“Satisfaction of one's curiosity is one of the greatest sources of happiness in life.” ~Linus Pauling, Nobel Laureate (Chemistry, 1954 and Peace, 1962)

Good evening:

As the first trading week of October and the fourth quarter of 2023 began, Fundstrat Head of Research Tom Lee acknowledged that the tough third quarter, in which the S&P 500 fell 3.6%, has left investors nervous and fearful. However, he pointed out that the markets and the economy have been resilient this year, and “from that perspective, it’s always been better to add exposure when markets are concerned and skeptical and fearful.”

And they are: Lee pointed out, for example, a recent intraday spike in the CBOE put/call ratio to 1.97% – i.e., investors bearishly and disproportionately buying puts. “A spike like that has only been seen 20 times in the last 7,650 trading sessions (0.2%), it’s incredibly rare,” he pointed out, “and it’s a signal that a turning point for stocks is imminent. When market participants make an extreme move in one direction, the forward path tends to be the opposite. With the right catalysts, a buyable opportunity will emerge soon.”

Mark Newton has also noticed recent bearishness, and he, too, sees this as a good sign. “Look at what's happened since July – this was a time when people were greedy,” Fundstrat’s Head of Technical Strategy said at our weekly huddle as he displayed a recent Fear & Greed Index chart. “Now we’re in a time when people have largely gotten fearful. We're down at the lowest level really since March, we are near extremes at this point.” And as readers might recall, markets began a long rally shortly afterwards.

“I am of the opinion that markets are very close to bottoming out, probably about a week away,” Newton said. “We have a short term oversold market heading into the bear-killer month of October, and timing, breadth, and momentum have gotten to very compressed levels. Historically we saw levels like that in March, and we also saw them last October when the market bottomed. So we're getting pretty close.”

“The recent pullback feels awful,” he said, “but yet there’s been no real structural damage – we really haven't seen that technical deterioration. And the reason is Technology. Tech has held its value, and not just FAANG, but broader tech, software, everything else. So until or unless this breaks, Tech is going to lead us out of this I think in Q4 and that's going to happen as rates start to roll over.”

Lee, in turn, suggested that interest rates have risen so relentlessly as to turn equities and the S&P 500 into a single-issue market. “In the short-term, we cannot escape this connectivity – for now, as long as interest rates rise, we will see equities weaker.”

“This move higher in rates is arguably a shift above where rates should be fairly valued – price is a signal, but that doesn’t mean it is calibrated to fundamentals,” he said. Advancing his case, he pointed out that “Europe has a greater inflation problem than the U.S., and yet they’re borrowing money at far lower rates.” So, Lee asked, “Is there a fundamental separation taking place between what 10 year yields are in the US compared to the rest of the world? Are they anchored properly by fundamentals?”

This apparent disconnect is shown in our Chart of the Week:

From a macro perspective, jobs numbers were in the spotlight this week. We saw positive numbers from ADP, but the August JOLTS report came in hot – though a closer look at the data suggests an anomalous reading possibly resulting from unintended quirks in the BLS seasonal-adjustment methodology. 

We also saw very strong numbers in the September jobs report, with huge jobs additions but wages softer than expected and unemployment slightly higher than estimates. Ahead of the report's release, Lee wrote that a plausible “best-case scenario is a ‘hot jobs’ figure and an equity intraday reversal. That is, stocks sell off in a knee-jerk reaction to a hot wage or hot jobs figure, but then equities manage to close higher.”

His hope was for hot jobs data to serve as a catalyst to trigger the “flush” in stocks foreshadowed by increasingly bearish sentiment. While it might be too early to say that the flush occurred, an intraday rally as he described it is exactly how we ended the week. 

Elsewhere 

The United Autoworkers decided against expanding its strike against any of the Big Three automakers, UAW President Shaw Fain announced Friday. Fain said the union had won a key concession from GM in which workers at future electric vehicle battery plants would be covered by the UAW's general agreement with other GM employees. Progress has also reportedly been made in negotiations with Ford and Stellantis.

The largest health-care strike in US history began on Wednesday, when 75,000 employees at Kaiser Permanente walked out of their jobs at hospitals and medical offices in five states and Washington, DC. The strikers include vocational nurses, home health aides, and medical technicians.  

President Biden announced a new effort to relieve student debt, approving $9 billion in student-loan forgiveness for 125,000 Americans. Among those that will qualify for this initiative are those who have worked in public service for at least a decade and borrowers with disabilities.

Regulators continued to look into antitrust concerns involving Big Tech, with the UK’s Ofcom asking the Competition and Markets Authority to launch an investigation into the cloud-computing businesses of Amazon and Microsoft. Ofcom claims the two companies collectively control 70-80% of the market in the United Kingdom.

The first-ever U.S. fine for space junk has been levied against Dish Network. The company’s EchoStar-7 was supposed to climb 186 miles above its working orbit of 22,000 miles up in 2022, but ran out of fuel after climbing 76 miles, thus posing a threat to other satellites. Dish Network was fined $150,000.

And finally: Nobel Prizes were announced this week. This year’s Laureates were recognized for work on mRNA vaccines (Katalin Karikó and Drew Weissman – Medicine), attosecond laser pulses (Pierre Agostini, Ferenc Krausz and Anne L'Huillier – Physics), quantum dots (Pierre Agostini, Ferenc Krausz and Anne L'Huillier – Physics), and “innovative plays and rose which give voice to the unsayable” (Jon Olav Fosse – Literature.) The Nobel Peace Prize was awarded to Narges Mohammadi, an activist who has been imprisoned and sentenced to 154 lashes in Iran because of her fight for women’s rights.

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