Net Short No More
In last night’s Closer, we discussed the latest positioning data from the weekly Commitments of Traders report published by the CFTC. Released last Friday with data as of the prior Tuesday, the report would have captured October options expiration, and likely thanks to this, there were a number of significant changes to positioning across assets. As we discussed last night, one key area that saw big changes was equities.
Perhaps the most notable of these was in S&P 500 futures. Whereas this past summer saw positioning shift to the most net short (meaning a higher share of open interest is positioned short versus long) levels in over a decade, the past few months have seen those readings steadily unwind, and last week marked the first net long reading since June 14, 2022. Meanwhile, the small-cap Russell 2,000 still remains deep in net short territory, although there was some improvement. The Russell went from a recent low of 14.3% net short five weeks ago to 8.53% net short last week. That’s the highest reading since March.
As previously mentioned, the S&P 500 is back to net long for the first time in well over a year. In fact, the streak of net short readings concluded at 70 straight weeks. That is now the longest such streak in the record of the data dating back to the late 1990s. The only other streak that comes close in length ended at 60 weeks in April 2016.
As for the Russell 2,000, its streak of net short positioning has also been impressive at 135 weeks. However, that is not even half the length of the previous record that lasted from the back half of the 2000s through the early 2010s. Put differently, positioning in Russell 2,000 futures has historically held a more pessimistic tilt with net short readings 72.5% of the time since data for the index begins in August 2002. Although current readings indicate there continues to be more speculators betting against rather than for the index, the recent rise also indicates there has been some improvement in optimism towards small caps.
Bespoke’s Morning Lineup – 10/31/23 – Two in a Row?
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“You cannot keep birds from flying over your head, but you can keep them from building a nest in your hair.” – Martin Luther
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It’s been a while and it’s still early in the day, but with futures trading higher as we head into the opening bell, the S&P 500 is on pace for its first back-to-back run of gains in three weeks. Treasury yields are moving lower this morning, and the 10-year yield is barely hanging onto the 4.8% level after breaking above 5% just over a week ago. In international economic data, China released some weak PMI data, and GDP in Europe missed expectations.
Back here in the US, the Employment Cost Index came in slightly higher than expected at 1.1% versus forecasts for an increase of 1.0%. Besides that report, we still have home price data at 9 AM, Chicago PMI at 9:45, and Consumer Confidence at 10 AM.
There’s never a shortage of strange when it comes to the markets, and October has been no exception. In a month where geo-political uncertainty in the Middle East moved to the front burner, gold surged (which you would expect), but crude oil, which you would also expect to rally, quickly ran out of steam. The fact that crude oil was unable to get going given the geo-political backdrop reinforces the view that the market isn’t expecting a major escalation/spillover of the current unrest.
With crude oil down just under 9% this month and gold up just under 9%, October is on pace to be just one of 20 other months in the last 40 years that crude fell at least 5% in the same month that gold rallied more than 5%. In the table below, we list each of those prior periods along with each commodity’s forward three-month performance. Going forward, crude oil has tended to largely recoup the ground it lost, averaging a three-month gain of 8.9% (median: +5.3%) with positive returns just over two-thirds of the time. Gold, however, was not as strong. Over the next three months, it averaged a gain of just 1.2% with gains less than half of the time (42%) On a median basis, though, gold’s forward three-month performance was a loss of 0.2%.
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A Slow Correction
On Friday, the S&P 500 joined the Nasdaq in officially entering a correction having fallen over 10% from its July 31st high without a 10% rally in the interim. That is the 55th correction since 1952 when the five day trading week began, and as shown below, it was one of the longer streaks for the index to officially hit that 10% threshold. The median number of trading days across all corrections since 1952 to reach that 10% decline has been 32 days, about half the time the current correction took to hit 10%. That makes this the slowest (for lack of a better term) correction since May 2015 and April 2011 when it took 65 and 67 trading days, respectively. However, looking further back, there were much longer periods like 1980 when it took half a year.
