The Buffett Indicator, Bear Market Returns, Inflation comes in Waves
Hey it’s Kieran! Another week in the markets is upon us, so here are the key events to be aware of, and the most interesting Macro research coming out of the investment banks. I’ll hopefully speak to you this week in the Traderseed Trading Challenges and as ever, if you have any questions, just leave me a comment below.
Weekly Watchlist
After last week’s blockbuster economic calendar, this week events should be lower impact, however markets have a tendency to shock and surprise just when you least expect it. On the data front, we’ll get an update on the health of the US housing market on Tuesday, US GDP on Thursday, as well as data on personal income and spending on Friday.
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The Macro View
Sentiment Extreme Buy. After last week’s equities breakout attempt and subsequent failure, many people have been liquidated, leaving positioning “Extremely Light” according to Goldman’s Sentiment Indicator which measures “stock positioning across retail, institutional, and foreign investors versus the past 12 months. Readings below -1.0 or above +1.0 indicate extreme positions that are significant in predicting future returns.”
Bad breadth is back. From optimistic to pessimistic levels in a few sessions. Percent of stocks above their 20 day moving average has fallen sharply. From 90%, now only 66% of S&P 500 stocks are still holding their 50-day moving averages.
The Buffett Indictor. Market still overvalued. A little long-term perspective. Bear markets usually end when US stock market value / GDP ratio swings to the other extreme by 20% to 30%… The current market remains very much overvalued.
No Capitulation yet. Why might the market still be overvalued? Well, as we can see from flows into equity funds, despite all the bearishness, we’re still not seeing flows reverse all that much.
Bear Market Returns. Going back to 1926, the average bull market returns 162% and the average bear market loses 41%. Current drawdown from All Time Highs in the S&P 500 is 25% .
Recession is consensus. Consensus for the global economy in 2023 are similar and all predict stagnation or mild recession. As we know, the consensus is usually wrong and if we are to see a global recession it will be the first one that everyone is expecting.
Inflation develops through waves, we just saw the 1st one. Here’s a great long term chart to ponder. If this decade is to play out like the 1970’s, we are very much only getting started.
I hope you found this interesting and useful. I write this newsletter every Monday so make sure to follow me! As ever, keep your risk management top of mind, trade safe, and stay nimble out there.
Have a good week!
Kieran
www.traderseed.io
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