Nasdaq went "no bid" on 9/13 with zero stocks advancing. 13 of 13 times, Nasdaq 100 higher median 12M gain 21%. When already >25% drawdown, median gain +64%

In 2H2022, there have been two separate days where markets saw massive declines:

• post-Jackson Hole on 8/26
• post-August CPI on 9/13

In both instances, equites were reacting to re-calibration of Fed expectations. That is, when investors see risk of tighter Fed, stocks have fallen in a broad retreat. The negative reaction to future Fed policy is logical.

But this does not mean stocks have to break below the June lows (sure, a retest is possible). Foremost, we view June 10, 2022 as the date of the fundamental capitulation — the date investors essentially lost all hope regarding containing inflation. By contrast, the larger debate today is whether inflation is “sticky” or will soon “fall (maybe fall like a rock).”

If inflation has peaked in June 2022, then stocks arguably made their structural low

If inflation has indeed peaked, this is important for arguing stocks have already made their low, or at least their structural low. The 1970-1985 inflation saga underscores this point:

• S&P 500 made a major low every single time “headline CPI” peaked
• This was followed by a strong equity rally lasting 3-years plus
• Equities did not bottom on “core CPI” peaking, but “headline”
• June 2022 is arguably the “headline CPI” peak

Thus, even for those in the “inflationista” camp or even the “we are in a long-term bear” camp, the fact is, if headline CPI has peaked, the June 2022 equity lows should be durable.

NASDAQ NO BID on 9/13: Only 4 times Nasdaq saw “zero advances” when already down 25%

One of our research analysts, Matt Cerminaro, highlighted a pretty interesting development from 9/13:

• on 9/13, the Nasdaq went 100% “no bid”
• 100% of the stocks declined on that day
• meaning there were zero advancers
• as Bloomberg highlights, this was the first time since March 12, 2020

There have been a few times since 2020 where this figure was 1% or basically barely above zero. These instances are shown below and as flagged, were times when NASDAQ was at the end of a sell-off.

• these “zero-ish” readings have not really happened at the start of a sell-off

STRUCTURAL CAPITULATION: Since 1996, 13 prior instances of “0” Nasdaq advancers and only 6 when Nasdaq already down 25%

Since 1996, there have been 13 such prior instances where the Nasdaq 100 went completely “no bid”

• these are plotted as dots below
• the yellow are instances of zero advancers
• the red are instances of zero advancers and when Nasdaq is already down 25% from an 18-month high

ZERO BID: 13 of 13 times, Nasdaq 100 higher median 12M gain 21%. When already >25% drawdown, median gain +64%

The forward returns for the Nasdaq post-zero bid are impressive:

• 13 instances, median 12M gain is 21%
• 100% win ratio, or 13 of 13 instances
• when drawdown >25% in place, median 12M gain is +64%
• staggering upside

This highlights that the Nasdaq has structurally bottomed. That is, when zero stocks advance, that is essentially one form of capitulation.

The scatter below highlights that the stronger the drawdown in place (x-axis), the greater the 12M upside.

• the shaded red area are instances where Nasdaq drawdown was already >25%
• the intercept of this regression implies Nasdaq 100 could have >40% upside in the next 12M

INFLATION: 12 of last 14 inflation reports show falling inflation, not “sticky”

Equities tanked on 9/13 following the August CPI report. This is a “hard” inflation report, so it is naturally market moving, especially considering inflation is the single most important factor for markets. Take a look at the table below:

• over the past two weeks, there have been major 14 economic reports that are a snapshot on inflation (or an aspect)
• 12 of 14 show marked/sharp declines in inflation including “hard” reports like PPI and Import prices and key surveys like ISM, and regional ISMs
• Only CPI and perhaps JOLTS show any sticky inflation

The takeaway? While CPI is certainly hugely important, the upside inflation surprise (negative) from CPI is not necessarily corroborated with other inflation reports. While I cannot explain the variance, this could be a result of the lags/smoothing in the CPI report itself.

INFLATION: Regional PMIs this week show prices paid falling “like a rock”

On 9/15, the Empire (NY) and Philly Fed regional PMI surveys for August were released. In both cases, we are seeing a decline in the prices component:

• Empire prices paid for 15.9 points to 39.6
• Philly Fed prices paid fell 14.0 points to 29.8
• These are “falling like a rock” and not gently/sticky

And this is a consistent picture from the PMIs and the regional PMIs. As shown below, the “prices paid” components are falling pretty rapidly.

• this is not “sticky” inflationary

And this is something that many economists/Fed historians note. For instance, take a look at the comments from former Fed Vice Chair Alan Blinder (now professor at Princeton). He notes that this inflation is “still young.”

NYFRB Underlying Inflation Gauge (“future inflation”) has rolled over…

Even the NY Fed (NYFRB) underlying inflation gauge has stopped rising and is now rolling over. This is sending the same message.

• while the August CPI showed a picture of “sticky” and rising inflation
• many other measures/leading indicators point to inflation weakening

STRATEGY: 2H rally view intact

Given the list of market worries above, the natural question is how is there a positive thesis on equities into 2H2022? Here is our take:

• our continuing analysis shows leading indicators point to disinflationary/deflation
• US corporates remain impressively resilient, enduring the pandemic global shutdown with cost discipline
• and US corporates are weathering the inflation surge impressively as well
• the US economy has managed to absorb rapid Fed rate hikes so far
• and US economic relative positioning far stronger in 2022
• US net beneficiary of higher energy prices, absolute and relative (US exports oil)
• US is on-shoring assets = future competitive advantage
• US has labor issues, but this will be solved by either automation or rise in workforce participation
• investor sentiment is rock bottom and worse than GFC by some metrics
• fixed income markets show far less inflation in swaps, etc
• and while many believe “bonds are getting it wrong” including Fed officials
• the drop in energy and housing and other indicators are supportive of this lower inflation outlook
• hence, Fed could do far less tightening as the market is doing Fed’s work

Bottom line. We see 2H rally thesis intact.

STRATEGY: 2022 Bear market was 164 days, or 25% duration of prior bull

Our data science team put together the comparative duration of bull markets and bear markets, and the corresponding ratio:

• since 1942, there have been 14 such cycles
• median ratio of bear vs bull is 31%, meaning a bear market is roughly 1/3 duration
• since 1982, this ratio is only 15%

• in 2022, the preceding bull market was 651 days
• the current bear market was 164 (using 6/16)
• or 25% ratio

As seen below, this ratio is solidly within the ranges seen since 1982.

• many investors think “more time” is needed for this bear market
• but given the shortness of the preceding bull market 651 days versus 1,309 median
• the corresponding bear market should also be shorter

BUY THE DIP REGIME: Stocks already saw fundamental capitulation

And we want to revisit the chart below, which looks at the internals of the S&P 500 — the % stocks >20% off their highs, aka % stocks in a bear market.

• this figure surged to 73% on 6/17
• this was only exceeded 3 times in the past 30 years
• each of the 3 prior instances was the market bottom
• we think this is the 4th instance

BUY THE DIP: forward returns strong

And stocks have the best forward returns when this figure exceeds 54% as shown below:

• in 3M, 6M and 12M
• the best decile for returns
• is when this figure is oversold >54%
• hence, buy the dip regime is in force

We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday

 _____________________________

33 Granny Shot Ideas: We performed our quarterly rebalance on 7/12. Full stock list here –> Click here

______________________________