the S&P 500.
I don’t know when the ripcord will be pulled, but it feels like it’s coming.
For now, we just keep dancing until momentum oscillators and outflow measurements signal that it’s time to get out of the way… And when the momentum turns Red… that’s where we start to trade aggressively at both Flashpoint Trader using the SPY and IWM – and target the companies with the largest downside potential at my new Hyper Momentum Trader.Today’s Momentum Reading
Broad Market: Green
S&P 500: Green
Recap: The World’s Biggest Indicator (Momentum) is Green… There wasn’t a reversion today, but we did test the all-too-critical top support line on the S&P 500 at 4,080, and was quickly rejected. If we find ourselves in a situation where we can break above that barrier – you might be looking at a melt-your-face-off rally that completely detaches the market from reality and forces massive levels of short covering. While I have a single short hedge in my portfolio, I’m still long this market until this trend reverses. That could come as soon as next week after the Fed’s meeting
Flash Points I’m Watching
Flashpoint No. 1: Fed Balance Sheet
The Fed slashed another $16 billion from its balance sheet this week, according to the SOMA report. The markets continue to drift higher and higher, but I’m still acting with caution when the Fed is draining liquidity from the system.
Flashpoint No. 2: The Debt Ceiling Debacle
Everyone’s favorite political football has returned to Washington. No, not the Keystone Pipeline. I’m talking about the Debt Ceiling. The media is back in a frenzy as we engage in the same stupid ideological and ignorant economic discussions as usual. The Hyperbole is high… “The end of Social Security if the GOP gets its way” – (well, I’m never going to get my benefits unless they’re at a big discount to my payments into the system.) “World-wrecking economic damage!”, and breadlines from unemployment. I really don’t have time or interest in this stupid story anymore – but I’m forced to address it. Could the debt ceiling debate fuel a downturn that makes momentum go lower? So too, could Vladimir Putin. Or Apple earnings. The one thing that you can’t do is worry about this stuff. We don’t have control over it. We have a momentum indicator that tells us when to get in and when to get out.
Today’s Recommendation
Do nothing. We’re about to enter one of the wildest weeks of the year, and it’s time to react to the news and not guess. The Fed meeting… the jobs report… and earnings from big names. There is still a lot of cash on the sideline… so… do we melt-up or meltdown? Next week will tell us that answer, and expect some interesting swings in this environment.
What You Missed
I want you to take a look at something…
Do you see the arrows in this chart?
This is the most important thing you’ll see today.
These arrows are pointing to “Hyper Turns” – critical moments in the market that can lead to explosive gains.
Over the past year, these Hyper Turns have led to gains of…
393% in 5 days
583% in 12 days
464% in 16 days
695% in 7 days
733% in 9 days
227% in 4 days
1,200% in 2 weeks
And many more
The next Hyper Turn is about to jolt the markets.
In fact, it could be as early as next Wednesday.
And I’ve identified three plays to take advantage of it… targeting Triple Digit Wins on each trade.
Click here to get the full details.
Stay Liquid,
Garrett
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January 27 2023
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