As we have noted in the past, the S&P 500 entering correction is not exactly as scary as it may sound with regard to performance going forward. While there is always the chance that a correction will extend further (potentially becoming a bear market), historically, returns have been solid once the index first enters correction. In the chart below, we show the average one and five-year annualized performance of the S&P 500 from the day the index first enters correction territory (the day the S&P closes 10% from a high without having a 10% rally in between). As shown, whereas any normal one-year period has seen the S&P average a gain of close to 9%, after the first close down 10% from a high, it has averaged an even stronger 10.6% gain over the following year. As for five-year annualized performance, periods after a correction tend to outperform the norm albeit by a much smaller margin.
Chart of the Day: Weak 200-Day Breadth
Bespoke’s Morning Lineup – 10/30/23 – Still Here
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While the record streak of positive Mondays ended last week, it’s looking like another positive start to the trading week this morning as investors breathe a sigh of relief that the world didn’t end over the weekend. The week is starting off slow in terms of news and data, but it’s going to be a busy week of data, earnings, and central bank decisions (FOMC, BoJ, and BoE).
Simply put, last week was a lousy one for US stocks. While the S&P 500 was down less than 1.5% for the month of October heading into the week, it now finds itself down just under 4%. What was notable about the declines, though, was in how uniform they were. In a market that has been so uneven for at least the last year (see the YTD performance numbers in the fourth column), all fourteen of the US index ETFs we track in our Trend Analyzer were down over 2% but less than 3%. Another common theme? All of them are at ‘Extreme’ oversold levels.
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Bespoke’s Brunch Reads – 10/29/23
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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On This Day in History:
Black Tuesday: October 29th, 1929, better known in the history book as “Black Tuesday,” followed closely on the heels of Black Thursday, not even a week before. Black Thursday, or October 24th, 1929, was a day of panic in the market as the Dow Jones Industrial Average shed approximately 11% of its value. Despite efforts to glue the market back together in a hurry, it further off the cliff the following Tuesday as the Dow plummeted another 12%, leading to a total collapse. The collapse was, of course, catastrophic as many lost their life savings or fortunes. After nearly a decade of gains, it all came to an end in a matter of days after the panic and market crash of Black Thursday and Tuesday in October 1929. The ensuing period of economic hardship marked a new chapter of hardship in American history.
Artificial Intelligence
From doom to boom: AI is slowly re-energizing San Francisco (MSN)
As much as the pandemic killed the city of San Francisco as businesses closed, crime rates rose, and the drug crisis escalated along with the homelessness issue, the city appears to be experiencing an optimistic turnaround. In the city that’s home to the 49ers (at least in name), which was named after those who rushed West for gold, the AI gold rush shows some promise. The flow of venture capital into AI companies in San Francisco hit new highs, with startups raising significant sums. AI firms are leasing tons of office space in the city and recruiting has become easier due to the boom, all of which is expected to continue to drive economic growth. [Link]
Dropping Out of College to Join the AI Gold Rush (WSJ)
AI has a wave of college students dropping out to pursue AI startups. Over 25% of American startup investments this year have gone to AI companies, with a generative AI market estimated to be worth $43 billion in 2023. While many are applauding this surge of entrepreneurial spirit, there is also caution that not all ventures will succeed, and a shakeout is expected for companies that use AI simply as a branding tool. Critics argue that AI is deeply complex, and students still have so much to learn before dropping out and pursuing the new technology so fast. [Link]
This new data poisoning tool lets artists fight back against generative AI (MIT Technology Review)
A new tool called Nightshade allows artists to alter their art before uploading it online. Invisible to the human eye, the tools can disrupt AI training when using art without consent. While helping artists, Nightshade could damage future AI models and cause them to produce unpredictable results. The tool brings power to artists, promotes their creativity, and puts a check on the explosively popular new technology. Check out the article to see some images of Nightshade at work. [Link]
Artificial Intelligence Powers Mach Ai & Clout Ai Bats (Rawlings)
Making a baseball bat is way more complicated than it may appear. With AI in the picture, Rawlings claims to have made the best possible ones in the Mach Ai and Clout Ai bats. AI ran thousands of calculations to create unique barrel designs that balance factors like pop, swing weight, and forgiveness. AI can create design variations more than 100 times faster than human engineers and was able to produce models comparable to that of top-of-the-line bats. It looks like AI has even found its way into sporting goods. [Link]
Electric Vehicles
Toyota nears mass production of solid-state batteries (Financial Times)
