The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Year-to-date performance
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Year-to-date performance
We use two cross-sectional long-only momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for more details, open positions, and signal updates.
Performance is hypothetical.
Year-to-date, the weekly report strategies are up 24.6% (equal allocation, no leverage) versus a gain of 21.7% for the SPY ETF. Despite the strong correlation between the two strategies and the market (SPY), a brief period of outperformance in early April of this year accounts for the higher return. Note that the strategy’s beta over the last 10 years is approximately 0.45.
2. Weekly Summary (September 30–October 4, 2024)
- Stocks ended the week higher after a better-than-expected jobs report.
- Large-cap stocks (SPY) gained 0.3% to end the week 0.1% below all-time highs.
- Long-duration bonds (TLT) plunged 2.8% due to worries about an inflation uptick and a policy mistake by the Fed.
- Commodities (DBC) surged 4.1% due to a rally in crude oil after escalating tensions in the Middle East. See Section 5 for more details.
- The US dollar index (UUP) ended the week higher as the probability of another 50 basis point cut fell to 0%.
- Since January 3, 2022, bonds (TLT) have been down 29.7%, while gold and large-caps (SPY) have gained 43.3% and 25.6%, respectively.
- For the week, the equally weighted magnificent seven stocks index gained 0.3%. TSLA fell 4%, but META gained 5% for the week.
- The energy sector (XLE) gained the most this week, by 6.9%. The consumer staples sector (XLP) fell 1.9%.
Three Standard-Deviation Surprise
Many macro analysts were dumbfounded this week after a stronger-than-expected jobs report. The unemployment rate fell to 4.1%.
Most of the macro space, with a few exceptions, has been suffering from cognitive dissonance in the last few months. On one hand, they were looking for accelerated rate cuts, with higher unemployment being the driver. On the other hand, the expectation was for a growing economy. While these two conditions, i.e., higher unemployment and a growing economy, are usually contradictory, the narrative was about an elusive economic dynamic referred to as a “soft landing.”
We do not preclude the possibility of a “soft landing,” but we are skeptical of any forecast that rests on low probability conditions. When this happens, it is more likely the result of wishful thinking than sound analysis.
This week caught those who subscribed to the overoptimistic scenario of a “soft landing” with a little higher deployment and solid growth off guard, as they went long bonds and shorted energy. The iShares 1-3 Year Treasury Bond ETF (SHY) fell 0.6% for the week, which was a 3-standard deviation decrease based on the available sample since 2002.
The last time there were 3-standard deviation downward movements in SHY was in 2022, when inflation was out of control and the Fed was raising rates. These extreme moves are a result of market participants’ reactions and do not predict the future state of the economy. However, we have only observed these moves during significant market stress periods like 2008 and 2022.
Last week, we wrote:
The question here is not whether inflation will rise due to stimulus packages, but how much. The bond market did not like these developments, and the TLT ETF fell slightly on the week, despite favorable inflation numbers.
The TLT ETF plunged 2.8% for the week. According to the PAL OB/OS indicator for the weekly timeframe, TLT is about to become oversold.
Note that the volatile uptrend that started in October 2023 is still intact. A drop of TLT below 92.50 could serve as a signal that the uptrend has ended.
Last week, China announced an aggressive stimulus package of 2 trillion yuan to boost its economy. The iShares China Large-cap ETF (FXI) surged 18.5% last week. Despite expectations of a quick mean reversion, the ETF gained 11% this week.
This year, the doom-and-gloom surrounding China has resulted in significant losses for shorts. Gloom and doom has been a favorable contrarian indicator over the years, along with overoptimism.
Following a 5.9% surge last week, the London Metal Exchange Index (LMEX) saw a 0.4% increase, indicating a bullish outlook for metals. This index tracks the prices of copper, aluminum, lead, tin, zinc, and nickel. See Section 5 for the updated chart.
Last week, we wrote:
However, if China proceeds with additional fiscal stimulus, volatility in the capital markets will increase. In the event of an inflation uptick, bond losses may accelerate and commodities will gain, but the direction of the stock market is uncertain.
3. Update on market positioning
We use two cross-sectional momentum long-only strategies that generate signals for capital markets and factor ETFs.
Last update: Friday, October 4, 2024, after the market close. The year-to-date performance is 24.6%. Below are the open positions and new signals.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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