We’ve had a big week in markets. The S&P is up 5 percent. We’re looking at whether this rally has legs, where’s the volatility, and if the recession is canceled? Also, we have a shorter trading week next week due to Memorial Day on Monday in the US. What’s to expect in 4 days?
Key themes:
- Does this relief rally have legs?
- Where’s the volatility?
- Is the recession canceled?
- What’s ahead for next week?
This is the 20th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead experts on Twitter:
Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Time Stamps
0:00 Start
1:10 Does this rally have legs?
1:58 When will the tail end?
2:40 Crypto has no participation in the rally
3:31 Why tech is still weak?
3:52 Why tech is so subdued?
5:00 What to expect in the options market in the next 4 weeks?
6:42 Durable goods chart from Sam’s newsletter.
8:52 Layoffs in tech, will it continue?
11:30 Will investors and analysts become tougher on companies as we normalize?
13:55 Will we have a recalibration of valuation expectation if there is no recession?
14:34 What to watch out in the 4-day trading week?
Listen on Spotify:
Transcript
TN: Hi, everyone, and welcome to The Week Ahead. This is Tony Nash and I’m joined by Sam Rines and Albert Marko today. We’ve had a big week in markets. The S&P is up 5 percent.
So we’re going to look at a few topics today. First, does the relief rally have legs? We’re also going to take a look at volatility and the recession. Is the recession canceled? What’s happening there? We’ve heard a lot of talk about that. And finally, we’re going to look at the week ahead. So what do we expect for the short week ahead in the US? We have a holiday here in the US on Monday. So what do we expect for Tuesday to Friday in US trading?
So let’s go to you with this relief rally. What’s your thought on this? Does this relief rally have legs?
AM: In short? No, not really. The Fed uses many tools to produce rallies. A lot of it is coming. This week was short covering. Previously, what you’ve seen, especially when during a holiday season, holiday hours, whereas like when I was trading, a lot of liquidity out there is they actually serve the market. They did this over Thanksgiving. They did this over Christmas. If you go back and look at the charts, those 4800 prints were done over holiday trading hours. It’s easy for them to do it. Does it have legs? Probably not.
TN: So legs. Does the tail of this last few days next week, or is Friday the last kind of really interesting day we see for a while?
AM: Well, they have a tendency to figure out what the Bull bear line is, and I think it’s at 4250. Don’t be surprised if Tuesday we’re in the 4200 pushing that line. That’s when the put options are absolutely just completely obliterated after today, for sure, by Tuesday. And then people start getting bulled up. Once they get bulled up, they just pulled the rug.
TN: Sam, what do you think?
SR: Well, I think it’s really interesting that you saw this rally and you had basically no participation in crypto. Crypto tends to be tip of the spear type risk. If you really want to put some significant risk on in a portfolio, you go ahead and buy crypto. That’s just what you do.
So I think that’s a fairly telling sign that, yes, there is a rally underway. And if you look at it, oil is ripping right now, particularly some of the smaller producers. So you are getting some of the underlying stuff moving, but you’re really not having that tip of the spear, real risk type move that you would really want to see for some sort of sustained long-term risk-on type rally.
TN: And we saw guys in Nvidia really take a hit this week. Granted, it’s coming back a little bit, but tech is still weak. And so we’re not seeing some of those risk names really come back.
AM: Yeah. What’s interesting and this goes into the next topic is how are they rallying the market if tech’s not running.
TN: Right. So let’s talk about that. Why is volatility so subdued? I’m not really sure. So we’ve got a chart for the VIX up on the screen. So can you talk us through it’s the lowest point it’s been since Covid. So what’s going on there?
AM: Yeah. So the question is how could it be at a three-year low with such bad news out in the market? Raising rates, Fed sitting there talking Armageddon when it comes to the markets, bad news, bad earnings, everything is going wrong. How possibly could this thing be at the three or low?
Well, they keep it there on purpose to sit there and subdue the VIX. Well, now the VIX is at what, 28? I believe it is right now. But really, they could probably take this to 22 and use that to rally the market rather than tech. But, man, I’ll tell you what, you got to be very careful because the VIX at 22, and if they start rallying the market at that point, 4250 is could be the tip of the iceberg. You know what I mean?
