The market rebounded well from the morning's lows.
With the benefit of hindsight it was a great day to trade.

Who would have thought the S&P Index would close almost exactly flat?

It's been a long day and week and I can't wait for the weekend.

Enjoy the long weekend.

Be safe.

Still negative, but some improvement in market breadth at 3:25 pm:

Breadth

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Heat Map

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Movers

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(XBI) turns green.

As I mentioned yesterday, I have a research call for the next hour or two.

I was a putz for selling my (VXX) long.

I haven't heard anyone mention that the yield on the 10 year US note is +7 bps today to yield 1.77%.

The way I see things and the way the markets are acting - bad - we are likely to have one helluva buying opportunity in the next few weeks/months.

Working with a scale lower to buy more (XBI) .

Just added.

Investment, not trade.

At 1:15 pm:

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This is how you get into trouble in a mature Bull Market: 

dougie kass

Notice when Mr Wonderful and others on FIN TV who don't have the time or inclination to analyze companies closely, use glittering generalities that have nothing to do with owning a stock. (I like the product, management is listening to the consumer, upside calls are being purchased, etc.)

No discussion of fundamental expectations (relative to consensus), or valuations or accounting.

Dougie

New intraday low (SPY) .

I am seeing some bad signs in the market - for example, (NVDA) can't hold its gains.

Many others.

I am initiating a small long purchase (investment) in (XBI) .

I plan to average into a large position on weakness.

The ETF has been in a steady decline over the last year - from $170 to the current price of $96.28 - and is trading at a sizeable discount to net asset value.

Here are the top holdings. 

I want a diversified ($7.1 billion of assets) exposure to biotech - and XBI is my choice.

More on this investment early next week.

At today's price on (MSOS) , there is no better reward vs. risk that I can find anywhere in the markets. 

I don't know the timing, however.

* This won't be a permanent condition but a period of cautiousness and conservativeness makes sense now

Fare you well my honey
Fare you well my only true one
All the birds that were singing
Have flown except you alone

Going to leave this broke-down palace
On my hands and my knees I will roll, roll, roll
Make myself a bed by the waterside
In my time, in my time, I will roll, roll, roll

- The Grateful Dead, Brokedown Palace

With the exception of a handful of value stocks, the overall market has broken down. 

Sure, we will have sporadic and unpredictable rallies - but, in the main, the charts - and, arguably, the fundamentals - are in bad shape and deteriorating. 

Larger than usual cash reserves seem a sensible position to have. 

As for us, I can't remember when my cash positions were so large as, for now, I remain concerned with return of and preservation of capital over return on capital.

I continue to see that we are making a broad, important and distributive market top. Here, at 10:45 am: 

Breadth

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From Peter Boockvar: 

Retail sales in December fell a sharp 3.1% m/o/m at the core and there was no respite on the revision to November as that was revised down by 4 tenths to a decline of .5%. These are NOMINAL numbers so on a REAL basis they are even worse, much worse.

Versus November there were declines in auto's/parts, furniture, electronics, food/beverages, clothing, sporting goods, department stores, restaurant/bars and also online retailing. Thus, the weakness was broad based. Sales rose for health/personal care, building materials and misc (like pet stores and convenience stores) retail. On a dollar basis, core retail sales are the lowest since July.

To highlight the influence of inflation with today's retail sales figure which is mostly on goods, in the December CPI seen this week core goods prices have risen by 10.7% since March when the government checks went out and resulted in the spike in retail sales that month. Retail sales ex gas stations since March are down by .8%. Thus, just on this back of the envelope calculation, REAL retail sales mostly on goods since March are DOWN by 11.5%. The only thing missing is the food part and spending on restaurants and bars but you get the point.

To be fair here, I'm going to stretch out the calculation from before the checks went out as retail sales were basically front loaded this year. So since February, retail sales ex auto's are up 10.5% and core goods prices are up by 10.8%. Thus, REAL sales since February are essentially unchanged, lower by 3 tenths.

