You Ain't Seen Nothing Yet - Morning Market Squeeze

Key Tactical Takeaways:

> When the S&P 500 made a new high close on 11/16, the key credit spread index we follow did NOT make a new tight extreme. Though possibly a bit early, this is a yellow flag.

> Although major equity indices have held rather firm during the recent digestion period, increasing negative divergence by inflation expectations, interest rates and aussie/yen warn that S&P 500-correlated portfolio risk should be reduced until this clears up.

> We think it is worth risking 1% of our trade ideas portfolio (1% is always the amount we risk) with a position in ....

Some Quick Thoughts:

When I was old enough to start appreciating music in the early 80s, I was fortunate to have 3 older brothers that introduced me to classic rock. One of my favorite songs from the genre is You Ain’t Seen Nothing Yet by Bachman Turner Overdrive. Although the song's meaning has nothing to do with what we are about to discuss, the title is more than fitting for what is about to come in terms of Corona-related cases, hospitalizations and deaths. Specifically, even before folks make that final rush to super markets (I was at one yesterday and it was both crowded and chaotic) and the bulk of college students return home in preparation for the Thanksgiving holiday, case counts, hospitalizations and deaths are already going parabolic. The most concerning number, when it comes to the potential stranglehold on the economy, has to do with hospitalizations, where rates are already 33% > at the peak of the first wave.

Look, I get it...the stock market is not the economy. That's why the smart money focuses on the bond market. After Thursday's jobless claims data revealed the first rise (+40K) in 5 weeks, the 10-Yr yield is on a crash course with the critically important 0.83% area. Already on Thursday, our CTA trend following model went from 2/3 short the 30-Yr Treasury contract to 1/3 short, an indication that the inflationary trend of the past few months is weakening.

The most successful traders on Wall Street follow a system and adjust quickly when they recognize they are wrong. You'll recall that in wake of the first big vaccine headline from Pfizer we began suggesting that forward 4-week returns for the S&P 500 were expected to “remain muted” as the index digests the fact that it sits 13% > its 200-DMA (see page 8). Then on Wednesday we recommended getting short equities on rallies via QQQ. Unfortunately, that recommendation came just prior to the NYC school shutdown news, which has caused QQQ to benefit from an underlying bid in big tech stay at home plays during the recent 3-day correction.

Bottom Line: For reasons we are about to list, we are still very cautious about anything correlated to the benchmark equity indices. The volatility-based system we follow tells us to remain short ...Lending confidence to this position is the fact that benchmark Treasury yields, 5-Yr, 5-YR Forward inflation expectations and aussie/yen have all been diverging meaningfully lower against the S&P 500. Yes, credit spreads are near the tight end of the range. However, it is important to note that as the S&P 500 made a new high close on 11/16, the key BofA High Yield Spread index we follow did NOT make a new tight extreme. We're not saying we're expecting ..., however, we are looking forward to seeing... before considering such an outlook..

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