00:00 All right, one word we kind of like to use on the show
00:03 is don't chase, don't chase.
00:05 But there's things not to chase in the market.
00:08 Dennis points out to me, you know,
00:09 that as, you know, that as SPY versus the triple Qs
00:14 and then the IWM, let the chase begin.
00:18 Where should it start?
00:19 Where's the starting line?
00:21 - Well, clearly so many parts of the market
00:23 were deeply oversold as you guys were just discussing.
00:26 And if you looked at things like small caps
00:29 and cyclical, certain parts of cyclicals,
00:31 you could see rallies of 10, 11, 12% from the October lows
00:36 just to get you back to your 200 day moving average,
00:39 which just mean that a lot of these areas
00:42 were left for dead.
00:43 I think there then kind of sparks the discipline
00:46 that will be needed and you'll have to watch very closely
00:49 as we start bumping up into that overhead resistance,
00:52 which is probably for some of these areas,
00:55 another three to 5% up from here.
00:58 How do they interact with that resistance?
01:00 And is this move something that is more sustainable
01:03 or if this really is just a knee jerk
01:05 kind of mean reversion trade
01:08 that is just happening very, very quickly.
01:11 - There's the million dollar question.
01:13 Is this sustainable?
01:14 What does Cameron Dawson think?
01:16 Because obviously, you know,
01:17 you've been on the bear chain correctly in a lot of stocks
01:19 because a lot of stocks have been very weak,
01:22 basically for two years.
01:23 I mean, people can talk about the raging bull market,
01:25 but the S&P has made a high for almost two years.
01:28 So that's kind of the definition of a bear market here
01:30 is not making new highs.
01:31 It's been a long time.
01:32 This year, I don't think we've made any new highs at all.
01:35 I think it's actually at the beginning of 2022.
01:38 So we're going on almost two years
01:39 without a new high in the S&P.
01:40 And we look at the IWM and it's almost 30%
01:43 off the all time high.
01:44 So significantly off.
01:45 So is this sustainable?
01:47 Are we past, like we beat,
01:49 like it appears that we are beating inflation.
01:51 I don't know if we beat it yet.
01:52 Is this rally sustainable?
01:55 - I think at least the first step
01:57 is through the end of the year.
01:58 I would expect it to be just because the largest weights
02:01 in the index, the tech, the Magnificent Seven,
02:04 the communication services stocks,
02:06 those being the largest weights being up a lot,
02:09 you're not going to see the same kind
02:10 of tax loss harvesting dynamics
02:12 like we saw into the end of last year,
02:14 which really caused markets to be weak going into December.
02:18 So there's going to be, we think, some kind of chase,
02:20 at least into the end of the year,
02:22 meaning that you get people drawn into the market,
02:24 you have trend following strategies.
02:26 Once you've broken through resistance,
02:28 those strategies add more length to the market buying,
02:31 begets more buying,
02:33 and you could see this chase through the end of the year.
02:36 And then I think there's a really important assessment
02:39 that has to happen.
02:40 And if we go through kind of the key drivers
02:42 of markets outside of just the fundamentals,
02:46 we have to consider things like sentiment.
02:49 How bullish is everybody?
02:50 Has everybody already gotten on the train
02:52 of being extraordinarily optimistic about the world?
02:56 Similar to the start of 2022,
02:58 when there was just widespread optimism.
03:01 We'll look at valuations.
03:02 Valuations aren't good timing tools,
03:04 but what we have seen over the last few years
03:07 is that outside of that COVID period,
03:10 where we were growing money supply at 30%,
03:12 the balance sheet was up by the trillions of dollars,
03:16 where we saw this really big surge in valuations,
03:20 that valuations have typically topped out
03:22 around 19 and a half to 20 times forward on the S&P 500.
03:26 That's where they peaked in early 2020.
03:29 That's where they peaked in July of this year.
03:31 So let's see where we stand on valuations.
03:33 Then it's a matter of looking at earnings expectations.
03:36 It's really important to remember
03:39 that the market is always looking the next year forward.
03:42 So we price in the earnings recession
03:45 that we've experienced this year back in 2022.
03:48 This year in 23,
03:49 we are now pricing in the earnings recovery
03:51 that's already being forecast in 24.
03:54 So let's watch and see where expectations go
03:56 through 24 as we look to 2025.
04:01 And the last one is just watching positioning
04:03 because positioning is probably the driver
04:06 that I most underestimated at the beginning of 2023,
04:10 saw it being a big driver in 2022.
04:13 And I think that where we're looking at positioning now
04:16 is watch things like Deutsche Bank
04:18 consolidated positioning, Goldman Sachs
04:20 publishes one as well.
04:23 What they show is that you're overweight
04:26 from an equity perspective.
04:27 You're in the, let's think of it as one standard deviation
04:30 is in stretch positioning in the Goldman measure.
04:35 0.7, 0.8 is about where we are.
04:37 So you're not at the point yet where positioning
04:39 is a risk in and of itself, but you're getting close.
04:42 So chase into the end of the year,
04:44 watch positioning, watch valuation,
04:46 watch earnings expectations and watch sentiment
04:49 because those will all be really important drivers
04:51 we think into 24.
04:53 Okay, well, there's always surprises in the market, right?
04:57 And there's always things that could trip up this rally
05:01 going into the year end.
05:03 You've identified a couple things.
05:06 What do we need to keep an eye on
05:08 that can maybe spoil the party into the year end?
05:12 I would watch really closely the dot plot
05:14 in the December meeting for the Fed.