TN: Oh, yeah. I guess my question, Albert, is the VIX measures S&P options for the next 30 days. Right. And so what it’s telling me is that the options over the next four weeks aren’t expecting a dramatic downward move. So are they just playing in that options market to make sure that it looks pretty orderly or what exactly is happening?
AM: Oh, yeah. They’re creating a story. They’re creating a narrative and tell you, hey, it’s time for you guys to get bulled up. Okay. Their objective is to erase excess money out the system and to give us a soft landing. They have said this much to Sam’s point, which he’ll talk about is they said we’re going to raise rates and we’re going to let off when we have to let off. They’re giving you all these signals to get bulled up.
TN: Yeah. I just want to make it clear because I think there’s a misconception out there about the VIX. I think a lot of people believe that the VIX reflects volatility in the market today. And that’s not at all it. I just want to make clear as we talk about it, that we’re looking at the options market over the next 30 days and how the Fed potentially is playing in that options market to make things look like a soft landing. Right?
AM: Yeah. They’ve erased trillions of dollars in the past OPEXes, and they’re just lining everybody up for another one. I mean, I think at one time it was 9 trillion. Another instance was 11 trillion. Just obliterated options.
TN: There’s a lot of opportunity in this. Right. I mean, if you see what’s coming, it can be really interesting.
AM: Well, this is a pattern thing. People do what they know. They’re creatures of habit. Fed is no different.
TN: That’s right. Very good. So on that note, Sam, you had an interesting newsletter out this week looking at kind of the recession. And one of the interesting charts which you have now is looking at durable goods, all durable goods and durable goods, excluding transportation.
Can you talk us through that a little bit and help us understand what that means for kind of the recession that we hear talked about so much over the past few weeks?
SR: Yeah, certainly. It’s pretty straightforward. Right. If you look at a combination of same-store sales across for retailers across all of them and not just a few big ones that made headlines, things were fine. Then you look at durable goods.
Durable goods skyrocketed coming out of COVID. And guess what? They’re continuing to make new COVID highs. Yeah. They just put it on a month-over-month basis. But it’s pretty aggressive to say that while they’re still growing and still ex-autos above anything that you can get back into the 80s. That’s a pretty big figure there.
It’s very hard to say, hey, we’re in the middle of or entering a recession when you have jobless claims sitting at 210, 215 thousand a week and you have durable goods sitting that high, the Red book same-store sales are in the low teens. That is an absolutely stunning figure for any time outside of call it COVID. Right. I mean, normally you’re very pleased with a 5% figure.
So it’s very difficult to get to the whole recession narrative unless you’re looking for something to really break here in a major way. We’ve already seen a housing break. I mean, we called that out a long time ago, but at the end of the day, if you don’t have people defaulting on their homes, which they’re not, and you don’t have a significant number of layoffs in the construction industry, which we haven’t seen, you can have a slowdown in home building and home builders and home buying and not really have it be systemically important to the US economy.
TN: Right. And we’ve had some layouts in Tech, which you talked about a couple of weeks ago, but a lot of those are bodies that people kind of panic bought. Right. They overbought headcount and now they’re shedding that headcount that they overbought.
I don’t know if that’s isolated to Tech or if that’s just happened across a service industry generally, but it seems like we’re starting to see a narrative that there’s a lot of layouts happening and a lot more coming. Do you see much of that, or are you seeing much of that outside of Tech?
SR: No, not really. It’s a San Francisco problem, not a San Diego problem. That’s the way I like to frame it is. Yeah. You overhired a lot of people in tech.
TN: And paid a huge amount of money for them.
SR: And paid a premium. And when you paid a premium and figured out that COVID wasn’t forever and the COVID demand wasn’t forever, if you want to realign your cost structure with your revenue outlook, you’ve got to take some head count down. But to be honest, you’re really not seeing it be something that’s systemic to say the entirety of the labor market by any stretch. West Texas isn’t laying people off on the oil drilling front. They still need.
