April 21, 2023
Good morning,
An almost eerily calm spell in the equities market may be coming to an end today. Traders have been watching the stock market hug the unchanged line each day this week amid a slew of disappointing economic data. It has kept investors in suspense on whether bad news from corporate earnings or the economy would spark a fresh bout of turmoil. The S&P 500 Index (SPX) is heading for the smallest monthly trading range since 2017. Today is an option expiration day when investors are obliged to either roll over existing positions or start new ones. About 90 million option contracts expire this afternoon, that is up 5% from a year ago. Expiration is a process that usually involves portfolio adjustments and often leads to a spike in trading volume and sudden price swings. Combed with record short positioning in the hedge fund community mentioned Monday and we may be seeing the last of the eerie calm for a while.
The conflicting gulf between technical market signals leaning bullish and macro-economic signals leaning bearish (recessionary) only widened this week. The gulf is understandable if you assign different time horizons to each narrative. Technical market signals typically look weeks ahead, while macro signals may signal events that take months to materialize.
This morning’s macro bullets:
• LEI falls for the 12th consecutive month and by the most since April 2020, indicating an elevated risk of recession.
• Philly Fed manufacturing activity contracts at the fastest pace in this cycle.
• Both initial and continuing jobless claims pick up, as labor market conditions ease.
• Existing home sales resume their decline in March.
In the battle between conflicting technical and macro signals, with time, macro usually wins. I remain cautious here and continue to warn that near term market action may cause those who are cautious some discomfort. Hope you have a nice weekend.
Be well,
Mike