CORE GOODS PRICE index in Orange/RETAIL SALES ex gas, both since March

CORE RETAIL SALES in $s

Import prices in December fell .2% m/o/m after a .7% increase in November. The estimate was for up .2%. Prices ex petro grew by .3%, half the estimate but after a .7% gain last month. And prices ex food/fuel were higher by .5%. On a y/o/y basis, import prices ex petro were up by 6.8% and ex food/fuels by 5.7%.

Bottom line, a 6% m/o/m drop in energy prices drove the miss and industrial supply prices fell by 1.7% after big jumps in the 3 prior months. One has to wonder too what the influence of the stronger dollar has been in mitigating still robust import prices. We'll see in coming months as the dollar has rolled over since.

IMPORT PRICES ex petro y/o/y

Out of all trading long rentals - for profits!

It's really amazing to now hear Fed members try to out hawk each other with plans for rate hikes after QE ends and then QT after being so dovish for so long and so badly misreading the inflation story. I mean it was just in November when SF Fed president Mary Daly said "monetary policy is in a really good place." That place then was the start of a modest pace of taper thru Q2 and zero rates for a while. That view has done a 180. We've talked about the really tough needle to thread here for them as they balance the reaction of both the economy and the markets (my conjoined fraternal triplet analogy) in order to get on a stairway to heaven rather than a highway to hell. Non voting member and Philly Fed president Patrick Harker has his own idea of how to do that as he expressed on Closing Bell yesterday.

Sara Eisen asked him with regards to tightening with both the balance sheet and rates, "How are you going to do all of this without tipping the US economy into a recession especially at a time when the fiscal stimulus is also being withdrawn. How do you do that?" His response, "We do it carefully and methodically and it's why I'm not in the camp of raising rates and doing balance sheet normalization all at the same time. Let's start to raise rates, lets then when we get away from zero move into a normalization process (with the balance sheet). Put that on a glide path. It will be steeper that path than last time around because the nominal size of the balance sheet is large."

Wilfred Frost then followed with the important question about the markets response. "If you see that the inflation rate is still well above target and that unemployment is still nicely lower, to 3-4%, but that the market really falls out of bed, do you just ignore what the market is doing?" Harker answered with this, "That is why I want to be methodical about it. I hope that won't happen and that we take a measured approach to this."

That last question highlights I believe is a fork in the road that the Fed will likely reach at some point where markets are weak and inflation remains high. Which turn do they make? Likely the S&P 500 road and not the other Main Street, price stability one.

Shifting to the high yield market, as while US tech stocks are going thru a major valuation gut check, a 4.5% high yield to worst still seems attractive to investors for some yield desperate reason even though the Fed is telling everyone they could hike 6-7 times in the coming two years on top of QT. Below is a chart of the yield to worst and the OAS for high yield which only stands at 290 bps vs above 300 in January 2020. That 4.5% yield to worst compares with 5% before covid. If you want to venture into CCC territory, you can get 7% but it was at 10% pre covid and the OAS of 550 bps vs 850 bps in January 2020. If you want to look for the next valuation gut check, watch this sector closely.

YIELD to WORST

HIGH YIELD OAS

The Bank of Korea hiked interest rates by 25 bps as expected to 1.25% and expect more to come. Governor Lee said "Inflationary pressures are expected to be much larger than earlier expected. There are uncertainties surrounding the pandemic, but they are unlikely to derail the domestic economy's recovery." The Korean 10 yr yield was up 4.4 bps to 2.47% after jumping by 20 bps yesterday. The won though was little changed as the hike was as expected. The Kospi was red along with most other Asian markets and by 1.4%.

China said exports rose 17.3% y/o/y in December, just above the estimate of up 16.3%. We know Chinese industry has been juggling the volatile power price environment, covid driven plant and port shutdowns and getting as much product to the rest of the world before their lunar new year. Imports grew by 16% y/o/y which was well less than the estimate of almost 24%. All we have to do is look at the record trade surplus for them and it can easily explain why the Chinese yuan has been so strong.

