Welcome to Expert Insights, a weekly analysis of all the major market moves, news and opportunities that will shape the week ahead.
This newsletter and the statements contained herein are the mere opinions of industry professionals, to which other equally qualified industry professionals may disagree and should not be relied upon as financial advice and do not necessarily represent the views of Freeway. You should always do your own research and seek independent expert financial advice.
Dear #FreewayFam,
Bear squeeze, bear rally… Can the market bear it anymore? The war in Ukraine seems to be reaching a stalemate, inflation keeps soaring, and a global recession is still looming in the background. These are difficult times. In order to understand them better, read these experts’ views and insights for this week.
Agent Alpha
General ‘risk on’: A bear squeeze only or something more profound? If it is only a squeeze, how far can it go? How should one position to max it out?
There is a general risk asset price squeeze dynamic from now on. And the questions obviously vexing the industry are how far can it go? At what stage — should it continue — will it become something more than just a bear squeeze? At what level is this completely debunked and the near-term upside we’ve seen over the last few days is merely a blip in a structural bear market? And what is the general positioning setup into this squeeze or, in other words and perhaps most importantly, HOW to benefit to the max IF, indeed, we do push on?
We have also started to get quite important divergences of opinion amongst Wall Street’s most — current — respected strategists, so I outline in my view how to read this splintering of opinion.
I am also going to highlight two interrelated factors that are critical as to whether or not we can finally start to think if a bottom for risk assets has been found or not.
I’ll begin with the setup:
I highlighted in prior Alpha pieces how the global proxy risk index, the S&P, was displaying some seller exhaustion; lower lows with accompanying higher RSIs (Relative Strength Index). We can see how that proved — from a trading perspective — true.
As to where we now sit — always using the critical ‘exponential moving averages’ and not the ‘simple’ that so many do — we hold above the 29-day MAV, shy of the 50-day and the target area — should the squeeze dynamic manage to continue — I highlight as around the 200-day c. 4068, with upside potential on a bear squeeze extremist dynamic of that longer-running trend line around 4150.
As a related aside: Morgan Stanley Chief Strategist Mike Wilson — who has nailed these markets YTD and is widely followed — called earlier this week for a rally with a target in the area of… you guessed it, 4150.
So for this current squeeze to become more than just a bear squeeze — to reiterate the point made in earlier Alpha pieces — a move > trend line around c. 4200 would be required. That is still of course a c. +8% to +10% in the general market potential move from here, which, believe me when I say it, would cause a LOT of PAIN out there for a whole swathe of the investment industry which is now mass-crowded in bearish investment strategies.
S&P E-mini
Now, for this rally to be debunked, the obvious swing point highlighted by the horizontal red line around 3585 would need to be breached to the downside. Should that happen, we are looking at a complete reset of risk assets as 3k–3400k will most likely become the new target trading area for the global risk index.
That’s the broad technical setup. What about positioning?
Before I go there, I thought this from investor Dan Niles (well followed in the States) summed up nicely the near-term outlook when he tweeted:
‘Rally from CPI lows on 10/13 (he is American after all) has been modestly related to oversold conditions then solid bank earnings. NFLX (-60% ytd) results give optimists hope that beleaguered tech has now found a bottom. Believe bear mrkt rally continues at least until the megacaps report starting on 10/25’
Makes sense.
To positioning:
The latest Bank of America’s FMS (Fund Manager Survey) was published yesterday as Bank of America Chief Strategist Hartnett — who we definitely must give credit where it is due having absolutely nailed these markets YTD almost to the very tick (regular Alpha readers will remember I flagged his call when he said to short the market at 4137 back in early Sept… to the tick, almost correct! — says that ‘our fund manager survey screams macro capitulation, investor capitulation, and crucially start of policy capitulation. Cash levels 6.3% highest since April ’01, investors 3sd UW equities; tasty morsels for bear rally (if UST yields stay <4%)’.
In other words, Hartnett is saying — if the U.S. fixed income yields can behave (obviously from current levels) — investors should start to position for the ‘risk on’ dynamic ahead.
And so I highlight this chart from BoA about positioning, which says essentially the trades for ’23 is SHORT $ (+GBP), long tech vs. U/W staples and healthcare & in general +Europe vs. The U.S. The last recommendation is +Europe vs. -SHORT the U.S.A. I don’t agree with that call, that’s a notorious widow-maker trade attempted year after year by many a strategist to their detriment.
It is really the first time since this bear market began that this ‘divergence of opinion’ amongst the major Wall Street strategists has happened. I refer to the two strategists who have nailed this year pretty much perfectly. Morgan Stanley’s Wilson and Bank of America’s Hartnett.
I paraphrase here, but Hartnett is basically calling for a bottom as I see it, saying that positioning and capitulation are now so extreme that investors need to take advantage and take the risk on the plunge, positioning themselves against the crowds that are now so obviously, well…, crowded. This, as Morgan Stanley’s Wilson is saying that the upside is coming on a squeeze basis with a 4150 target area for the global risk proxy index the S&P, BUT is nuancing this call by saying that the earnings outlook for U.S. corporates — that are starting to report Q3 earnings season now — is operating on a lag. That the current earnings season, which is starting off reasonably well vs. bearishly positioned consensus is distorting somewhat the true picture that will become far more negatively obvious come Q1 ’23, thus meaning a market in early next year will succumb to further downside accordingly.
Time will of course tell — but I find the dichotomy of view now worth highlighting.
