WEEKLY MACRO NOTE - Lost Something Mate?

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Welcome to this Sunday's WEEKLY MACRO NOTE.

TABLE OF CONTENT:

• WEEKLY WRAP UP

• CRYPTO

• CHART OF THE WEEK

• SENTIMENT

• THE WEEK AHEAD

• ECONOMIC CALENDAR

• FOR THE SAKE OF SPECULATION

WEEKLY WRAP UP

Last week brought broad-based declines across Indices and Sectors on a global scale.

SPX declined -4.47%NDX -5.77%

All major US sectors declined from Tech XLK -6.19% to Basic Materials XLB -6.62%, Financials XLF -3.78% to Consumer staples XLP -3.58%

Even Utilities XLU, which remain one of the few sectors in a relatively bullish trend, declined -2.34%

Despite all of this the VIX closed at 26.31, with a high for the week at 28.4, singling to me that panic has not yet kicked in. Nasdaq Volatility VXN & Russel Volatility RVX at 32.8 and 31 respectively show slightly higher levels of fear baked into expectations, but nothing remarkable yet.

If history is to be our guide, we should expect to see Vol break out above >40 sooner or later, with a true moment of panic selling occurring.

I consider AAPL & TSLA to be bellwethers of the stock market, the former because everyone owns it, the latter because it is the favourite speculative tool of retail traders - it is the stock with one of, if not the, highest call buying volumes on record.With TSLA closing up +1.22% last week I think it is safe to say that retail is still not only holding but also buying Elon's storytelling.Meanwhile, APPL, which failed to break out to new ATHs 4 weeks ago, declined -4.24% last week and is now down -15% in 4 weeks from its most recent local high.

ADBE joins the list of fallen angels with a -24% decline WoW as the company is being punished for a very overpriced cash purchase of FIGMA at 10 times its valuation in 2019. This is in a market where private equity markdowns are starting to happen, and they are not insignificant, given that they have been put off as long as possible. Note: I would put a lot of private equity on the same level as all the speculative stocks which for simplicity I will group under the ARKK banner. ARKK and all the meme stocks topped in March of 2021 and have since declined 70% in value.

The Dollar Index DXY rose +0.61% last week.The biggest losers were the GBP -1.46%, CAD -1.81% and AUD -1.80%

The EUR on the other hadn’t held its ground post the ECB +75bps hike and declined only -0.31, holding on by a thread to that all-important parity level.

Another notable FX move last week was the USD/CNH, now trading at 6.99.

The divergence between Bond Market Volatility and Equity Volatility remains at record levels. The last time the MOVE Index was trading at 124 the VIX was well over 60.Currently, the MOVE is at 124 with the VIX at 26!

I fully expect this divergence to closed before all is said and done.

MOVE vs VIX DIVERGENCE

With bonds selling off and rates moving higher, 60/40 and risk parity portfolios continue to get destroyed, and with the entire US yield curve trading above 3% no reprieve appears to be in sight.

Interestingly the FEDs Balance Sheet rose by +10B last week and since the start of Sept is actually up +6B, so a lot more work needs to be done if they plan on reducing its size by -95B this month.

If there is a question I would ask Chair Powell at next week's press conference it would be precisely this; why is it proving so difficult for the Fed to shrink its Balance Sheet at the stated pace?

The yield curve continues to be at its most inverted since 1999.US 10/2s -42bpsA phenomenon which is not relegated to the US aloneCANADA 10s/2s -67bpsUK -10/2s -7bps

CRYPTO

In the world of crypto, following the long-anticipated (years in the making) ETH merge, where Ethereum moved from a PoW chain to PoS chain, the second largest cryptocurrency by market cap declined -18% in a week, while BTC declined -8%.

BTC remains the King of Crypto, the only one with a degree of legitimacy, and the Bear market in this space is unlikely to be over until the ETH/BTC relationship return to the mean, if not the lows.

BTC at 20k is now hovering at the 2018 high, a level which if broken could lead to a significant selloff. Many have come to believe that because "Bitcoin has never fallen below its prior cycle's high" the same will hold this time.I have written before about how idiotic basing one's investment decision on such relationships is.

