5 Observations to Assess As We Enter Upcoming FOMC: The heated soft landing vs. hard landing debate intensifies.

Premium Research for Members. Happy Lunar New Year to Everyone.

Note to Readers: Happy Lunar/Chinese New Year to all my readers! This is an update in between my Bi-Weekly strategy updates. I will be sending more Strategy notes like these to our Private Substack/Patreon members as bonus content in addition to the promised scope of content and research. As a result, my Bi-Weekly reports will be briefer/more concise given that intermittent Strategy reports will capture my views on a rolling basis.

A preview is included here for my public friends.

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Happy Lunar New Year to my Investment Community: This Year, it appears that the saving grace for the Global Economy could be China’s Reopening.

Members,

Many of my views shared within my Bi-Weekly research notes (1st half January here and 2nd half here) are being validated by the market.

• In the first half of January, we forecasted firmer market price action across U.S. and China markets as investors price in the possibility that a soft landing is increasingly plausible. That has since happened. Whether that will prove to be true or not….well, that’s a different story. Be sure to stay tuned for more research as the year progresses.

• Starting the second half of January, we believed upside was rather limited in the immediate near-term and We saw a large resistance-driven selloff from S&P 500 at the 4000 level back to < 3900, before a Friday optimism fueled bounce back to 3970. As I mentioned, there was little evidence based on my methodology that additional buying at SPX 4000 had safe risk/reward as we started the mid-point of January. I continue to believe that any large rally into the 4100+ area is an opportunity to reduce - this view has not changed. I’m not interested in selling at the very top (that’s impossible). I’m interested in selling in regions where I think risk/reward is generally against me. Vice versa is also true when it comes to buying.

• Our opinion that Tesla would re-enter the 125-140 range that I believed we would see again upon further market stability has also materialized.

• BABA continues to advance towards our intermediate-term target. We were among the few market strategists who remained constructive on China during the Fall 2022 moments of chaos.

• TLT/DLTR/XLE continue to stay supported despite an active attempt to rotate capital back into risky assets.

So far, the markets have been largely consistent with my viewpoints.

If you haven’t had a chance to read my January previews, here is the link below.

Mid-January Strategy: Our Opinion for a Stable 1st Half of January has Materialized. Now comes the hard part.

Now based on my inter-market analysis, much of the market’s recent strength over the past 30 days has to do with a confluence of factors:

• A large retracement in the U.S. DXY Dollar Index

• A strong market wide view that the 2Y Yield has peaked and will not break north of 4.6%

• A very strong China reopening sentiment that has the ability to bolster global GDP.

Indeed, the first two macro drivers above have added support to the thesis that the Fed has essentially reached peaked hawkishness. And the third macro driver offers investors hope that China’s reopening can be the saving grace for the global economy as China demand has the potential to offset Eurozone and U.S. demand weakness.

Long-time members will know that since Fall 2022, I’ve made commentary that the 2Y Yield would likely have trouble breaching the 5% region. I am still in the camp that the Fed is unlikely to be able to take the Fed Funds Rates significantly north of 5%.

However, how long rates stay at these levels is now far more important than what the terminal rate is. If Rates stay at 5% for much of 2023, then I think U.S. stocks have significant gravity working against them.

Let’s talk about 5 charts/observations that I’m looking at ahead of upcoming FOMC.

1. On Fundamentals: Netflix Revenue vs. Subscriber Figures (what this implies about the consumer spending)

2. On the Bond Market: High-yield options adjusted spreads (what this implies about the high-yield market default probabilities)

3. On Geopolitics: Secretary Yellen’s visit to China and the implications behind further U.S. - China cooperation (what this may mean for the U.S and China markets)

4. On Macro: Encouraging Data that supports the thesis of “immaculate disinflation”

5. On cross-market Data: Several more data points on Inter-market Data that explains recent equity market strength and how to think about them going forward

Many of our views have aligned with what the market has eventually done. While nothing is ever guaranteed, I hope to help the good folks continue to navigate what I believe to be an increasingly difficult environment.