Toyota claims it is in the process of scaling up “solid-state” batteries. If the automaker is successful, it’ll have a huge range and charge time advantage, as solid-state chemistries have significant advantages over traditional battery packs. [Link]
How to Make Sense of Electric Cars’ Month of Disarray (Heatmap News)
Tesla and Rivian, EV makers, are good examples of those who have tried to cross the “valley of death” between product development and large-scale production. The business is a tough one to be in. Legacy automakers like General Motors and Ford are facing those struggles as they attempt the transition to electric vehicles. Companies like GM and Ford typically earn profits from gas-powered vehicles while losing money on each EV sold, so they will need to find ways to bridge the gap and make burning cash to scale up operations and become profitable a reality as the path forward in the auto industry more clearly becomes electric. [Link]
Financial Services
Schwab Study: Millennials Want Fixed Income With Feels (WealthManagement.com)
Fixed-income investments are becoming more appealing to investors as interest rates rise. Surprisingly, millennials have a larger portion of their portfolios in fixed income compared to older generations, with up to 45% of their investments in bonds and other fixed-income assets. The study also highlights that ETFs are the preferred investment vehicle for 80% of respondents, and 55% are considering equity ETFs, 47% fixed income products, and 43% real assets. As millennials invest more in fixed income, it’s suggested that the generation wants to invest more with individual beliefs and values. [Link]
Elon Musk gives X employees one year to replace your bank (The Verge)
Elon Musk, full of ideas that many would categorize as crazy, has made another major announcement for his social media platform X, formerly Twitter. Musk envisions that X will handle various financial activities, including payments, money, securities, and more. He suggests it would eliminate the need for traditional bank accounts altogether. It’s not the first time Musk has mentioned plans to make X a financial platform before, and he does have experience with financial services with his old company X.com which eventually became part of PayPal. [Link]
Real Estate
Food Halls, a Hot Real-Estate Investment, Conquer the Suburbs (WSJ)
Food halls are growing in popularity in suburban areas as the popularity of hybrid work and foodie culture bodes well for the dining collections made well-known in big cities. These small restaurants offer diverse and gourmet food which are often local businesses rather than big chains. Thanks to the pandemic, food halls in the suburbs took off as people moved to more remote work and proved more resilient than traditional restaurants. To put the growth in perspective, the US has at least 364 of these food halls, and 120 more are expected to open by the end of the year. That’s a 33% increase by New Year’s. [Link]
The effect of bus rapid transit on local home prices (Science Direct)
Bus Rapid Transit (BRT) systems are becoming more common in cities across the US. BRT systems provide those looking for different transportation options, but they can be a bit of an inconvenience as they can come with increased noise levels and less space on the road for others. This research finds that homes within a 20-minute walk of a BRT station carry a price premium of 5-7%. The research also finds that the value of real estate near BRT systems increased six times more than what the system costs to build. It’s possible then that the profits from higher property values might help pay for new transit projects in the future. [Link]
Environmental
An Oil Giant Quietly Ditched the World’s Biggest Carbon Capture Plant (Bloomberg)
Occidental Petroleum (OXY) is constructing a billion-dollar complex called Stratos that aims to capture carbon from the atmosphere and bury it underground. In 2010, the company built a plant for carbon capture which was never successful. That plant used older technology, but OXY is hopeful that the new technology in Stratos will provide much more positive results. Other large corporations and even the US government are betting big on the project. It’ll be interesting to see the results. [Link]
Mental Health
Libraries Are the New Front Line in America’s Mental-Health Crisis (WSJ)
Over recent years, natural disasters, the pandemic, drug epidemics, and a lack of mental health services have led those in need to libraries for food, shelter, warmth, assistance, or just a safe space. In response to such a trend, librarians find themselves in a unique position to help those seeking it, whether it be drug overdoses, homelessness, or other odds and ends. Some libraries are hiring social workers and receiving training to provide the best assistance they can. Who knew all that was in the job description? [Link]
Sports Betting
Here’s Why Bettors Are Angry With DraftKings Over Franz Wagner Free Throws (Action Network)
A recent NBA game between the Orlando Magic and Houston Rockets had DraftKings sports bettors in a frenzy after an error in scoring that cost them their money. Franz Wagner made two free throws during the game which were mistakenly credited to his brother. That caused confusion on the points prop betting as Franz had 19 points in reality, but 17 were shown. DraftKings decided to honor the correct score and the issue was largely resolved in the end for those that would’ve lost money on that error. [Link]
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Have a great weekend!
