"I have tried to keep on with my striving because this is the only hope I have of ever achieving anything worthwhile and lasting." ~ Arthur Ashe

Good evening,

Major stock-market indices have continued to advance and, as of Friday, the S&P 500 has closed up nine out of the last 10 days. With a decided scarcity of new macroeconomic data to drive the markets this week, Fundstrat Head of Research Tom Lee saw positioning as one of the main reasons for the rally.

Lee told us that despite what the rising indices might suggest, “this is not a rally that investors are trusting or embracing.” He added, “based on our conversations with clients, many remain skeptical. In fact,” he said, “it is not just our clients. Equity fund flows remain negative, investors have been buying more puts in the past week, and the CBOE US equity put-call ratio has been hovering near a high of 1.0 for the past few days. And CTAs as a group have essentially been selling stocks. That’s a contrarian bullish signal,” and it is shown in our Chart of the Week:

Lee reiterated that when investors are positioned like this, he believes “markets can levitate in the absence of catalysts such as macroeconomic data.”

Head of Technical Strategy Mark Newton agreed that we have seen an impressive rally this week, but warned that contrarians need to be aware that other measures show sentiment starting to improve. Following the rally that began last week, Newton observed that “you can really see the extent of the flip-flop in AAII sentiment. Over the last week, we went from 50% bears to 27% bears, while the bulls rose dramatically. People certainly aren't as negative as they were a couple of weeks ago.”

Newton was cautious about the market’s near- and intermediate-term prospects. “I think it’s pretty constructive overall to have gained as much as we have, but I don't think it's right to really chase this rally in the near term,” he warned. Although the major indices have advanced, Newton observed that, “Technology largely carried the rally. The majority of the market has really faltered a bit. When you look at equal weighted S&P, you can see the extent of the damage that we've done in the last few weeks, and that makes it problematic to think that we're going to immediately go back to new highs. I am optimistic between now and the latter part of January, but my work suggests that next week we're going to have a pretty big pullback, right into the time around Thanksgiving.”

What would give Newton more confidence in the markets? “We really need yields to get down under [4.35%] to say that the Treasury market has officially bottomed. That would make me think that we're going to have a decent rally into the next summer, but I think that's a little bit premature. In my view, yields are still likely going to chop around and we're near yield-based support.”

In contrast, Lee sees the market and corporate America “already in a profit-recovery cycle.” He noted that, “earnings season turned out to be better than many believed.” Blended (reported results plus estimates for companies that have yet to report) 3Q 2023 YoY earnings growth climbed to 5.7%, a revision up from 1.6% when earnings season began. “But the real story emerges when you look at the S&P 500 ex-Energy,” Lee said. Excluding Energy, that number jumps to 11.1%.

And as Ken Xuan, Head of Data Science, noted, earnings for every sector have been  revised higher once actual results began to be reported. “The only exception to that was Healthcare. And that’s basically down to the results of one company, Moderna (MRNA 0.97% ), weighing the sector down.”

With 92% of the S&P 500 having reported third-quarter earnings as of Friday morning, 81% have beaten estimates, and those companies are beating expectations by a median of 7%. 

Other observations from Newton:

“Airlines are something that look very good to me for a very good bounce in the next couple of weeks. A lot of that is due to crude oil having recently rolled over – as crude goes down airlines tend to work.”

“Another thing to watch is what’s happening with the Aerospace and Defense group. Given the ongoing Israel Hamas war – and it doesn’t seem like there is going to be an end to this conflict anytime soon – I think this part of the Industrials sector will thrive.” 

“The longer-term cycles for Energy are quite optimistic between now and next September. September 2024 is when I think Energy peaks. I would say that we have about a 10-month period ahead of us where Energy should do very very well.” 

Elsewhere 

The Asia Pacific Economic Cooperation summit begins in San Francisco on Saturday. The White House has confirmed that President Biden will meet with China’s Xi Jinping on November 15, while the Chinese President is in the US to attend the summit. Xi will also be the featured guest at a $2,000-a-head dinner with US business executives – for $40,000, an executive can be seated at Xi’s table.

Hollywood can resume production after the Screen Actors Guild and the Alliance of Motion Picture and TV Producers came to an agreement that includes “streaming participation” bonuses, higher minimum pay rates, and protections against studios using AI to incorporate, replicate, or imitate actors’ likenesses and voices. Some have estimated that the strike by actors and writers (settled earlier) cost the California economy more than $6.5 billion.

A ransomware attack on the US unit of the Industrial and Commercial Bank of China (ICBC) temporarily jarred the Treasury market on Thursday, impeding the bank’s ability to clear Treasury and repo-financing trades, and affecting market liquidity. Some observers attributed the attack to LockBit, a Russian hacker syndicate, which has also been blamed on previous cyberattacks on Boeing and the UK’s Royal Mail.

OpenAI blamed a distributed denial-of-service (DDoS) attack for intermittent outages in its ChatGPT service this week. Anonymous Sudan, a hacker group believed to be affiliated with the Russian government, claimed it had carried out the attack because of what it described as OpenAI’s pro-Israel bias.

China’s economy slightly deflated in October, with CPI coming in at -0.2%, a larger decline than the -0.1% expected by analysts. This was driven largely by lower prices for food – particularly pork, a major ingredient in the Chinese diet and thus a significant component of the country’s CPI. However, it wasn’t just pork: Core CPI was -0.6%.

And finally: Colombian authorities are working to recover the wreckage of the San José, a treasure-laden galleon that sank off the coast of Cartagena in 1708 after a battle with the British navy. The value of the 200 tons of gold, silver, and jewels  on board is estimated to be as much as $20 billion, or about 6% of the country’s GDP. It should be noted that Spain also claims ownership of the ship and its contents.

On this Veterans Day, we at Fundstrat thank the men and women of the United States Armed Forces, both those who have served and those currently serving.