TN: I’ve two friends who’ve just been hired to go out on rigs in the past two months. I mean, that is still building up.
SR: It’s still building up. And there’s nowhere near enough labor to do it. And you don’t have enough labor and leisure, right?
TN: Yeah.
SR: I really do think that we’re going to see the summer of vacations at any price. And if you look at leisure and hospitality, they are well understaffed. And that’s going to continue to be a problem. This is San Francisco problem, not a San Diego problem.
TN: Okay. So let me ask you guys, and I’ve been running through this, bouncing this off a couple of people over the past couple of weeks. But through the COVID period, banking analysts and investors have been pretty lenient on management teams. Hey, just make it through. Just keep running your business. Yes. We can tolerate a lot of kind of variability. They’re very forgiving on things.
Now that we’re normalizing, and I heard someone say this week something like only 7% of the workforce is actually working from home. I don’t know if that’s accurate or not, but I heard somebody say that maybe it was 17, but I think it was seven.
But now that we’re kind of normalizing, will those investors and analysts become tougher on companies on those management teams? Because it seems like they’ve been very loose, giving them huge birth to do whatever they want just to keep the business together over COVID? Are those expectations tightening down?
AM: I would have to say absolutely. I mean, in the past two years, you’re talking about just companies treading water, navigating the turbulent water of the market. Now you need actual leadership to figure out what’s going on with the supply chains, how to get workers working at a productive rate, getting supply and so on and so forth.
It’s crunch time now because although we can talk about a recession not happening, and I think that’s accurate. Look at the retail numbers that just keep coming out. We even said don’t short retail do that. The piper has got to be paid and management has to step up right now. 100%.
SR: Yeah. And step down. I think that’s a completely relevant one. And a lot of it is concentrated in VC.
TN: Right.
SR: A lot of it is things that you don’t get the AK on. These are private companies that raised at ridiculous multiples during COVID. Those are going to continue to see some downroads here.
TN: Right. But not just in private companies. Do you think that because of the change expectations post COVID, do you think we’ll see some management turnover in some large companies?
SR: Yeah. You’ve already seen Jack Dorsey out, right? You’ve seen that kind of called the Elon effect on that front? Yes. You’re going to see a lot of them.
In particular, I would say you’re probably going to see give it six to nine months when the body is washed up on shore from the downturn in DC, there’s going to be a lot of people that went over their toes there and they’re going to be axed.
AM: Yeah. Not just that, Sam. Not just that being pressured but also there’s going to be a lot of companies out there looking for merges and acquisitions that are going to force these.
TN: So if we don’t have a recession, we’ll still have a recalibration of, say, valuation expectations. Is that fair to say?
AM: I would say so. I mean, talking about recession, it’s a numbers thing. It’s a perception of what numbers is being displayed by the Fed and the Treasury. I mean, they can just fabricate those for however long they have to. So you won’t technically be in recession, but wage inflation, inflation is going out of control.
TN: You kind of rolled your eyes when I said that, but what were you thinking?
SR: I don’t know.
TN: That’s a good answer. What do you expect for next week? We’ve got four trading days next week. What’s going through your mind and what are you thinking about as you go into the holiday weekend?
AM: Bull bear line, 4250. I expect them to at least try to come close to that. But there’s going to be a lot of sellers out there trying to get whatever they can figuring out that OPEX and the Fed minutes are coming out next month with more rate hikes.
TN: Okay, 4250 on the S&P. Sam, what are you thinking?
SR: I’ll be watching the dollar really closely. If you continue to see a lot less pressure underneath the dollar here, oil is going to moon. So I’m watching oil very closely, mostly due to the dollar and some downward pressure on longer term rates. As we continue to see the narrative of the fed go fast then backtrack call it 1994 with 2001 characteristics.
TN: Interesting. It’ll be great to see. It’d be really interesting to see it, guys. Have a great holiday weekend. Thanks very much and have a great week ahead. Thank you.
AM: Thanks.
SR: Thank you, Tony.