The Bespoke Report – It’s the Geo-Political Unrest, Stupid
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Bespoke’s Morning Lineup – 10/27/23 – An Up Day to End the Week?
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“If you could kick the person in the pants responsible for most of your trouble, you wouldn’t sit for a month.” – Theodore Roosevelt
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It’s getting to the point where if you want to see the market trading higher, set your alarm an hour or two earlier. Dow futures were firmly in the green very early this morning but reversed sharply a couple of hours ago as oil prices spiked following news that the US had launched airstrikes on certain targets in Syria. You know what that means; we’re heading into another weekend with a ton of uncertainty over what’s going to happen in the Middle East. There’s very little incentive to take much of a stand heading into an over 60-hour lull where the equity market will be closed for trading. Therefore, how the market manages to finish the day today will give a good idea of how sentiment looks after a rough couple of weeks of trading. Not including today, the S&P 500 has been down on five of the last six Fridays.
While Dow futures are now firmly in the red, S&P 500 futures are hanging onto positive territory (for now), and the Nasdaq is indicated to open firmly higher. Whether those gains hold will depend in part on how this morning’s economic data comes in relative to expectations. At 8:30, we got updates on Personal Income (weaker than expected) and Personal Spending (stronger than expected) as well as the PCE Deflator on both a headline (higher than expected) and core (inline) basis. At 10:00, the University of Michigan will give us updates on overall consumer sentiment and inflation expectations. Of the reports, Core PCE and the inflation expectations components of the Michigan survey are the two we’ll be paying closest attention to.
The last five trading days have been painful for US stocks, but the weakness has been global in nature. The snapshot below from our Trend Analyzer shows the performance of regional global equity ETFs and where they stand relative to their trading ranges. Outside of Europe, which is still oversold, every other ETF in the snapshot closed yesterday at ‘extreme’ oversold levels. Declines have been widespread around the globe with every ETF trading down at least 1.5% over the last week and all but two are at least 5% below their 50-day moving averages.
Looking a little closer at the returns in the last week, US equity ETFs have been hit especially hard with declines of more than 3% while most of the other ETFs are down closer to 2% or less. The underperformance of US equity-based ETFs is mostly a reflection of the weakness in mega caps this week. Mega caps have been big drivers of US outperformance this year, but now investors are getting a taste of the process working in reverse.
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Chart of the Day – Stock-Bond Correlations
New Lows for S&P and Sentiment
The S&P 500 having made fresh lows in the past week has justified a continued decline in bullish sentiment per the latest AAII survey. As shown below, only 29.3% of respondents reported as bullish this week compared to 34.1% last week. Although sentiment has quickly reversed, the last week of September actually saw an even lower bullish reading of 27.8%.
Bearish sentiment, on the other hand, rose up to 43.2% which was the highest reading since the first week of May. Bearish sentiment rose 8.6 percentage points week over week which was the largest single-week increase since February.
Given the new high in bearish sentiment and drop in bulls, the bull-bear spread tipped deeper into negative territory. Bears now outnumber bulls by 13.9 percentage points. That is the widest margin since May.
While the AAII survey has shown an expressly negative turn, other sentiment surveys are more mixed. For starters, the NAAIM Exposure Index echoed the AAII results. The index tracking equity exposure of fund managers echoed the pessimistic tones of the AAII survey as it dropped to the lowest level since the week of October 12th last year. Meanwhile, the Investors Intelligence survey of newsletter writers has managed to hold onto a more bullish tone. That survey’s bull-bear spread has been more steadily above its historical average over the course of the past couple of months.
