It’s been some rally. The S&P 500
is starting the week at a seven-week high, bolstered by hopes for a less hawkish Fed and a sense that earnings pessimism was overdone.
The benchmark stock index is up 12.6% from the recent low hit md-June, having delivered its best July performance since 1939, according to Dow Jones Market Data. Last week’s 4.2% pop took it through resistance at 4,000, moving further above its 50-day moving average in the process. And so on.
But, naturally, some are not convinced.
With the S&P 500’s relative strength index now at 74 and in “overbought” territory, bearish short-term traders may be expecting a bit of a pull back.
And Kevin Smith, chief investment officer at hedge fund Crescat Capital, thinks the problems are greater than just an over-extended momentum gauge.
“Last week looked like short-seller capitulation to us for the market at large and in mega-cap tech stocks in particular. Crescat is not capitulating at all. There were many ‘buy-the-news’ headlines that could mark the peak of yet another bear market rally,” Smith says in a note to clients.
He cites three items of what he terms truly bearish news over recent days; the Fed’s 75 basis point interest rate hike; a consecutive negative real GDP print; and “lousy” mega-cap tech earnings.
“Yes, it was all really bad news, but short-term positioning was offside on the expectation of all this bad news, so there was a technical shakeout of short sellers,” Smith reckons.
On the economy, investors are fooling themselves if they point to a strong jobs market as evidence of a soft landing as the Fed tightens policy.
“It is sad how many people, including policy makers, appear clueless about the fact that labor markets are always a lagging indicator ahead of economic downturns. Because inflation is so high today, and the Fed so behind the curve, the current period of negative real growth is likely to be very drawn out and is only just getting started,” Smith argues.
And on big tech earnings he is particularly dismissive: “There was a massive deceleration in revenues, earnings, and free cash flow of all the FAANG+ stocks that have recently reported, and they are all still richly valued…The truth is that high-multiple growth stocks traditionally do poorly in an inflationary environment. These stocks are hardly even growing anymore especially on an inflation-adjusted basis.”
Source: Crescat Capital
Smith concludes that because the FAANG+ results were not nearly as strong as the market has been interpreting, he is adding to his bearish bets. “We have been increasing our shorts there into this recent short covering rally. We think the equity bear market will resume soon in earnest with the Fed still in tightening mode and the yield curve now well-inverted.”
U.S. equity index futures are a touch softer after their recent strong run, with the S&P 500 future
down 0.3% to 4,113. and the Nasdaq 100
future slipping 0.3% to 12,935. The dollar index
is retreating further from recent 20-year highs, down 0.4% to 105.47. The 10-year Treasury yield
is up 2.1 basis points to 2.672%.
U.S. economic data on Monday: ISM manufacturing for July and construction spending, both due at 10 a.m. Eastern
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