At the risk of being repetitive, I will here quote Nassim Taleb again

I will also point out that BTCs lifespan extends only to a cyclical bull market, we have not yet witnessed how it might behave during a cyclical bear market.Thus the fact that BTC has never fallen below its prior cycle high is meaningless.

CHART OF THE WEEK

It is often said that the Dow Jones Transportation Index DTX is a leading indicator within the stock market. This week it made a new closing low with a -8.79% decline.

DOW JONES TRANSPORTATION INDEX

This was driven by a -23% decline in FedEx which now also joins the list of fallen angels. In a preliminary report last week the company estimated EPS of $3.33 for the quarter, well below the estimated $5.14 per share.

To quote the CEO Raj Subramaniam “ We are seeing volume decline in every segment around the world” and “I think we are going into a worldwide recession”

Anyone who cared to look could have seen this coming a year ago, you did not need to wait for the CEO of FDX to tell you in an interview with the one and only Contra Indicator Cramer.

SENTIMENT

Interestingly sentiment turned slightly less bearish last week, with the highest bullish reading in 3 weeks

Meanwhile, positioning became more bearish, with a significant increase in SPX & NDX shorts. Even if positioning is still net long the Nasdaq.

3 Weeks ago i pointed out Brazil, net longs continue to build, even if the USD gained 2% against the Real this past week.

Fear and Greed index at 36 shows increasing Fear, but remains far from the levels of Extreme Fear recorded in late May when a low reading of 3 was recorded.

Equity Put/Call ratio rose to 0.81 from 0.53 in the prior weekIndex Put/Call ratio rose slightly from 1.17 to 1.22

THE WEEK AHEAD

This week we have both the FED & the BOE announcing monetary policy.The former is expected to do +75bps, while some doubts remain as to whether the BOE will do the anticipated +50 or a surprise +75.

A busy week in CB LaLaLand with:The Swedish Riskbank is expected to hike by +75bps to 1.5%Bank of Indonesia is expected to raise rates by +50bps to 4%Norges Bank expected to raise +50bpsCB of Taiwan expected to do +25bpsCB of South Africa expected to do +75bps taking their base rate to 6.25%

A point I would like to make here is that the FED tightening effectively forces every other central bank to follow suit, lest they should risk their currencies devaluing against the dollar at an even faster rate and thereby causing even higher levels of inflation on their citizens.

So we have global liquidity tightening and a global recession = NO BUENO for stocks.

ECONOMIC CALENDAR

FOR THE SAKE OF SPECULATION

For the week ahead I will be looking closely at TSLA for signs of strength or weakness to provide some indication of what we might expect on the index level.

Hindsight bias may cause us to believe that because July and Aug saw violent rallies that squeezed Bears, the same is likely to occur going forwards.While bounces are inevitable, the same dynamic does not necessarily have to play out.And just like we had weeks of relentless buying, we should not be surprised if these are followed by weeks of relentless selling.

The long-term “buy and hold” bull has yet to capitulate and traders who doubled down on their longs at the lows may have their stops sitting in the 3650-3750 range.

Whether this happens next week or in the following weeks is pure speculation, but I would suggest the likelihood of the SPX following the DJT to new lows is quite high.Especially if QT is set to accelerate in earnest.

I want to leave you with a few questions rather than try to make any further predictions

- How will bulls react if Powell comes out in his customary hawkish tone despite the latest decline in equities?

- If the SPX is moving +/- 4% with the VIX in the high 20s, how much will it move if VIX moves up to the high 30s?

• How do you think FedEx earnings bode for other companies?

All this said we look at the week ahead I would urge caution, volatility cuts both ways and as it stands we are in the middle of a range where in the very immediate term equities could either bounce or continue to selloff.

Either way the path of less resistance appears south and any rally IMO remains a sell.

Safe trading and have a good week,

Antonio C. Nobile

I am not a Financial Advisor & this is not financial advice

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