Weekly Preview / March 27
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Monday: N/A
Tuesday: N/A
Wednesday: N/A
Thursday: N/A
Friday: EU Inflation, Personal Spending / Income
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Monday
Carnival (CCL)
Tuesday
Micron Technology (MU)
Walgreens Boots Alliance (WBA)
Cal-Maine Foods(CALM)
Jefferies (JEF)
Lovesac (LOVE)
Lululemon Athletica (LULU)
McCormick (MKC)
Progress Software (PRGS)
Wednesday
RH (RH)
Paychex (PAYX)
Thursday
BlackBerry (BB)
Friday
N/A
Bulls get the upper hand, in the face of banking turmoil
Despite concerns of economic fallout and contagion in the banking sector, the market held up remarkably well. We got a clear BUY signal last week, in one of the technically best setups possible. Not only was the market oversold, but the MACD triggered a BUY signal just as SPY cleared its M-Trend level (essential to allow for allocation). We are now waiting for this trade to play out in the coming weeks or even months, as a lot of market participants are still underweight equities (or downright short).
Upside for the move is at $427 (R1 level), an 8% potential gain. Downside is at $380 (S2 level), with a3.7% potential loss.
SPY Analysis
MACD Signal triggered with SPY closing above the M-Trend
Meanwhile, the market was (and still is) fairly oversold, with many issues near 2 month lows. This signals a favorable moment to add equity exposure to portfolios. At the very least, this level for the broad market makes it hard for the market to “crash” outright.
We conclude that the most likely path for stock prices is higher, over the next couple of weeks. Upside is limited, however, due to a couple of factors:
Despite various measures, a banking crisis is still looming
The Fed is still practicing a restrictive monetary policy
That second point could be countered by the following chart that made the rounds on Twitter last week:
Fed Balance Sheet Total Assets
It certainly looks like the Fed has reversed QT, and instead opened the taps on Quantitative Easing. However, that is not the case. The increased balance sheet comes as a consequence of the new Bank Term Funding Program (BTFP) . It allows banks (and other depositary institutions) to borrow cash from the Fed by posting Treasuries as collateral that would be valued at par. This would avoid a fire-sale of bonds in the event an institution is faced with liquidity stress.
As the chart shows, banks quickly tapped the program and borrowings surged by about $152 billion.
Treasuries are starting to hedge equity risk
A significant change occurred over the past 2 weeks: market participants have been less worried about inflation and more worried about a possible recession. When equities declined, treasuries rose. This is very good news for multi-asset class portfolios, which only had short positions to rely on for hedging purposes.
The Fed’s actions are either going to “break something” (bad for stocks, good for bonds) or keep inflation (and companies’ EPS) chugging higher (reasonable for stocks, bad for bonds). That is why, we are watching breakout / breakdown levels for treasuries as well.
Long term treasuries have been trading in a relatively tight range since November 2022. TLT has not managed to break out above $110 despite 2 previous attempts. We haven’t seen a breakdown below $100 either, as the yield has kept bonds bid. As treasuries are approaching Overbought levels, we are expecting more sideways action unless stocks break down for some reason.
In any case, the yield curve is now fully contradicting the Fed’s actions. The market expects between 0.5% - 0.75% of rate cuts by December. The first rate cut is slated to arrive by July, only 5 months away.
Takeaway
During the past week, we added to equity exposure significantly and completely eliminated hedge positions. With 46% stocks and 44% bonds, the portfolio is at target allocation for now.
However, it should be noted that the composition of that 46% equity risk exposure is rather defensive in nature (32% of the portfolio has a beta of 1 or less):
20% is SPY ETF (highly liquid, reasonably diversified)
9% is Healthcare (defensive sector)
3% is Consumer Staples (defensive sector)
We believe this is the right approach for now, and no modifications are needed in the near term. A breakout / breakdown in stocks or treasuries would be the next trigger we are looking for in order to adjust exposure. With a quiet week ahead, only headlines could move the market, along with systematic strategies.
Note: our usual Portfolio Rebalancing Article will be published on Wednesday instead of tomorrow.