MAGGIE LAKE: Hello and welcome to the Real Vision Daily Briefing. It's Monday, January 31st, 2022. I'm Maggie Lake, and here with me today is Mark Ritchie, managing partner and CIO of RTM Capital Advisors. Hi, Mark. How are you?
MARK RITCHIE II: Good, Maggie. Thanks for having me back.
MAGGIE LAKE: Yeah. And once again, an action-packed day with a lot to talk about. US stock markets rallying right into the close here to close out the month of January. The NASDAQ up, I think, as it's still settling up almost 3.5%. We saw this really big surge right in the last hour of trade. Russel up, S&P green across the board. But let's remember this is capping off a really painful month, especially for some of those tech names.
And I think we're all wondering as we watch this, Mark, by the way, the VIX also down 10% in this. I think we're looking at this and wondering, is this the bottom?
MARK RITCHIE II: Sure. Right, do we have a bottom? So, good news, bad news, which one do you want to cover first? The bad news in my view is we're already in a cyclical bear market type correction or bear market environment. We can get into the specifics of why I think that is, and this is potentially a move I've been looking for for months. The good news, though, is that last Monday looks to be a pretty key technical low for the short term.
And today's move and bounce should have been expected after we had what looked like at least some short-term capitulatory lows. And this is, yeah, it's maybe a little bit a month and window dressing or short covering. I didn't look at the final volume runs today. I don't think volume was that impressive. But this is expected.
So, the question, where do we go from here, and what are the key things to look at, technically speaking, I can get into those in any which--
MAGGIE LAKE: Yeah, let's dive in. Why do you think we're already in a cyclical bear market?
MARK RITCHIE II: Well, the percentage of stocks that are already well below their long-term averages, and I've been talking about this, really, got to go back almost six months. But if you look at the advance off the COVID lows in March, we had a whole group of stocks, the stay-at-home names, that entire area of the market that led, those actually topped early last year. Then that was followed by other risk assets that topped say, spring into mid-summer. You could throw crypto as well into that group.
But some of the other enterprise software type names, some of your higher flyer but with earnings on the table started to top. And then you had your payments and the last of the tech ones go in the fall. And then that was followed by mega cap tech late last year, and then into January. And then we saw the overall market break. So, the number of bulls in the herd has been deteriorating for months.
And I highlighted this I think in the fall saying if that doesn't improve, and markets go higher, which is what we had in the small caps, you had the IWM try and break out and fail. And then we had significant technical damage done, the small caps are already in a bear market. They're off over 20%.
MAGGIE LAKE: IWM, you're talking about the Russell, right?
MARK RITCHIE II: Yeah, sorry. And then, if you look at the NASDAQ, Monday's low was something like 19% on the Composite. So, I don't know, I don't use the 20% bogey, I look at the deterioration we've seen under the surface is what you see in bear markets. So, if it walks like a duck, and sounds like a duck, it is one as far as we're concerned. And if mega cap tech trades poorly even through, say, the rest of the earnings season, or starts to make new lows, I think you'll see last week's lows go.
But that doesn't necessarily mean we're going to go meaningfully lower. I'm just saying right now, the preponderance of evidence is that we're already in that cyclical bear market correction. Where do we go from here? There's a couple things I've been looking at. And some of the signals in terms of last Monday are, I think, significant, at least in the short term, and we can get into that if you like.
MAGGIE LAKE: I want to just step back to something that you just said which is, so even if that level holds, you don't see a bounce. What happens from here? If this is not the bottom, do we bounce along the bottom? Are we looking at another leg down?
MARK RITCHIE II: Certainly. Of course, these are the questions everybody wants to know. So, if you look at last Monday, it was a classic short term capitulatory low. And what I mean by short term is certainly, days, hopefully weeks, could it be the ultimate low? Of course. That's why there's a number of things you should watch. But just to highlight, you had the VIX hit nearly 40, you had put/call levels hit the highest since March or April of 2020.
And for those who aren't familiar, that just means plenty of people either outright hedging or outright making short bets. When the preponderance of participants are making those bets, they don't pay off. When everybody rushes for insurance at the same time, you're not going to need it, it's when you don't have the insurance that often, the market is most vulnerable, at least in the short term. We also had some sentiment measures hit pretty bearish levels, AAI bear reading was over 50%.
Last time that happened was at the COVID lows. Last time before that was at the lows in Q4 of 2018. So often, people go, I guess throw caution to the wind and start buying. Here's the other part. I haven't bought really anything meaningfully yet, because I'm not wanting to just try and catch falling knives. The point being when you see a momentum technical low like we had last Monday, you want to look at that as a key measure of market behavior.
