Caffeine and vitamins are necessary for the stock market.
What a miserable way to end the month. The S&P 500 finished down 2.6%, exactly at its February closing low. Trading closed the month in a gloomy mood, just like it did at the end of December.
What is therefore expected to occur in March? The move that would inflict the greatest anguish to the greatest number of traders under the current circumstances is for the markets to increase.
What is the issue with stocks?
Both fundamental and technical issues exist.
Technically speaking, hardly a single S&P sector is seeing any sort of momentum. Not a single. not booming industries like technology or communications. not defensive industries like healthcare, utilities, or consumer goods. commodity industries like the energy and materials sectors? Nothing.
Active traders like Commodities Trading Advisors (CTAs) are becoming more relaxed as a result of this.
According to price momentum triggers, CTAs are currently in sell mode, Eric Johnston from Cantor Fitzgerald told me.
The core situation is straightforward: Either inflation news improves or incomes start to suffer once more.
Data points continue to show that inflation is not decreasing, European CPIs are rising, and the outcome is higher global rates, which are detrimental to the value of stocks, according to Eric Johnston of Cantor Fitzgerald.
When compared to the roughly 5% predicted earnings growth, we are now down to 1.7% and seem plainly headed for a zero: Note that since December, experts have been lowering 2023 earnings predictions downward to account for a "no landing scenario":
Estimated earnings for 2023: a gradual decline (S&P 500)
Even yet, the rate of decline has recently slowed. Now, that might alter.
Naturally, the drop in earnings projections will only increase stock market costs. The S&P 500 is currently trading for close to 18 times 2023 earnings, notwithstanding the dip in February. The S&P rarely trades above 18 times forward earnings for any period of time, and most definitely not during a recession. Seventeen is the historical average.
To put it another way, even at current levels, you have to accept the optimistic "no landing" scenario, which is a little difficult for many traders to do.
Values that were reasonable at the beginning of the month are no longer reasonable, according to Interactive Brokers' Steve Sosnick.
The pain trade may come into play again
Which gets me back to one of my favorite subjects, the pain trade. Sentiment now is like the end of December: very bearish. And that presents a potential opportunity.
“I think that large accounts have de-risked sufficiently for their taste right now,” Sosnick told me. “They’re not clamoring for protection against relatively modest moves, which is why we see VIX mired in the 18-22 range.”
This makes some sense, but the “inflation returning” story makes a bounce very problematic. Without better inflation numbers, bumping along the bottom seems the best anyone can expect.
For the first six weeks of the year, the narrative “Lower inflation, moderating rates = earnings will stabilize” held sway. But in the last few weeks, with the inflation reports we have been getting, that paradigm is changing to “Higher inflation, higher rates = lower earnings.”
And that’s where we find ourselves on the first day of March.
Even though February ended on a lousy note, the S&P 500 is still up 3.4% for the year. Given the absolute giddiness around short-term Treasury yields that are near 5% (I mentioned this week that even my mother wanted to buy 2-year Treasuries), that’s not such a bad outcome.
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