Market Lab Report - What's driving this rally?

by Dr. Chris Kacher

What's driving this rally?

The question on the minds of investors has been who is driving this rally in stocks and crypto? It appears much of the buying is due to retail investors trying to pick a major bottom much as we saw in 2022 when we got three dead bat bounces that eventually rolled over. Powell's testimony was interpreted as dovish by mainstream media giving hope to retail investors. We also have a substantial amount of short covering in both stocks and crypto. Liquidations in crypto have been spiking higher since January.

A cautionary metric shows the insider transactions ratio recently spiked to its highest level since the bear market began showing there is much insider selling in stocks. Insiders are officers or owners of a company who own at least 10% of the company. In crypto, we have FTX, Celcius, and others who are still sitting on much Bitcoin. These are entities that are probably looking to sell into strength. Meanwhile, institutional investors as a whole are aware of the macro issues that remain as well as the impending recession so can use these bounces in markets to lighten their portfolio exposure.

Bulls cite inflation is dropping across the CPI, PPI, and PCE while wage pressures remain tame. GDP across various economies is coming in stronger than expected while the labor market remains strong with unemployment at its lowest since 1969. But unemployment is always at its lowest before major recessions. Further, two factors that make this time different in the unemployment statistics are the fewer number of people returning to work post COVID as well as the record number of people who are retiring, resulting in lower unemployment than normal. But with the 5-figure employee layoffs from major tech companies, others will follow and unemployment will shoot higher at some point over a number of months, depending on how deep and long the recession lasts.

Supply side inflation

Plus we still have a supply side inflationary issue which the Fed has little control over, so this form of inflation may remain stubbornly high as witnessed from the still rising or persistently high food prices in the US, UK, and EU. This is due to fertilizer and wheat supplies being down massively due to war between Ukraine and Russia. Both Russia and Ukraine combine to produce 25.4% of the world’s total wheat exports. Shipping also remains costly as shown by the Baltic Dry Index chart. A 40-foot container from Shanghai to Long Beach cost $2,000 prior to COVID. Later, it cost $25,000 for the same trip. These costs were passed onto consumers. Food and beverage have a 13-14% weighting in the CPI and PCE.

Corporate earnings are also starting to see big misses by major companies such as Alphabet, Amazon, and Apple, so analysts will have to lower their lofty earnings projections.

Tipping points

Another tipping point shows 64% of Americans are living paycheck to paycheck with no savings, an all time high, while credit card debt has officially reached $930M, also an all time high. Meanwhile, the average personal savings rate has fallen to 2.3%, close to an all time low. What does this mean for Americans who have less of a social safety net compared to countries in the EU when unemployment soars as recession sets in? More helicopter money will be needed. But even with multiple $1000 checks that were issued from the US government during and after COVID, the homeless problem continued to soar. Major cities such as Los Angeles and San Francisco are seeing tent towns erected across the landscape.

To sum up, a soft landing from an eventual Fed pivot seems unlikely. The recent huge jump in the dollar and treasury yields underscores this point. But in the meantime, the market remains hopeful which can sustain a bounce longer than one expects if past bear markets are any clue such as in 2000-2002 and 2007-2008. The current bounce in the NASDAQ Composite is just over 20%.



Shorting the Bitcoin miners

As mentioned in the Wednesday webinar, the price of Bitcoin was stalling despite the major stock market averages trending higher. This suggests that as we roll over again, Bitcoin miners such as MARA, HUT, CLSK, BITF, and RIOT are again vulnerable to deep downtrends. These miners tend to correlate with each other so shorting into logical areas of resistance can be profitable.