Subscriber content. To subscribe to the Daily Market Brief please visit Market Services on NorthmanTrader.com. The Daily Market Brief is an in-depth market analysis published each trading day by Sven Henrich before US market open.

The Daily Market Brief keeps investors and traders abreast of the latest market critical technical and macro developments as well as market directional strategy.

We are making some past Daily Market Briefs public so you can get a sense of how we approach markets analytically. This particular brief below was published on October 31, 2023 during the fall correction which was accelerated to the downside following the Hamas attack on Israel. This brief highlighted our rationale for a bullish outlook on markets.

For context here’s a chart of $SPX with the time frame of this brief being published circled:

For reference please also see without paywall other examples of Daily Market Briefs published during key market turning points. March 10, 2023,  June 17, 2022, August 16, 2022 and October 17, 2022.

To sign up to our subscription services please see Market Services.

October 31, 2023:

Slowly, and I emphasize slowly, the pieces are starting to fall into place.

First off a slight change in character is evident, dips are being bought and some of the lower down trends are being broken to the upside and defended on backtests:

Yet we all know some big hurdles are still ahead of us this week, the Fed, $AAPL earnings, and the jobs report. And in between all kinds of economic reports and still geo political risks. The market remains a minefield.

But yesterday we saw some evidence of things perhaps going right. The funding requirements came out and while still atrocious with $1.6 trillion in additional debt for the next 2 quarters they represent a relative slowdown from the torrid pace we have seen.

Yesterday I mused whether a slow down would calm yields down a bit and so far this seems to be correct:

Lower yield relief after all is the key to a year end rally.

Cynic alert: With an unlimited credit card called a suspended debt ceiling until January 2025 Janet Yellen and ilk will keep spending like there is no tomorrow. 7%? 8%? debt to GDP spending this year and next. Reality is this is massive fiscal impulse that is so historically large cynics may come to the conclusion they will simply not allow a recession to take place in 2024 during the election year, add Treasury buybacks as a mechanism and perhaps it’s enough to control the out of control spending.

There is a broad sense emerging that the math doesn’t add up. Even Yellen herself and Powell, both have been claiming for years that the fiscal path is not sustainable yet it keeps getting worse eventually choking the entire system to death. There are only 3 feasible solutions: Default which they won’t permit, massive cuts to entitlement spending which is a political non starter and, magic, lower rates. A lot lower rates. That is the easy and mathematical obvious solution. Hence the higher for longer mantra is nothing but political posturing by the Fed. They and other central banks will end up cutting the hell out of rates again. Why? Because they have to. All roads lead to intervention. The math demands it.

With the economy slowing and excess savings depleted I suspect this will happen a lot quicker than any of us think. 6 months seems very far from now, but it really isn’t, but it’ll offer a lot more inflation reports to come which will set the excuse to do it. So don’t be surprised if we start seeing rate cuts in the spring and summer and the futures market is already starting to hint at that.

Typically markets are in panic mode when that initially happens, but with so much deficit spending perhaps it all plays differently this time. TBD.

Overnight the BOJ opted for a “flexible” YCC approach whatever the hell that means but the view is they will let yields rise above 1% while continuing monetary easing. The impact for now is going in bulls’ favor for the dollar is declining:

So these quasi positives are contributing to the magic. What magic? The magic save of the monthly 20/40MA of course:

And depending on how we close today we may even see a save of the trend line. Imagine.

Just in time for month end and positive seasonality to kick in. Magic indeed.

That’s the allure here and with massive CTA short positioning I’m ready to see this candle burn on both ends:

Massive short exposure with little long exposure on the side of asset managers. What could possibly happen?

The potential firepower in signal charts remains awe-inspiring:

And if so, then all this will have been a stress test of the bull case with some fake out moves to the downside:

But proof remains in the pudding so to speak so we need to continue to take it a day at a time, but for now it looks somewhat promising.

Banks are holding in:

$RUT held last October lows:

That may not look like much, but considering that yields are so much higher than last year it’s actually impressive that these lows were not taken out despite every excuse to do so since small caps are much more sensitive to higher yields:

No, this chart is ever looking more promising for a cyclical top, especially if the Fed sends some sort of signal that they are actually done which is ever more evident that they are despite what they have been saying. So yes language will matter tomorrow and unfortunately it’s up to Powell to either send the right signal or to bollix it all up again.

In any event we need to wait for confirmation and followthrough:

Despite all the flushing last week $SPX had retained its positive divergence and $VIX its negative divergence:

And a lower high. Perhaps, with hindsight, it will have proven to be a signal, a signal that this was all a giant fake out. A new war, massive yield angst, a massive dollar rally, with trend line breaks on the charts with small caps collapsing to last October’s lows and they couldn’t even get the $VIX to 25/26? Really?

And now gap city all around us:

I’m not complacent here as it’s still very early in the week with tons of events ahead of us, but I can see all the elements falling into place.

First step today is to see the monthly close tonight. Then the Fed reaction tomorrow and then $AAPL on Thursday and then the weekly close following the jobs report.

With regards to $AAPL the biggest and baddest stock on the planet it has corrected like everything else, but man, we’re staring at massive potential bull flag with new lows having come on a positive divergence:

Judging by the previous positive divergences on $AAPL in the past few years roasted bear meat may just be served for Christmas dinner. TBD.

Anyways, the elements are there, now we require evidence of follow through and how this all looks like by the end of the week will be key.

We remain patient here on hard fought over long positioning. We’d like to see some at least short term overbought readings before closing a scale or 2 for discipline and to pay for some of the recent stops. Perhaps a move toward the 60+ level at least on the 2 hour RSI:

And with potential new government funding drama in mid November it would make sense to lighten up a bit just before then, but in principle our emphasis will be on patience for a swing into year end. We consider $NDX long to be our swing, and $SPX and $RUT to be our scale vehicles.

Day at a time, see how we close today.

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