OFFSHORE YUAN (the lower the stronger)

In Japan where they are seeing very benign inflation stats, mostly because of mobile phone fees, is not immune to the global inflation situation as they reported December PPI up 8.5% y/o/y. That though was just below the estimate of 8.8% as prices unexpected fell .2% from November. The November print of 9.2% y/o/y by the way was the quickest since 1980. The 10 yr Japanese inflation breakeven was little changed in response but just off the highest since August 2018. The yen, which has been following the direction of oil prices over the past year has broken away with its rally vs the dollar this week, along with all other currencies. The yen is at a 3 week high today vs the dollar.

Largest trading long rental: (MSFT) .

On only a very very short term basis, I like some of the beaten down Nasdaq stocks.

Here is a Ludcris forecast, at sometime today the Nasdaq could be green.

I paid $65 for more (C) and initiated a (JPM) long at $161.80.

Stocks I bought in the hole in premarket trading for a short term long rental include (SPY) , (QQQ) , FB ,  (NVDA) , (MSFT) , (TWTR) (more of an "investment", more on this later), (COIN) , etc.

With futures -35 handles, I would not be surprised with an oversold bounce in here - even though some might be hesitant about a long weekend. 

Perhaps the existence of a holiday weekend creates a higher than normal degree of skepticism that leads to a contrarian call higher. 

Stay tuned. 

I made some trading long rentals. Not sizeable, though.

"He trembled with excitement
His cheeks were quite aglow
And afterword he cried to me, "Encore!"
He pleaded with me so
To have another go
I murmured caressingly

"Whatever for?
Once, yes, once is a lark
Twice, though, loses the spark
Once, yes, once is delicious
But twice would be vicious
Or just repetitious."

- Stephen Sondheim, I Never Do Anything Twice

Thursday was an encore presentation, as, for the second time in one week, stocks collapsed. 

Monday's market schemissing was followed by yesterday's vicious decline as the rotation from growth to value intensified as stocks took an abrupt afternoon dive. 

My late December, 2021 column, "Could the Setup For 2022 Portend an End to the 12- Year Bull Return?" incorporated my specific market and sector (growth) concerns. 

In this missive I exposed the risks I saw. 

To summarize: 

* The setup for 2022 is far different than 2021.

* After a lengthy period of unbounded fiscal and monetary largesse we are exiting peak economic activity and peak liquidity

* Sell strength and buy weakness?

* The growth and narrow market performance bias into "The Nifty Seven" has grown ever more extreme, conspicuous and worrisome

* Since April 2021, over half of the S&P gain is from only five stocks

* The January effect this year might result in weakness in the anointed "Nifty Seven" as investors defer a tax event and strength in beaten-down value stocks as investors see relative value

* I remain fearful of Omicron not because of its virulence but due to its likely continued impact on supply chains and, in turn, inflation

This illustration captured my concerns of a top heavy market in which a few, anointed soldiers ("The Nifty Seven") moved ever higher when the soldiers - the rest of the market - moved ever lower, reminding us of a Bob Farrell quote, seen later in this post, about the risks associated with narrow leadership. 

It is now clear that the first part of January has exhibited a marked change and reversal in pattern as the market leaders have fallen hard, along with the Nasdaq Index, and value stocks have begun to catch up with a vengeance. 

In my mind, there was not enough time for managers to make the shift - so we are now seeing Value FOMO as investors run to buy value and to discard large-cap, technology. 

But I am getting ahead of myself - so let me move back to my prior observations. 

In many ways it is "different this time" for the markets.

For a number of years the Federal Reserve and central bankers around the world have priced money materially below the rate of inflation - serving to give license to investors to discount cash flows to heady multiples. As a result, the S&P Index has advanced at a compounded +23.5% annual rate over the last three years.

