Market Lab Report - Choppy markets sponsored by QE-lite
|13 Apr 2023 06:09 ET
The alt-currency trades
When the Fed started to assume a hawkish stance in late 2021 for the first time since 2018, we became more bearish though are always on the lookout for opportunistic trades in either direction. This underscored the nature of this swing/day trader's environment. Shorting is a short term endeavor where one must be quick to take profits as pigs get slaughtered as we have discussed in detail in our reports and books. Nevertheless, alt-currencies such as precious metals and Bitcoin presented buy signals early this year so we reported accordingly on the actionable names.
At any rate, this hardly seems like the start of any new bull market in stocks despite what has been said by the mainstream press. The risk-on Russell 2000 remains one of the weakest performing indices as it returns to price levels not seen since May of last year when it began its seesaw pattern. If past bear or choppy markets are any guide, such periods are what Jesse Livermore said should be avoided as huge sums of money are lost trading such markets so the sidelines could have saved many investors who don't short in years such as 2000-2002, 2008, and 2022 in stocks as well as in 2014, 2018, and 2022 in cryptocurrencies. Alternatively, solid profits have been made by nimble shorter term traders or by capitalizing on themes as we have done such as in the alt-currency, lifeboat stocks since early this year, thus our advisement to members on actionable names on both the long and short side.
Markets are likely to continue to trade in a choppy manner as stealth QE continues to push M2 higher but institutional investors look to sell into strength as recession looms. Net liquidity rose due to the banking disaster but is countered by bank withdrawals as depositors have been withdrawing funds. Liquidity is likely to fall once again as the Fed will only print just enough as it continues to battle inflation. That said, China and Japan continue to contribute to the overall rise in global M2, thus adding to the riptide nature of major market indices so far this year. If inflation remains stubbornly high due to supply chain issues which keep food prices inflated as one example, the Fed may have to keep rates at elevated levels which will keep liquidity scarce.
Indeed, the upper chart updated to April 11 data shows liquidity starting to roll over once again.
But another wave of tightening comparable to what we saw last year is over because history shows us recession is coming, likely sometime later this year. With the sharp rise in interest rates, the housing market has faltered, but a rise in unemployment (shown inversely on the chart) will confirm we are close to recession. Historically, unemployment starts to rise just before recession takes hold then accelerates.
Once economic data shows contraction in GDP, rising unemployment, corporate earnings falling, and/or delinquencies soaring as many are on the precipice of being unable to pay off their credit card and mortgage debt, the Fed will be forced to lower rates to rescue the economy. Inflation may well be nowhere near their target 2% rate forcing higher average inflation as the norm on a global level. This means prices continue to accelerate as fiat continues to degrade, thus the average standard of living would be hampered.
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