You could say the market is stuck in a funk -- "neutral," but a bit greedy and ... pessimistic.
The CNN Fear & Greed Index has bumped up to 63, which is technically in "Greed" territory, but just above Neutral.
The American Association of Individual Investor Sentiment Survey is in Neutral territory -- though very close to being too pessimistic. What was most interesting is the number of bears has dropped from 52.3% to 39.9% since Dec. 21, but almost all of those people piled into the "Neutral" camp as the number of bulls remains quite low.
I'm not big on technical charts, but this chart sticks out so much I couldn't help but use it to illustrate my "neutral" point (I'm not opposed to them, they just aren't my first inclination of things to highlight).
The S&P 500 has snuggled right up against the 200-day moving average -- a crucial level. The S&P has failed to breach the 200-day moving average since the selloff took hold in late March. It could easily be rejected again. On the other hand, if it breaks through, we could see buyers emerge -- not only from all of those positioned as "neutral" but from bears, too.
So maybe I should refine my view from simply "neutral" to "neutral, waiting to pounce on the next move -- if only I knew what that next move would be."
Questions That Need Answers
A big question is what is next for inflation. I think it is dying and rolling over and headed toward deflation, because the economy is weaker than the data seems to indicate and is also rolling over (New York manufacturing data on Tuesday was yet another awful print).
The Fed seems easier to understand: A quarter-point hike for February and some hawkish talk, but a bond market that doesn't think the data will let the Fed deliver its full hawkish intent.
From an economic standpoint, I think technology and private equity are the epicenter of the problem and the problem will spread.
I'm keenly watching services, because I think we will see exactly what we already saw with goods, a pent-up demand boom followed by "normalization." That will disappoint stock and economic bulls.
Earnings will be about the outlook. I expect to see lots of weaker-than-expected guidance. Any slowdown in share buybacks could be a jolt to investors.
Expect current data to be interpreted as a "soft landing," but the data won't stay here; it will deteriorate, so you want to sell, but we could see some more upside.
A lot, I think, depends on whether the 200-day moving average is broken on the S&P 500 or rejected. I wish that wasn't the case, but it seems pretty powerful.
Bottom Line
Here are my positions on stocks, rates and credit. For stocks, I am neutral and prefer owning options that cost very little, but generate profit if the S&P 500 breaks 4,100 or 3,900 by the end of next week (yes, I think resolution will be rapid, though I hope I don't miss it between now and when futures open, let alone the actual market). If a gun were held to my head, I'd bet the rally continues and we test 4,200 on the S&P 500, which means I've got to get ride back on that bucking bronco (or I got off too early). Still, I think we will break 2022's lows, but that isn't my gut for the next move.
As for rates, the 10-year at 3.5% isn't particularly appealing. We should see corporate issuance spike after earnings announcements. Now, 3.5% is quite inverted vs. the front end with a Fed that will hike at least a quarter percentage point more. The Bank of Japan won't help things. Positioning has become a bit bullish on bonds (at least from the chatter I get). So, even in my deflationary vision, would I be long 10's here -- probably not.
I like 5-years better than other points. It is "only" 3.6%, so not much of a pick-up, but I like the risk/reward better in fives. Maybe, the 2-year is more obvious, but so little duration and if I'm right and the Fed won't hike, but also won't cut, there isn't a lot of room. For now, I'd be short treasuries/sovereign debt. Yes, I think deflation will be the discussion point of this quarter, but for now, I just don't see much value in sovereign debt.
As for credit, I'm neutral. I don't like leveraged loans -- such as the Invesco Senior Loan exchange-traded fund (BKLN) , SPDR Blackstone Senior Loan ETF (SRLN) -- and other closed-end funds, but I do like collateralized loan obligation funds, such as the Janus Henderson AAA CLO ETF (JAAA) .
