Edition #192
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Today’s research report will focus primarily on quantifying risk parameters that are currently manifesting in the market. I’ve been hyper-focused on the idea that the market is trading at an important inflection point, one where the bond market is shifting away from inflation concerns and towards recession concerns. In turn, markets are celebrating that the Fed could likely pivot in the near future and therefore put downward pressure on yields. With yields and asset prices having an inverse relationship, all else being equal, we’re starting to see upward momentum across the stock & crypto markets. However, this isn’t the first time we’ve seen risk assets rally in 2022. Therefore, we’re forced to question whether or not this current rally will produce a sustained ascension or if this too shall fail.
For example, here’s the Invesco QQQ Trust QQQ 0.00%↑ , designed to track the Nasdaq-100, since January 2021:
The market has experienced multiple strong rallies, which have all lost momentum and materialized into new year-to-date lows. With the current market rally being up +8.2% from the YTD lows, the current market environment is behaving similar to the prior instances. Therefore, we must ask ourselves the following question:
What makes this one different?
Inflation has not abated and is actually accelerating higher. The Federal Reserve is still tightening & becoming increasingly aggressive. Economic data is trending lower, despite pockets of resilience. The Russia/Ukraine conflict is ongoing. Investor sentiment is historically negative. Small business sentiment is historically negative. Consumer sentiment is historically negative. Corporate earnings are expected to be revised lower and/or contract.
With the negative factors considerably priced into the market, we merely need to see things become “less bad” in order to see signs of improvement. This recent rally is the only one which has started to make higher lows, which is an early indication that this specific rally might have legs. With investor sentiment starting to improve, could this be “the one”?
In the analysis below, I’ll breakdown the 6 most important charts to quantify risk appetite in the market. I’ll explain why they’re so significant, analyze the key signals that they’re providing, and provide additional insights on how I think the market is likely to evolve going forward.