QQQ: Don't be left holding the bag
It is probably nuts to post this with less than 12hrs to go for a seemingly pivotal CPI print, but logically speaking, the CPI is a red herring. I am using the Q's as a proxy for US equities but the idea is generally applicable across multiple indices, sectors and key index heavies. Technically speaking, the Q's are testing a neckline support turned resistance level where there has been multiple touch points which the index had to break through and break down from. At the index level, this would translated to c.13,000. The Q's are testing this significant neckline resistance with a c.+4x standard deviation from trend which marked the previous 2 bear market rally peaks so I am not sure why the 3rd time would any different especially when this bear market rally has not been supported by volume flow, unlike the previous two.
Why is the CPI print a red herring? Simply because the CPI is and was destined to roll over by virtue of mathematical fact as it is a year-on-year growth figure. A lower, non-negative, CPI print does not change the fact that the same chocolate bar is more expensive today versus a year ago. "...but the Feds will cut rates" you say. Why? It is every central banker's wet dream to get positive real rates without crashing the economy, why would the Fed cut rates unless the lagging data shows signs of a economic recession? Be careful of what you wish for. It is not the inversion one should fear but the inevitable steepening.
Talking about expensive, US equities' real earning yields, or implied equity risk premium, is below 2% relative to a basket of US treasury bills/bonds. Are equity investors being sufficiently compensated at a time when the consumer is stretched, companies are laying off people, growth and profitability are down, interest rates are c.5x higher while Uncle Sam has stopped transfer payments and the Fed are reducing their balance sheet?
Of course the market can remain illogical longer than a bear can stay solvent, but the key message is don't be the poor sob left holding the bag. As usual, happy hunting and stay safe.
Why is the CPI print a red herring? Simply because the CPI is and was destined to roll over by virtue of mathematical fact as it is a year-on-year growth figure. A lower, non-negative, CPI print does not change the fact that the same chocolate bar is more expensive today versus a year ago. "...but the Feds will cut rates" you say. Why? It is every central banker's wet dream to get positive real rates without crashing the economy, why would the Fed cut rates unless the lagging data shows signs of a economic recession? Be careful of what you wish for. It is not the inversion one should fear but the inevitable steepening.
Talking about expensive, US equities' real earning yields, or implied equity risk premium, is below 2% relative to a basket of US treasury bills/bonds. Are equity investors being sufficiently compensated at a time when the consumer is stretched, companies are laying off people, growth and profitability are down, interest rates are c.5x higher while Uncle Sam has stopped transfer payments and the Fed are reducing their balance sheet?
Of course the market can remain illogical longer than a bear can stay solvent, but the key message is don't be the poor sob left holding the bag. As usual, happy hunting and stay safe.
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