Conclusion:
I think the market setup right now is increasingly proving to be a bear squeeze dynamic which will only become ‘more’ should c. 4200 take out. But should the move higher ultimately only prove a bear squeeze to then succumb to an earnings crunch into ’23 and fall back, it is still a very powerful upside to play for in the coming weeks being c. +8% to +10% of potential nonetheless.
The positioning is quite extreme, and I think it is very handy to be provided with such a glaring portfolio snapshot of the global investment community by Bank of America’s latest FMS. I advise taking notes accordingly.
And, finally, I want to highlight two interlinked and critical factors out there that will determine not only whether or not this is a bear market rally that has legs, but also whether or not this is a bear market rally that has legs to push to the target area of Morgan Stanley’s Wilson (4150), but through and beyond, meaning it turns from a bear market rally into something far more substantial and powerful through ’23 as Bank of America’s Hartnett I believe is implying.
Do you recall Bank of America’s caveat? That 10-year yields do NOT travel too far > 4% handle. Well, the chart below is the 10-year U.S. nominal yield and it is hovering around 4% currently. What I find very encouraging is how there — again — is a clear negative divergence. A higher set of prints in the absolute yield level vs. lower RSI prints. I think we’re looking at a topping-out dynamic in other words and a move back into the mid-3 % range, plausibly.
If this proves accurate, it will provide a tailwind to more than just a ‘bear market rally’.
10 yr yield
What about financial conditions?
Well, they are starting to ease once again, which of course is a tailwind for risk per se. Need to see this easing continue.
BFCIUS
Until next time,
Alpha
Crypto Quant
Divergence!
This is the point where bear markets break traders, and usually everyone gets confused.
BTC and related metrics on Technicals: I’ll list each one with a simple indication of up (⬆️) /down (⬇️)/sideways (⬅️➡️). Extra macro significance gets 2 arrows.
Total:
⬆️:0
⬇️:10
⬅️➡️:4
Verdict: We may have some relief, but the market still looks bearish.
The analysis below:
⬇️ The spy is moving up on basically no volume.
⬇️ Crypto fear and greed remains in the 20s (23 now). Recession fears are quite justified.
⬇️ Daily moving averages are 100% bearish.
⬇️ Ichimoku for BTC is as bearish as always, and nothing has changed since September.
⬅️➡️ DXY is having a pullback, but the implications are unclear as it is overall macro bullish. There’s a Doji on the monthly candle, so far.
⬅️➡️ BTC Monthly open is an explicit Doji as well.
⬇️The 3-day SPY chart is just getting uglier by the day, we’re maybe a week out from this getting significantly more bearish.
⬇️BTC 4h metrics are again (!!!) a double top that has turned bearish, which is a massive correction sign.
⬇️ Bitcoin dominance is signalling that we are going to head near a bottom.
⬇️ Another short squeeze completed, we haven’t seen enough corresponding long liquidations yet.
⬅️➡️ Futures Funding data shows longs walking away. Either up we go (unlikely given volume), or down we go (more likely).
DXY is in an unclear state, as 1-month is a Doji, and 3-month has a long way to go before it closes. GBP, KRW and EUR have bounced, and CAD, CNY, CHF, AUD, INR, and THB are continuing down. ⬅️➡️
Recession warnings are abundant. ⬇️⬇️
Total2 (above). We are completely bearish on Total2. This has been sustained for a long, long time. We’re at a point where even above $670B would be bullish, but it’s just simply not near the horizon. This is a setup for an ugly, ugly drop — if it happens within the week.
BTC dominance (BTC.D) — Bitcoin dominance rising inversely corresponds to Total2 dropping. This implies the entire alt market is just dying off in general, as seems to be the case. Also lines up with the hash rate continually rising despite the market falling.
DeFi outlook: DeFi — DeFi has exited the broadening wedge downwards in the bear market. That is possibly the most bearish thing that can happen, overall.
Trader outlook: No change. The market is exceedingly shaky on the precipice of the big shakeouts.
Notable events outlook:
Crypto: Do Kwon says Interpol didn’t issue an arrest warrant, with no basis. France is prepared to look into Crypto Taxation. ftx.us and Sam Bankman-Fried are under investigation. The U.S. is looking into 3AC.
Globally:
China officially calls it quits on reporting just how awful their economy is. Blackrock aggressively lowers growth forecasts on China to basically nothing. U.S. controls on chips may play big into escalation against China.
War: Russia’s Iran-purchased drones have been identified. War is slowing down a bit.
Europe: Deutsche Bank gets raided for tax avoidance.
U.S.: Trump corruption is gaining a lot of coverage. Steele Dossier source is acquitted by a jury. Trump’s COVID coverup by a Gazprom employee (Russia) is also exposed. Herschel Walker cosplays a cop. U.S. conservatives say they won’t support the Russian war. Twitter freezes employee stock pre-Musk deals (if it ever happens at this rate) — while Musk is under investigation.
Prior Opportunity follow-up: N/A
New Opportunities:
I’d recommend sitting tight until we get a clearer picture, right now it isn’t clear at all. At best, this is a good time to stick to the Bitcoin short plan up till 21k or so.
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Sadie Hutton
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This newsletter and the statements contained herein are the mere opinions of industry professionals, to which other equally qualified industry professionals may disagree and should not be relied upon as financial advice and do not necessarily represent the views of Freeway. You should always do your own research and seek independent expert financial advice.
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