SSPY - Raising The Red Flag

Summary

• We are seeing a big rally in the biggest losers of 2022. Has the tide turned in the market?
• Investors are taking on risk. There is evidence to make that case that this rally is something more.
• On the other hand, investors have moved on from the inflation story and moved on to the recession story. This is a very difficult part of the cycle.

At the dawn of 2023, the market has also been a bit hectic, or maybe a bit disheveled is a better way to phrase it. The end of 2022 brought large amounts of tax loss selling after such a difficult year. The beginning of 2023 has brought massive short-covering. This is all quite normal. Individual investors take their tax loss at the end of December. Those who were short the big losers now have massive profits they wish to push off into their 2023 taxes. Hence the big rally in the biggest losers of 2022. The big question is: is this rally something more? Has the tide turned in the market?

Bitcoin has been a harbinger of investor psychology. It has been rallying for weeks. Investors are taking on risk here. There is evidence to make that case that this rally is something more. Most of those reasons are technical, like consumer staples falling while riskier (high beta) stocks are rallying. The technical charts show larger amounts of stocks heading higher, but the market has still not decisively broken the key 200-day moving average ((DMA)).

Conversely, investors have moved on from the inflation story (where bad news was good news) and moved on to the recession story (where bad news is bad news). This is a very difficult part of the cycle. Investors will believe that the storm has passed, believing it won’t be as bad as one thinks. No one ever does until they are in the storm (recession). The market could rally higher into the 4200 area. We have some risk-on and would prefer the market head lower and give us an opportunity to buy cheaper stock, but we are also comfortable receiving 4.5% on our cash holdings and the optionality that it brings.

The range in the market is getting smaller and smaller and at critical levels. It is getting ready to make a major move. We spend a good deal of time and money on some of the best Street research money can buy. Our volatility research team is pounding the table that volatility is about to move much higher. It is not something that they say very often. The last time they raised this red flag was in August 2022. The market moved 19% lower in 2 months. Not saying it is going to happen, but some experts are raising the red flag.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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