Another squeeze. The unconventional macro view. A disturbing divergence. Anomalous but profitable price action in gold. A backtest, because evidence-based analysis is all that counts. Access to the full report requires a Premium Articles or All-in-One subscription.
Report contents
- Weekly Summary
- The Unconventional Macro View
- Stock Market Analysis
- Commodity Market Analysis
- Bond Market Analysis
- Forex Market Analysis
- Anomalous Price Action in Gold
1. Weekly Summary (October 30–November 3, 2023)
- Stocks and bonds soared due to a short squeeze.
- Bond yields were significantly lower due to the bond rally.
- Commodities and the US dollar ended the week lower.
The short squeeze in the stock and bond markets occurred because equity investors and traders focused on the bullish aspects of this week’s employment report and ignored warnings from the Fed Chairman that interest rates may have to stay at high levels for longer than initially expected.
The market was heavily short stocks and bonds, and a short squeeze was bound to occur. The rush to exit short positions by noise traders, discretionary traders, and CTAs using dynamic stops exacerbated panic buying.
For the week, the E-mini futures (ES) surged 238 points and the 10-year Note futures rallied 1.9 points. Note that there was another short squeeze in March of this year, but after July, stock gains evaporated, and after April, the downtrend in bonds resumed, as shown in the above weekly chart. Short squeezes occur with higher frequency in bear markets, and it is impossible to know whether they mark a bottom.
Large-cap stocks (SPY), the NASDAQ-100 (QQQ), and the Dow Jones Industrial Average (DIA) surged 5.8%, 6.5%, and 5.1%, respectively. The S&P 500 low volatility index (SPLV) ended the week up 4.2%. The S&P 500 high beta index (SPHB) jumped 7.2% due to the short squeeze, and small caps (IWM) surged 7.6%.
The 10-year note yield crashed 29 basis points to end the week at 4.56%. The TLT ETF surged 4.2% due to short-covering in the bond market. Commodities (DBC) fell 1.3%, mainly due to a 4.5% drop in crude oil (USO). The US dollar index (UUP) dropped 1.2%. Gold (GLD) ended the week down 0.7% despite the US dollar losses.
Year-to-date, tech stocks (QQQ) are up 38.7% and down 7.8% from all-time highs. Large caps (SPY) have gained 14.9% on a total return basis. Gold (GLD) is up 8.9%, and crude oil (USO) is gaining 6.8%. Commodities (DBC) are up 0.1% for the year. Low-volatility large-cap stocks are down 4.3% year-to-date, while high-beta large-cap stocks are up 9.8%.
Since last year, large caps (SPY) and tech stocks (QQQ) are down 6% and 6.5%, respectively. Small caps (IWM) are down 19.5% since last year, while bonds (TLT) are losing 37.8%. Despite the rebound in tech stocks, the market is fragile, with low-volatility stocks still in the red year to date.
Tech stocks (QQQ) have the strongest 252-day momentum at 39.3%, with gold (GLD) following at 21.3%. Bonds (TLT) have a negative momentum of -6%.
2. The Unconventional Macro View
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Specific disclaimer: This report includes charts that may reference price levels determined by technical and/or quantitative analysis. No charts will be updated if market conditions change the price levels and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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