In today’s briefing:
- Positioning Watch – How Are Traders Positioned?
- How Investable Is China?
- Key Tests of Resistance Ahead of Earnings Season
- US Equity Valuations: Less Expensive, but Not Indicating the Emergence of Deep Value
Positioning Watch – How Are Traders Positioned?
- Copper (industrial metal) longs continue to look interesting, while long Energy remains a consensus story
- JPY positioning is still WAY too short if BoJ continues to widen the band, while AUD positioning is also TOO negative, if China truly reopens.
- Market may still be (clearly) too bearish in the recession doesn’t arrive until Q2 while China reopens. We like to have net equity risk currently.
How Investable Is China?
- The MSCI Asia Pacific Index rose 20% from its October low and technically entered a new bull market. It’s time to revisit the question, “How investable is China?”
- A short-term analysis of the leadership internals of the re-opening trade shows little conviction that the re-opening will succeed.
- Longer-Term, the challenges of the debt overhang from infrastructure-led growth remains and a pivot to consumer-led growth is not evident, which is a recipe for slow growth and rising risks.
Key Tests of Resistance Ahead of Earnings Season
- The S&P 500 faces a key technical test at trend-line resistance of about 4000 while exhibiting strong overbought conditions.
- The bull-case consists of strong price momentum, which historically has led further gains.
- The bear case rests on a combination of a high correlation with VVIX, which is a tactical warning sign and the risks from earnings disappointment from Q4 reporting season.
US Equity Valuations: Less Expensive, but Not Indicating the Emergence of Deep Value
- Rising valuations during the COVID-19 pandemic reinforce the view of an inherent capacity to overshoot to the upside, but it is too early to conclude that subsequent compression is over.
- Compression in US equity prices in 2022 lowered secular valuation indicators, but they are not indicating the emergence of the deep long-term value that occurred in the 1970s and 1980s.
- The prolonged period of P/E multiple compression in the aftermath of the internet bubble bursting meant that US equity returns became earnings-driven, an outcome that is likely to repeat.
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