Despite a wrenching banking crisis, the first quarter of 2023 ended with the S&P up 7.03% (and up 3.51% for the month of March). Many skeptics (anecdotally, the majority of our clients) are likely sniffing at these gains, dismissing them as mere noise until the bear market re-asserts itself. But we believe 1Q23 gains now solidifies that “bears are now trapped” — meaning, our analysis suggests that the “lows are in” (10/12/22) and these gains will continue in April.

• The banking crisis is looking more like “clean up in aisle 7” (Mr Mom, 1983) than a full blown crisis. Granted, regional bank are languishing, but the crisis is not widening to a broader loss of confidence in the banking system. This started with a “social-media” generated bank run and those runs have not continued.
• Second, the Fed made a “dovish hike” in March and we expect incoming inflation data to support a further pause (softer inflation). Notably, consumer inflation expectations now stand far below reported CPI — U Mich mid-March +3.8% vs Feb CPI +6% YoY. This is the largest negative spread (-220bp) since late-1982. This gives argument for Fed to “tolerate” CPI reports as consumers see far less inflation.
• Third, over past 50 years, two consecutive quarters have never been seen in a “bear market.” Not in the GFC (2007-09), not in “dot-com” (00-03), not Volcker bear (81-82), etc. As of today, the S&P 500 has now posted two consecutive quarters of gains:
  • 4Q22 +7.1%
  • 1Q23 +7.03%
• Fourth, seasonals favor April gains. We have used the “rule of 1st 5 days” as a guide for 2023. This rule (1st 5 days >1.4% plus neg prior year) implied +2.6% gains for March and March 2023 is tracking +2.1%, so we are very close. This same analysis suggests April +4.2%, or >S&P 500 4,200. This would put YTD gains at ~10%.
• Fifth, investor positioning points to gains in April. CFTC data shows speculators are still short 202k contracts, pinning the bearish positioning in place since October 2022. Notably, some bears are beginning to exit the “trap.” Michael Burry (@michaeljburry) yesterday tweeted, “I was wrong to say sell” (which he did in January 2023).

Bottom line: We are 6 months into a bull market. I believe it is the bears who are trapped and could fuel further gains in April.

• Ongoing resilience in Technology stocks combined with some stabilization in the Banks looks to certainly have been a positive for US equity markets. Now the bounce is starting to gain credibility as breadth starts to show evidence of ratcheting up over the past week.
• Two possible roads look likely in the months to come.  First, Tech might start to stall out and reverse from its recent overbought state and other sectors fail to pick up the slack.  The second and more probable possibility, in my view, is that sectors like Healthcare and Financials start to rally to help buoy US equity markets, which combined represent nearly 25% of the S&P 500.
• Growth has snapped back vs. Value, and Small-caps have begun to stabilize in recent days following a regional-bank led period of underperformance.  Given the recent downturn in both Treasury yields and the US Dollar, it’s thought that both of these remain key bullish arguments for US equities and both Yields and the Dollar could still weaken through the month of April.

• Despite the S&P 500 moving higher, my key strategic indicators indicate considerable risk for equity investors. However, my aggressive tactical tools (HALO-2 and V-squared) have not yet reached tactical extremes, and we are ending a back-and-forth quarter on an up note. While certain market-based tools suggest that investors are pricing in Fed easing and the VIX index has collapsed from nearly 29 to under 19 over the past two weeks, my research does not support these two factors. Therefore, I am perplexed, much like I was during the back half of January and early February when dovish expectations were growing and equities were rallying.
• My analysis still has not signaled that we are in the early stages of a new bull market, although the burden of proof has shifted to anyone who shares a similar view to what I have been communicating. In my view, forward earnings expectations appear too high, valuation levels are unattractive, inflation remains elevated, and skepticism about the Fed returning to easing persists. Additionally, I still anticipate additional issues in the banking system, which will likely exert downside price pressures on the overall equity market.
• Regarding positioning, my work continues to support high-quality stocks versus low-quality ones, larger-cap stocks versus smaller-cap ones, and secular growth versus economic cyclicality. These ideas have recently surged higher and are extended, but I believe that any relative weakness presents an opportunity to raise exposure.

• The recent volatility in the bond market, indicated by the MOVE index, has contributed to increased use of the Reverse Repurchase Agreement (RRP) facility. As the bond market stabilizes, it is expected that some capital will move from the RRP back into the private market and serve as a buffer to net liquidity.
• The Fed may pause rate hikes, and historical data shows that while risk assets underperform after the final hike amid persistent inflation, they thrive in disinflationary periods. Thus, I believe a pause in rate hikes should be viewed as constructive for cryptoassets.
• On April 12th, Ethereum’s “Shapella” upgrade marks the formal transition to proof-of-stake and unlocks 16 million staked ETH. Concerns about outsized sell pressure are mitigated by existing liquidity access, withdrawal queue restrictions, and market de-risking prior to the upgrade. A ETHBTC rally may follow the upgrade’s successful implementation.
• Polygon Labs launched the beta version of Polygon zkEVM, a zero- knowledge rollup network enabling high throughput and low fees on Ethereum. It stands out with EVM-equivalence, allowing seamless Ethereum app deployment. The success of Polygon’s PoS chain and new scaling solutions, including zkEVM, support a bullish outlook on MATIC.
• The CFTC filed a lawsuit against Binance for unregistered crypto derivatives trading by US customers, similar to prior BitMEX action. The CFTC declared BTC, ETH, and LTC as commodities, potentially influencing the regulatory jurisdictional battle between the CFTC and SEC.
• Core Strategy – After an impressive quarter for bitcoin and the wider crypto industry, it is certainly tempting to look for recent tailwinds to turn to headwinds. However, we think the risk asymmetry in 1H remains to the upside, as liquidity conditions for risk assets should remain favorable, buoyed by global liquidity increasing. Key risks to this perspective would include sustained bond market volatility, a hawkish shift from global central banks, or a debt ceiling resolution, which would result in a glut of new treasuries coming to market.