February 1, 2023

Great(ish) Expectations

There’s what the money expects, and what it doesn’t. 

It’s like the weather.  We expected winter in Steamboat. We did not expect 50 inches of snow in the last storm, 120 inches in January alone, and 311 inches for the season already (our 30-year seasonal average is 315 inches). As you can see in this photo, the ski slopes are spectacular.

Steamboat Springs CO. Photo Tim Quast. Jan 31, 2023

Back to the money, what it expects with today’s Federal Reserve press conference to conclude a two-day meeting can generally be seen in how it treats Consumer Staples and Consumer Discretionary stocks.

It’s asset allocation. And it matters to both investor-relations officers giving expert guidance to the c-suite, and investors wondering what’s coming next.

Especially since stocks zoomed yesterday. One day is not a trend. And monthly index futures used by trillions of dollars of assets to track the benchmark expired. It can mean nothing more than forced buying for counterparties who sold them.

The beautiful thing about Supply and Demand in stocks is that they reflect every input.  Global macro. Fundamentals. Tail risk. Hedging. Long-short strategies. Asset allocation. Arbitrage. Monetary and fiscal expectations. Bad data. And so on.

And since the US and other economies reflect consumer spending, reading Supply and Demand in consumer stocks is helpful before a Fed rate-setting meeting.

Which will be immediately followed by monthly US jobs data Friday from the Commerce Dept.

So, what’s happening to Supply and Demand in Staples and Discretionary stocks? Image #2 shows the Demand/Supply – Sentiment on top, Short Volume, bottom – relationship in both sectors.

Image 2. Consumer Discretionary, Consumer Staples, Supply and Demand, Jan 31, 2023. Marketstructureedge.com

Consumer Discretionary: At Jan 31 Passive money led, Sentiment was 6.7 on a 10-pt scale so quite strong, and Short Volume was 49.6%, nearly half of all trading volume.

It’s a straddle. Global macro money says consumers are fine right now, but they’re half short, half long, the sector. It’s an oversimplification and most of the shorting in stocks is from machines trading for the day. But the machines reflect the tick data, the balance.

In Consumer Staples, the view is in some sense more troubling. Demand (Sentiment) is 5.1, just over the 5.0 nexus needed to support prices. Short Volume is lower at 48.9%, but it’s rising over the trendline.  Again, Passive money leads.

Interpretation? Asset-allocation models, long-short money, global macro money, see consumers as still having sufficient discretionary spending capacity but consumers are now reining in core staples expenditures.

And remember, it reflects everything that’s known. All the credit-card data, the port data, the supply-chain data, pricing data, warehouse data – you name it. Everything hedge funds consume to get an edge. 

So that’s what the money expects. 

What it doesn’t expect is any immediate collapse in that data.  Or a surge in layoffs. Or credit delinquencies, let’s say.

We can back that up by looking at the Financials sector.  I’ll spare you another photo but it’s basically spot-on with the consumer data.  There are 500 stocks in the sector, Demand is 5.6 and flat, Supply is 48.6% and flat.

No great expectation of credit trouble.  If the money gets surprised, we know where to look.

You can do this in your own stock.  Say you’re the IR person for WBD (or an investor in it), the best-performing S&P 500 stock YTD, up over 55% vs an SPX 2023 gain of about 4.6%.

What’s the Supply/Demand balance ahead of the Fed?  WBD is a Communications Services sector stock.  Demand is 8.0 and rising, Supply is 34.5% and falling. That’s why it added 3% yesterday. Before a lousy stretch for WBD into year-end, Demand was 4.4 and falling Nov 3, Short Volume was 58.3%.

Supply and Demand predict what happens to prices. 

Oh, and before SPOT shot up with earnings, it was 10.0, with Supply falling and 42%.

The point? You can know a great deal about the health of any market by looking at Supply and Demand. It’s true in sectors.  In your shares. In the whole stock market.

What the Fed either didn’t understand or didn’t care about is the disruption it created to Supply and Demand in the economy. Most surprising to me is how little businesses seem to comprehend it.

Artificial money fostered artificial demand at the same time the economy was foundering on the Covid shoals. The supply chain fell apart. Prices soared.

As the machinery of output and services regained footing, businesses hired and stocked up and made mass amounts of stuff.

Did operators not understand economics?

If artificial money drove artificial demand, why staff up and stock up like it’s real? But a lot of the economy did, and now we have too much stuff. Too many cars, heck even too many computer chips. And too many employees.

That will reverse.

The same thing happens in the stock market on much shorter cycles, thanks to Passive money allocating capital, and machines setting prices.

I think we need better economic data.

But we have great Supply/Demand data on the stock market.  And IR, it’s the Easy Button for you for impressing the c-suite and adding value there. That’s our principal job.

And investors, try Market Structure EDGE.  It works.

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