So, if we retest those lows, which markets often do that are basing or trying to put in lows or a range, you want to see does volatility hit new highs, the sentiment go to new lows. This is where you want to look for convergences or divergences, excuse me, in the market. So, a classic one would be, if a market has made a momentum low and then starts to make or challenge those prices, where is momentum trading, relatively speaking?
So, often meaningful lows, if you look at this in some of the classic bottoms that aren't just a V-shaped bottom, you will see that what usually happens is prices will often make or retest or make incremental new lows, but volatility does not confirm those, saying that, hey, the worst of it is over. Again, I wouldn't throw caution to the wind, but this is also where you'll also see certain areas of the market will trade much better than the general market. And that's what I'm most interested in.
So, let's say that Monday's lows are retested in a month or a week or maybe even three months, depending upon the outlook for the economy and the Fed. We could be in a range here for a while. But I want to see then what groups of the market are not making new lows. That's going to be the key and the tip off to say these are the areas of the market want to focus on, or this is going to be the potential new area of leadership in the market.
The only area I'm seeing right now that has held up extremely well is oil. But if the market is going to make a meaningful advance over the next three, six months, you're going to need more than one group.
MAGGIE LAKE: Yeah, and it's interesting, because we've been getting earnings coming out, and it seemed in the beginning, even when the earnings reports looked pretty good and there weren't any real bombshells in the guidance, there's nothing that can make investors happy, nothing seemed good enough. Then you got to Apple, and that changed a little bit.
And we have big tech earnings coming out this week, including Alphabet, Meta, Amazon, some of the gorillas out there. Does that matter? And even if they're good and stabilize, is that the kind of leadership that would matter? Where else would you be looking for? Hard to think it's the first ones that turned for you in that bear market because they were really that stay-at-home play. They're really beaten up/down a lot. What are you looking at? Is it fundamentals or purely technically driven?
MARK RITCHIE II: Well, right now, obviously, the response to the earnings is going to be important. So, Apple, obviously, was a feather in the bull's cap, and buoyed the market. Apple is listen, it's the largest percent in terms of the index itself. So, that positive response was very helpful. But ideally, even let's say that the remainder of the mega caps trade well post earnings, the market will continue to bounce, but you want to look beyond that. If they're the only things holding up the market, that's not a very robust advance.
That's the point. So, when mega cap tech really started to roll over, that's when you saw the general market get hit while a lot of the other smaller components of the market had been selling off and trading poorly for weeks or months. Right now, I think I checked, less than 20% of stocks in the NASDAQ are trading above their 50-day moving average, which tells you even everything is short term oversold, we need to see that number drastically improve.
80% of the market is trading below its short-term average, that's just an indicator of the weather to say it's been raining pretty hard for the last week or two. But let's say hypothetically speaking that the mega cap tech earnings do not go well in terms of you get selloffs in Meta and Amazon and some of these other areas, I would expect the market to challenge the lows from last week and this is my point I was making earlier. This is where we want to see, does volatility confirm that move? Are there other areas of the market that hold up well relative to mega cap tech? Or do we just Splinter apart?
If volatility makes new highs and the markets cannot find their footing, and we just blow through last week's lows, it tells me we've got further to go here. The worst thing a market can do is be oversold and stay oversold. Because there's just no buyers. The same thing, the best thing a market can do is continue to stay overbought, it means that there are lots of sold-out bulls who need to get in.
Right now, it looks like I said, Monday looks important. So, I want to see how hard do we bounce from here? Today's rally was a good step in the right direction. I'd also like to see some accumulation come into the market. What I mean by that is above average volume to the upside on larger updays.
MAGGIE LAKE: Yeah. I want to bring in this question from Lyn because it's exactly what you're talking about. Lyn on The Exchange, January 24th had one of the biggest net hedge fund buying days in the last five years, January 24th, last Monday that you're all talking about. Latest CFTC noncommercial net long positioning, 211,855 contracts, markets up again today. Question, is this a bear market rally? Are you paying attention to that hedge fund buying? Does that give you any indication? What do you make of that?
MARK RITCHIE II: Well, my guess is it's probably active managers potentially who are seeing at least a short-term low like I was saying in terms of I think of hedge fund buying, most of those guys are active, tactical. It could also be, of course, people adding long term positions to their book as well. Certainly, that's something we're watching. So, that's where I'm saying, I think Monday's lows are key to watch.
Look, we may never even retest them. If that's a V-shaped bottom, that has been one of the trends. And given some of the negative sentiment, that could be the case. But either way, I would be increasingly surprised given how oversold we are if we just vault to new highs from here, because we went severely below the 200-day moving average, most historical precedents would say when you come off this much in the NASDAQ, you are going to need to do a little bit of base building first.