I have been cautioning that, with inflation running out of control, and with supply chain dislocations not easily fixable, that it was inevitable that the Federal Reserve would be more "hawkish" than the consensus expected - and that it was inevitable that the markets would respond poorly.

This week we got a taste of what might be in our investment future as the markets were surprised to learn that the Fed is considering not merely ending QE but shrinking its balance sheet as soon as this year. Earlier this week, this revelation contained in the Fed minutes resulted in a swift and considerable decline in both equities, with the most speculatively priced Nasdaq stocks suffering the most acute damage and bonds.

The movie was played again yesterday.

Last week the long bond suffered its worst calendar week total return in nearly 50 years - declining in price (and rising in yield) for five consecutive sessions - losing over 9% of value. If that -9.3% loss was seen as a year if would be the fifth worst year in five decades:

This Time Is Different - Both From the Standpoint of Fed Policy and Politics

The setup for Fed policy in 2022 is far different than in late 2018 or early 2021.

Three years ago inflation was quiescent. By every measure inflation is now raging far above the Fed's targets and it is hurting those that can least afford rising prices. Despite turning its tail in early 2019 after the sharp 4Q2018 equity market selloff, the Fed faces more formidable political and economic obstacles today to supporting stocks.

Inflation hurts the most vulnerable political constituencies and, with far more emphasis on "equity", the politics of 2022 is also different than at any time in prior years. The political optics of the Fed lifting stocks again while inflation is spiking the price of food, energy and housing for most people are very unattractive. In the current political environment, the resistance to anything perceived as another bailout of the 1% may be more significant than most people appreciate. 

The Great Rotation Out of Growth

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names."
- Bob Farrell's Ten Rules on Investing

In my writings I anticipate and attempt to write about where the puck is going and not where it has been.

This quick rise in interest rates will also likely have a continued negative impact on all the segments of the market - especially growth stocks - by raising the risk free cost of capital and by reducing the present value of their earnings.

Modestly rising interest rates in the second half of last year had already begun to take the wind out of the most speculative stocks whose hopes for earnings was way out in the future.

The following chart that shows the high percentage of Nasdaq stocks trading at least 50% below their recent highs:

For months I have warned about the dangers of narrowing market leadership, noting that the markets have been buoyed by the performance of a handful of stocks - most notably Meta FB , Apple (AAPL) , Alphabet (GOOGL) , Nvidia (NVDA) and Microsoft (MSFT) - while many other "value" stocks and the rest of the market continued to trend lower.

With rates rising, I view the largest technology companies, which have a meaningful market weighting, and have up to recently been only modestly impacted, likely to suffer much more in the months ahead. 

Valuations Remain Elevated

I have and continue to be of the view that the general market optimism and elevated valuations in the face of numerous fundamental headwinds are not justified. Moreover, we believe that the market's extreme bifurcation - so conspicuous in the last several years - will, in the fullness of time, exert negative market consequences. Indeed, the damage over the last week to the former growth leaders may be the beginning of an extended period of market weakness.

While valuations and sentiment are not very good timing tools, I have spent a lot of time chronicling and discussing how we are in the 95th to 100th percentile in stock market valuations - Shiller's CAPE, total market cap/GDP, etc.

To me, the following chart - S&P price to sales, which cannot be manipulated by adjustments - highlights the degree of overvaluation present today:

Source: ZeroHedge

The Era of Irresponsible Bullishness May Soon Be Over

2021 began with a marriage of fiscal and monetary policies the likes of which the world has never seen and as the year ends with a failed Build Back Better Bill and a central bank that is quickly getting out of the bond buying business.

While there is always a possibility that our concerns may wane in impact - producing more positive market and economic outcomes - we remain doubtful, as we would attach a growing probability that economic growth will slow relative to expectations and that inflationary pressures will continue in the face of supply dislocations influenced in large measure by country and business restrictions. This will likely serve to produce disappointing corporate profits.

