Encouragement Where There Is None

February 14, 2022

Good morning,

Futures are little changed now, 90min before the cash market open.  They spent most of the night down over one percent on geopolitical concerns and rallied sharply back to Friday’s closing levels when Russia’s Foreign Minister announced “we can see a way to move forward with talks”.  That should wring some uncertainty out of the market – for the moment at least.

________________________________________________________________________________________________________________

Let’s step back from the headline reading and minute-to-minute view of the market.  Is there anything positive to glean from the broader picture?  We have:

1. The threat of runaway inflation
2. A Fed that may not be able to make the right decision as far as markets are concerned (this is a tough needle to thread):
   
   Too dovish = runaway inflation
   ​​​​​​Too hawkish = recession
    
3. Flattening yield curve
4. Potential of war
5. Crude into the triple digits
6. And of course, no more punch bowl

The most encouraging aspect of the current market environment is that there appears to be nothing encouraging to cite.  This is a formidable wall of worry.  And yet, the S&P 500 is off 8% from its high, the NASDAQ Index is off 12% and the MSCI is up 2.7% this month.  Equity indexes are hanging in there in the face of a hot mess.  EM is not saying global bear market, to say the least.

Oversold indicators remain very bearish (remember, bearish sentiment is bullish), and the bounce rally that was CPI’d last week did little to soften the oversold condition.  Ninety percent of the time, when the market get’s this oversold, it is higher one month later (Ned Davis Research).  There is reason to be hopeful in the short term (weeks, months), and there is reason for concern longer term as January’s sell-off did some real damage to the longer term picture.  It is possible that a rally in the weeks ahead could mend the long term picture, however, color me doubtful of that.  My doubts of that are irrelevant, and the data says be guardedly optimistic for now. 

Be well,
Mike