05:17 And the reason I say that is that the dot plot now
05:20 forecasts two rate cuts in 2024.
05:24 And there's a lot of argument to say
05:26 that the dot plot doesn't matter
05:28 and that there's no signal.
05:29 It's just throwing spaghetti against the wall,
05:32 which could be very true,
05:34 but it does capture somewhat where the Fed's mind is.
05:38 And if we see the dot plot show even more cuts in 2024,
05:43 that would effectively confirm what the bond market
05:46 has already priced in.
05:48 But if they hold pat and the median forecast stays the same,
05:53 it's not to say that they can't change their forecast
05:56 going forward, but that 25 basis points of cuts,
05:59 because we're not gonna get that extra hike
06:01 likely in December, that 25 basis points of cuts
06:05 is obviously very different than the 100 basis points
06:08 that's being priced in by the bond market.
06:11 If we don't get the confirmation from the Fed
06:14 or the data that that 100 basis points of cuts is justified,
06:18 that's where you start seeing that floor under yield
06:21 start to emerge.
06:22 So watch really the four to 4.3% on the 10-year treasury
06:27 as the area of support.
06:30 I would expect the next line of support would be 4.3%.
06:33 And then you might lose a little bit of that tailwind
06:36 from the yields coming down to boost markets higher.
06:40 So watch that closely.
06:41 And I see you pull up economic surprises.
06:43 This is the other really important one.
06:46 - Okay, all right, go ahead.
06:49 - Yeah.
06:49 - What is the detail on that?
06:52 - This is in picture format,
06:55 the reward for being optimistic,
06:58 which is that if you go back to the October lows,
07:01 what you can see is that economic data started coming in
07:05 better than expected.
07:06 If you zoom this out a little bit further,
07:08 what you can see is that through 2022,
07:11 a lot of economic data was surprising to the downside,
07:14 not the upside.
07:15 That was causing a lot of people to reduce estimates,
07:18 cut estimates.
07:19 We had an EPS revision down cycle
07:21 through the course of 2022.
07:24 2023 has been a very different story.
07:26 Economic surprises have been moving higher,
07:29 which just means that economic data
07:31 is continuously surprising to the upside.
07:34 So what you've seen is estimate revisions higher,
07:37 and that has supported earnings estimates
07:39 all through the year.
07:40 The really interesting thing is that economic surprises
07:43 peaked in July, right before the market peaked
07:46 in that kind of choppier trading period
07:50 that we've been in since early August.
07:52 What's very interesting is that now over the past month,
07:56 economic surprises have continued to deteriorate,
07:59 yet the market has rallied a lot.
08:01 This relationship doesn't have to hold.
08:04 It can be more spurious,
08:06 meaning it's kind of like eye correlations.
08:09 That's very fair.
08:11 However, if economic surprises continue to deteriorate,
08:14 that means estimate revisions are going lower.
08:17 You lose that support,
08:19 potentially enter into an EPS revision down cycle,
08:22 and then that starts raising the question
08:25 about where valuations stand, et cetera.
08:27 So watch that really closely,
08:29 because usually those big divergences
08:31 with soaring stock prices
08:33 and falling economic surprises don't last.
08:36 One can come up to meet the other and vice versa.
08:38 So it's an important relationship
08:40 and one that we'll continue to watch.
08:42 All right, one thing that has worried us about the market
08:46 is just it's been the big tech.
08:48 Yesterday, other companies picked up the slacks,
08:51 a little bit more of a broad-based rally.
08:53 Can big tech continue to lead here in 2024?
08:59 Yeah, I mean, it's been pretty incredible.
09:02 To quote the great Trisha Yearwood,
09:05 we've been living in a one-horse town,
09:08 and that horse has just been tech.
09:11 And tech has been so very dominant,
09:14 but I think let's take a step back
09:16 and think about the setup going into 2023,
09:19 which is that if we go down that list of sentiment,
09:23 sentiment was very poor on tech going into '23.
09:26 Fears about rates increasing,
09:28 all of the cost-cutting that tech companies had done,
09:31 and new questions about business models.
09:33 Valuations, though, had fallen 30%
09:36 over the course of 2022 for tech.
09:38 Earnings estimates had been revised down pretty materially
09:42 in the out years because of some of the stumbles
09:45 that tech had, and positioning was really light.
09:47 People sold tech into the end of the year,
09:50 actually at a record pace,
09:52 in order to do the tax-loss harvesting.
09:55 So that set an incredibly low bar for tech into 2023.
09:59 Now, as we roll into '24, it's the exact opposite world.
10:03 So you have valuations are up 40% from the October lows.
10:08 You have positioning that is extraordinarily crowded.
10:11 You have earnings estimates that have been revised higher
10:13 by about 5%.
10:15 And then you have sentiment, which is very optimistic.
10:18 And all this talk about, well, I get a call option on AI,
10:22 and the best businesses, and super resilient.
10:25 And all of that may be very true,
10:27 and it's just a matter of how much
10:30 have we already priced in?
10:32 So I would not be too surprised
10:34 to see a leadership rotation in 2024,
10:38 just like we saw a leadership rotation in '23.
10:41 And then the question is,
10:42 does that leadership rotation happen
10:44 because tech is falling while other things are doing better?
10:48 Or does it happen where tech just goes up less
10:51 because other parts of the market have more room to run,
10:55 because they're more oversold, unloved, cheaper,
10:57 and nobody's there from a positioning perspective?
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