So, even if the low has been met, I'm saying the preponderance of evidence says there's a quite a bit of overhead supply over the market, so I want to be waiting and watching. The best setup, though, may not be for one to two months. I'm willing to wait to see the bounce of evidence that says, hey, not only do we have a momentum low, now we're seeing certain areas of the market trade better relative to the index or to other groups.
Now we're seeing accumulation start to firm up and not just evidence of a bottom, evidence that the wind may be strongly at our back again. And we can get into, I think the market needs to figure out some of these things in terms of Fed policy and [?] as well.
MAGGIE LAKE: We confirmed that we cannot have a conversation about any of it without bringing up the Fed because there's such a wide range of forecasts out there. Pretty severe disagreement about the outlook for both inflation growth and Fed policy. I want to play a clip though before we get into some of the specifics, I think, that underscores the debate that's going on. Alfonso Peccatiello sat down with Cullen Roche, who talked about the prospect of sustained higher inflation. Let's have a listen to what they said.
CULLEN ROCHE: To me, this is the most valuable lesson. When you compare 2008 and the financial crisis response to the current environment, it becomes abundantly clear who the real money printer was. Because now, we're seeing real tangible signs of inflation in the real economy. And you have to sit down and ask yourself, well, what's the difference between what the Fed and the Treasury are doing today versus what was happening in 2008, 2009?
And the big difference is what I was talking about earlier, where the government in the last two, three years has run $7 trillion worth of deficits in essence, versus in the 2008 period, the Recovery Act, it seemed big at the time, but in comparison, that thing was like $795 billion, or something like that.
MAGGIE LAKE: And that full interview is available on Essential Plus and Pro tiers. Mark, this is very much the debate we're having. And I'll tack onto Cullen saying that there were headlines today, I don't know if anyone saw it, in several of the papers about rents being up by 30% in some cities. It was from a Fed survey done. That feeds into this idea that maybe even if it has peaked, inflation may stay at these higher-level rents lag when they show up too, so the argument is that we haven't even started to see that hit the data and hit the tape.
So, where do you come down in what you're expecting from the Fed? 50 basis points in March? Is it going to be as aggressive as the market seems to think? Or do you side with those who say it's a little too soon to say that we're going to have to see how the economy does?
MARK RITCHIE II: If you're going to put a gun to my head, I would--
MAGGIE LAKE: And I know you try to stay agnostic about this, Mark. I know you try not to really watch what the markets tell us as opposed to the pundits. But you've got to have a view on it, I would think.
MARK RITCHIE II: Certainly. Well, as a general rule, I think if you spend your time watching markets versus pundits, and your goal is to make money in markets, you should be doing that. However, what I will say is if I have to take a stance, I am very skeptical of the five to seven rate hike narrative. I think, if you were to press me hard on it, I would say some of this is an overreaction potentially to yes, some of the data prints, but even potential political pressures.
The reality what you just cited, though, in terms of say, large increases in rents, large increases in people's cost of living, standard of living, if you will, it's an effective tax hike that nobody thought was-- not actually saying nobody, but certainly your average person who has to go to the tank and go to the grocery store and pay their rent is poorer than they were a year ago. Well, yes, this is an economic problem, and it will be if it continues to persist.
But it's also a major political problem, which we could get into, because I do have something that I think people should be looking at going into the midterms, but right now, yes, my view is to watch closely because I think the Fed is a little bit backed into a corner because, of course, they have a dual mandate, but for the first time in how long, it seems that one side of the mandate is actually showing up. There's been no inflation for how long? A long time, or at least, that's meaningful when they have to, if not at least give lip service to potentially jawbone the markets and start making movements.
So, look, there's two scenarios on that side. One is the inflation is going to persist and the Fed is behind the curve. If that really is the case, meaning that we're going to see five to seven rate hikes and the Fed is still behind the curve, I don't see how the equity market does not go lower, or continue to go lower, because the Fed is going to introduce competition for stocks that it has not seen in a long period of time.
And what I mean by that is rates. If you look at, say, even average yield of dividends, compared to say, T-bills since 2009, it has been positively tilted towards equities for over a decade. So, if we're talking about a massive reversal in that dynamic, I don't see how you can-- that would push me towards the secular bear market camp. Meaning if that is where these drivers are headed, we're going to see continued pressure in certain areas of the market, especially high growth, retail-oriented, anything that has been driven on the promise or speculation of future earnings is going to be sold in favor of that business which is already built and producing earnings because it's a simple calculation of replacement costs.
Who is going to want to invest their money in something where the business hasn't been fully built out and the cost of building that business is going up every month, versus the business and the equipment that already exists and is yielding returns? That make sense?
MAGGIE LAKE: Would the, and Martin, I think Mark has already partially answered your question. He's asking, if Fed Funds Rate go to 2%, how low will the S&P have to go in that case?