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Buyer Beware: Why Recent Optimism Could Backfire Big Time

by | Nov 16, 2023

The oversold territory from late October was scary. But this rally might frighten me even more. The reason is that current optimism may create the very same problems that we’ve endured over the last 18 months. 

 You see, in those 18 months, the narrative around interest rates has shifted time and time again. When markets expected rates would rise, the equities fell as liquidity dried up. 

 But then, a bit of positive news would fuel speculation that the Fed wouldn’t need to raise interest rates higher. Bond and stock prices would rise on the sentiment. This would fuel large amounts of short covering, which propelled the market higher. 

 There’s just one problem… Rising bond and rising stock prices are — by definition — inflationary. And that can restart lots of concerns about the Fed needing to raise interest rates higher. Today, I want to show you what happened on Tuesday, and why you need to be VERY cautious about this rally. 

 Let me point out what I told my members at Executive Payouts Unlimited today… 

 This analysis is critical — because it impacts the Equity Momentum and Insider Buying activity. 

 Now, here’s what I told them earlier today.

Watching the ECI

 As an economist, I pay very close attention to the Economic Conditions Index at the Chicago Federal Reserve. This measures financial conditions — and liquidity — in money markets, debt and equity markets, and the traditional and “shadow” banking systems. This is the reading, and the higher the reading, the tighter conditions are. Tighter conditions can mean less liquidity, which means less money flowing into risk assets like stocks. This is the chart going back to mid-2021 before the sell-off hit. Remember, when this chart is moving down and the mix of risk, credit and leverage expands, conditions are easing.

National Financial Conditions Index

 You can take this chart below on the S&P 500-tracking SPY ETF, and turn it over. It will show a similar pattern of how liquidity impacted the index. 

  SPY chart

As you can see, there has been a huge spike in the markets since the end of October, when the Economic Conditions Index began expanding. 

 But here’s the real eye-opener… Goldman Sachs — which measures this stuff in real time (the Chicago Fed releases this once a week) — says that the move on Tuesday was so dramatic on stock and bond prices (both moving up) that they created easing in the market in one day that hasn’t been seen since November 2021. 

 “ZeroHedge noted that we saw one of the largest one-day declines (easing) in U.S. financial conditions since late 2020. And… that move was comparable to the Federal Reserve reducing its benchmark rate… by 150 basis points. Goldman Sachs (as ZeroHedge notes) has suggested that the “Financial Index Conditions Doom Loop” could make a return quickly. A surge in bond and stock prices is, by default — inflationary.

 That can spur economic growth and spending while forcing the Fed to turn around and talk more about financial tightening…

 And then… the S&P 500 finds itself moving lower.

 We are not out of the woods. 

 Expect more chop. 

 And ride this current rally until the indicators go red once again.

Chat soon,

Garrett signature



Garrett Baldwin

*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk. 

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WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

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