Big Four Macro Overview: Equities

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SPX Monthly Log Scale:

• Despite last years 28% decline, the defining uptrends remain intact. In my view, the A1-B1 trendline best defines the bull market but decent arguments can also be made for C-D. A test of C-D would require that the market decline roughly 30% from the most recent close.
• In the absence of overtly bearish behaviors and with the primary trendlines intact, I would be hard pressed to conclude that the macro trend has changed. The secular bull remains intact and it should be given the benefit of the doubt.
• That said, my fundamental world view continues to suggest that equity remains vulnerable. I believe that the primary trend is in a transition between bull and bear (or at least bull to neutral).
• While still willing to take bullish trades, I will monitor closely for opportunities to sell solid technical setups into weekly perspective strength.
• Generally speaking, this position in the trend continues to be characterized by poor valuations and overly developed bullish sentiment. That was certainly true going into last year, but has been somewhat addressed (depending upon the sector). Despite last years decline, I see valuations and sentiment as more consistent with a market building a top as opposed to one basing for a fresh bull run.

Triple Screen ( MACD Momentum):

• Suggests that the current weekly perspective rally is corrective to last years monthly decline. The daily (far right) is setting up a significant divergence, suggesting that the current daily perspective uptrend is quickly aging.

NYSE Composite Monthly (Log):

• Despite last years decline, the technical trend remains intact.
• Last years high to low decline covered 25%. Post “Greenspan Put” declines have covered -42%, -60% and -40% respectively. The 25% drawdown seems incomplete to me. Particularly against an environment in which the Fed is deemphasizing asset prices and concentrating on keeping inflaiton inbounds.

Fundamentally:

1. Both policy vectors (Fiscal and Monetary) are negative and are unlikely to provide support. This may change if rising rates break the weakest financial link and forces the Fed to pivot to address a systemic issue or the building recession threatens to become a hard landing.
2. Of the 19 bear markets since 1929, 15 have been accompanied by rising inflation . Rising inflation is by far the most consistent/reliable of the bear market factors.
3. I believe that the period of very low inflation created by globalization, good demographics, and several other factors has reversed. With higher underlying inflation rates, central banks won’t have the luxury of combating weak asset prices with unlimited liquidity.

And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

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Originally Posted February 6, 2023 – Big Four Macro Overview: Equities