8.12.22: Bears are getting decimated. When will they fully capitulate?
Key U.S. and China brief market notes by Larry's Analyst Staff Team.
Note to Readers: We believe the pain to stock market bears is beginning to run deep. The momentum from current investor positioning can far greater than market participants expect if the largest short-sellers are forced to cover. While bulls have strong near-term momentum on their side, this is a momentum driven rally fueled by powerful short-covering. A short-covering rally that is out of sync with macro and fundamentals can turn at any given moment. More important than ever is to formulate your plan today so that when different scenarios play out, you are ready to act.
We intend to keep our Community updated with important levels where we believe bullish exhaustion may take place. It is incredibly important to understand the risk/reward at the index level and of certain thematic sectors in the market to have correct expectations. Investors who take this current rally for granted without being proactive about forming a plan may end up being disappointed.
We intend to continue producing the highest quality research to inform our Community related to the risks and rewards this market will present us. See what one of our Friends inside has to say (bottom of email).
This email is brought to you by Interactive Brokers, one of our preferred brokerages to buy HK-Listed Shares in our China Internet Equity Coverage Universe. We believe it is at least worth a consideration to host your China-listed companies on the HK-listed exchange due to US-Sino tensions.
In our emails, we will provide the following coverage points:
Brief Snapshot of U.S. & China markets and valuation
Our Analyst Team’s Chart in Focus
U.S. & China Upcoming Economic Calendar Snapshot
Notable Chart from Media Outlets
Fear & Greed Index Recap
I hope you find this newsletter to be insightful and enjoyable! - Larry and Team
U.S and China Markets Brief Snapshot 🇺🇸 🇨🇳
(Powered by our Channel Financial Data Provider YCharts)
S&P 500 Index: 4207.27
KWEB (Chinese Internet) ETF: $26.72
Analyst Team Note:
Given the massive short covering we’ve seen in recent weeks, it wouldn’t be surprising if we had a period of mild choppiness to digest the recent economic data. That said, the bias still seems skewed to the upside due to positioning being relatively low.
Short covering has been the main driver of the recent rally and is now one of the most extreme in the past 5 years on a 20d basis (-3z). The covering has pushed net flows into positive territory as well.
Risky stocks (unprofitable and meme) have rebounded lately, but there could still be more to go. The rally in risky stocks is just 33% relative to the prior drawdown, and drawdowns of similar magnitude typically saw 80% rebounds and 50-70% rebounds even during bear market rallies.
Macro Chart In Focus
Analyst Team Note:
Today, commodity markets appear to hold irrational expectations, as prices and inventories fall together, demand beats expectations and supply disappoints.
One explanation is destocking as commodity consumers deplete inventories at higher prices, believing they can restock once a broad softening creates excess supply.
Yet should this prove incorrect, and excess supply does not materialize as we expect, the restocking scramble would exacerbate scarcity, pushing prices substantially higher this autumn potentially forcing central banks to generate a more protracted contraction to balance commodity markets.
Upcoming Economic Calendar
(Powered by our Channel Financial Data Provider YCharts)
U.S Economic Calendar (Upcoming Data Points)
China Economic Calendar (Upcoming Data Points)
N/A
Analyst Team Note:
The big news this week was CPI, which came in slightly cooler than expected despite the sticky segments (food and shelter) continuing to increase.
So what will the Fed do?
The market is currently pricing in 50bps (September), 50bps (November), 25bps (December), and no more hikes in 2023.
In the words of Larry:
“Even though CPI gave us a sigh of relief to go from 9.1% last month to 8.5% this month, I would have been more excited if the forces that drove CPI lower were Housing & Food… It is my opinion that the Fed's hawkishness on rates has not even touched the Housing/Rent (most important) portion of the CPI. And it hasn't dented Food prices either the way the Fed would want.”
We view this rally as a great opportunity to gradually reduce risk on short-term positions.
Source: CME Group, J.P. Morgan
Chart That Caught Our Eye
Analyst Team Note:
Fascinating chart from TS Lombard.
In a global recession, dollar strengthens.
When US growth outperforms relative to rest of world, dollar strengthens.
When the rest of the world outpaces US, dollar declines.
When the Fed tightens, we get dollar strength (the right hand of the dollar smile). But if the Fed stops and recession starts, we get dollar weakness. But here’s when it gets interesting.
A slowing US could slow global growth, which would mean dollar strength.
So is there a way out? While the dollar has been on a massive rally, more upside isn’t out of the picture.
Source: TS Lombard
Sentiment Check
We want to take a moment to thank Interactive Brokers for being one of our Channel’s trusted Partners and to inform my audience of the special features they have given that our online friends here closely follow Chinese Internet stocks (BABA/Tencent).
Much of Larry’s audience is concerned about the US ADR issue of Chinese Stocks being delisted.
Interactive brokers allows investors to buy HK-listed shares of Alibaba, JD, Tencent, and other brand name Chinese Internet companies on the HK market. This will effectively reduce any confusion or work you will have to do in case there is the event of delisting US ADRs
Words of Affirmation from Inside from our awesome Friends (And to answer David’s question: I watch the Digital Assets market for sentiment, but I’m more of a specialist on the Stock Market)
