An Unhealthy (Illiquid) Market
Maybe Friday’s 'stick save' was the start of another long rally, but too many factors seem to be working against stocks, and the data will be crucial.
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There was nothing to like about Friday’s price action.
Markets bounced a little on the PCE coming in around expectations. That was enough to trigger some relief in markets.
Then, the Chicago PMI hit the tape, worse than last month and far worse than expectations. It actually came in lower than where it bottomed in 2001!
Now, we can all argue that manufacturing isn’t as important as it once was (true) and that Chicago as a hub isn’t what it once was (it isn’t). Having said that, the numbers set off some alarm bells.
Stocks, especially big tech, sold off hard. Then, almost miraculously rallied into the close. Whether it was positioning for month-end, or something “better” than that, I don’t know, but the Nasdaq 100 wound up only down a little over 1% on the week, rather than almost 2.5%, which is where it was around 2:30 pm on Friday.
The question is will this bout of strength last? Can it last?
A lot will depend on the data.
While last week had almost no meaningful economic data (until Friday) this week is packed with data, much of it surrounding jobs.
I am looking for more weakness in the data, which I believe will translate into moderately lower bond yields and lower stock prices.
Seasonal Adjustments Theory
One theory, which I cannot confirm, but seems reasonable, is that most of the “seasonal adjustments” on jobs still follow “weather” in the North/Northeast. We “add” jobs in January and February, as things like housing slow in the Northeast. Then we subtract jobs as we come into the summer, as seasonal hiring picks up in the Northeast.
The theory, which we should see some evidence of this month, if correct, is that so much of the economy has moved away from the Northeast, especially since Covid, that the seasonal adjustments are no longer correct. That could lead to negative surprises in the next months of data. It is almost a corollary to “you can ignore Chicago because it isn’t important any longer”.
The data will tell the story but I’m looking for a resumption/continuation of weak data.
Liquidity
Liquidity bothers me. There are too many “air pockets” during trading sessions of late. Moves of 0.5% or so seem to materialize out of thin air. That does not seem good (though It can work in either direction).
I remain “perturbed” by the number of names that experience 10% or even 20% moves post earnings. Not small companies. Highlighting, to me, the over importance of options and a lack of true liquidity.
I’ve also found it “surprising” that since March 1, the S&P 500 is up 2.5%, but utilities (not big tech) was by far the best-performing sector (up over 16%). Nvidia NVDA itself did well, so we are seeing a lack of breadth (well known) and a real “stretch” on AI Deputization. Yes, data centers are coming and will require energy, and utilities will benefit, but this has the “feel” of people looking for the “last thing associated with AI that hasn’t been bid up.”
Another reason to encroach on max bearishness.
For now I prefer reloading on China (FXI and KWEB which I own), energy (XLE is my main ETF for that) and closed-end muni funds, while looking and planning for a better entry point.
Maybe Friday’s “stick save” was the start of another long rally , but too many factors seem to be working against stocks, and the data will be crucial and I think it won’t help!
At the time of publication, Tchir was long FXI, KWEB, XLE and closed-end muni funds.