Putting aside rate hikes, the Fed is ending a $1.44 trillion quantitative easing program in the next three months. That is more than QE1 and QE2 combined and is 40% above the size of QE3. This liquidity faucet is being turned off at the same time the European Central Bank is ending its pandemic emergency purchase program (PEPP). BoE is over, BoC is over and QE from the Reserve Bank of Australia might end in a few months.

With rates hugging the zero bound, the Federal Reserve's monetary pivot will likely prove problematic to the markets as it now has novel constraints with persistent inflation.

That excess in time and amount of policy has put us in a bind by:

* Stoking a dangerous asset bubble fueled by the liquidity of policy

* Deepening income and wealth inequality

* Embarking on a policy of money printing that has generated inflation from which it will be hard to escape 

What Else Do We Expect In 2022?

As I have previously written in my Diary, the only certainty is the lack of certainty, so developing a set of baseline assumptions and conclusions for 2022 is as hard as it has ever been. But I will take a shot at it and offer my views of what may be in store.

This is the most important part of today's opener:

1. A general valuation reset lower. On average, over history, a 100-basis-point rise in fed funds rates is associated with about a 15% valuation adjustment lower. Considering today's elevated valuations, that reset has the potential of being more than the historic average.
2. A hard rotational shift from growth to value. To some degree, this reflects the Fed's pivot, which will likely produce higher interest rates, serving to adversely impact discounted cash flow models of long-dated growth stocks.
3. Disappointing EPS growth, probably under 5%, compared to higher expectations. One of the biggest surprises this year has been the resilience of corporate profits. However, contributing potential negative influences include likely margin pressure from higher costs, a Fed tightening, some evidence of pulling forward demand, etc.
4. Modest EPS growth, if any growth at all, when combined with lower valuations could translate into negative overall returns for the S&P in 2022.
5. With continued high inflation - a regressive tax, a continued widening in the income/wealth gap houses a wide range of social, economic and political problems and investment ramifications.
6. A more aggressive Fed than is reflected in general expectations. Less liquidity could result in a marked reduction in flows into equity funds, which has provided unprecedented fuel to the markets in 2021.
7. Continued supply chain problems that, in part, fuel inflation and inflationary pressures to levels well above consensus. It is important to remember that many of the most important supply chains lie overseas, where more restrictive business and social closures have been put in place. In other words, the U.S. doesn't totally control its economic destiny in a flat and interconnected world.

Summary

I ended my "Portend" column two weeks ago with the following:

As I noted earlier, the setup for 2022 is far different than in prior years. Actually, it is far different than at any time in the last 13 years -- a period in which returns for basically all but one of the years has been positive. (Note: 17 out of the last 19 years have shown positive S&P returns!)

Most importantly, fiscal and monetary policy is no longer unbounded and we are likely well past the points of peak economic activity and peak liquidity.

With monetary policy pivoting and the Fed now prioritizing their inflation battle, interest rates will continue to rise - placing pressure on equities, in general and on long duration growth stocks, in particular.

After three years of compounded annual performance of about +23%-24%/year in the averages, a combination of political considerations and well-placed concerns about inflation will likely push the Fed to be far more hawkish than the consensus expects.

I view January's drop in stocks as a possible precursor to the remainder of 2022. If I am correct in view, this would likely result in a new regime of heightened volatility in both the stock and bond markets.

"Irresponsible bullishness" may be over, and the narrowness of the market's advance (which buoyed the Indices) likely approached an extreme ten days ago... just as financial conditions tighten.

Tread carefully as cash is king. 

TINA ("there is no alternative"), meet CITA ("cash is the alternative").

Now long JPMorgan Chase (JPM) .

Small.

* In premarket

Housekeeping item.

I was short JPMorgan Chase (JPM) against long Citigroup (C) in a pairs trade. 

It has worked out well and I just covered JPM at $161.90 in premarket trading.

As I mentioned on Thursday, with bank stocks elevated I would not chase strength.

My pal Whitney Tilson on cannabis.