Stock Pitches and Economic Ditches
Will highlight US industrial production, China industrial production, China PPI, and some call option volume data demonstrating high speculation levels.
Highlights
US Industrial Production Data slowed to cycle lows. This sent the US 10-2 yield curve back toward cycle lows.
China's PPI slowed to new cycle lows and industrial production data slowed -200bps in one month.
All-time high SPX call volume and overall market call volume corroborate extreme levels of exuberant sentiment.
Happy Friday!
Making a promise that I am not crazy. Just have been following the trajectory of the overall macro data, which has generally been moving in the negative direction over the course of the last year and a half. Recently, the market prices, not so much. Not a problem. Moments such as this week, stress two important lessons that I have learned in my short career. Stay patient and act incrementally. We are not always served the immediate feeling of delight through sweet sweet instantaneous gratification (many have become accustomed). Rarely do the components and the positioning within a portfolio occur overnight.
Readers will be spared from a dense monologue today. Most of the time, less is more. Anyways, I’m sure that many of the readers are incredibly busy right now sifting through all the incredible “new” stock ideas that are being pitched to them by an abundant amount of their friends and family at summer barbecues. “Take a look at (insert speculative company that went down over 90% during 2022 here). The price is still really low and if they get back to all-time highs it is a gain of approximately +954%”. Feels personal? It is ok, this situation is happening to me too.
The aforementioned is not completely the same as the behavioral experience that I observed on April 14th, 2023 (crypto peaked again). Here is a link to “Truckin”. However, would not completely categorize as dissimilar. Excited market enthusiasts went from pitching obscure illiquid cryptos to AI and high retail sentiment-driven stock names. Meanwhile, Junk Credit (High Yield Debt) has barely moved. Here is a reminder that something that was down 91% has to be up at least approximately 1,011% to be breakeven. Per usual, will discuss some data points below.
Macro
Will highlight US industrial production, China industrial production, China PPI, and some data that demonstrates high levels of speculation.
US Industrial Production = Slowing
Below is a chart of US production, which is an important component of economic growth. This slowed from +4.5% in September 2022 to +0.58% in December 2022. Then slowed from +1.5% in January 2023 to +0.2% in May 2023 (cycle lows), which is showcased by the data that was released yesterday according to tradingconomics.com. This has sent the US 10-2s yield curve back towards cycle lows (-90bps), which historically is a strong recessionary indicator with a high batting average.
*Tradingeconomics.com
*Tradingeconomics.com
*Tradingview
China Industrial Production
Also saw a Q4 2022 deceleration in the data. Just went from +5.6% in April 2023 to +3.5% in May 2023. This is the first month where the industrial data slowed following a large re-acceleration. However, slowing -2% (-200 basis points) is not an insignificant decline and represents the largest drop since November 2022.
*Tradingeconomics.com
China PPI
Stays deeply negative and makes a new cycle low. PPI was -4.6% in May 2023 vs. -3.6% in April 2023. This is outright deflationary, so will see how this continues to trend. Keep an eye on this metric because generally, PPI will lead future CPI data. No surprise that their central bank is attempting to stimulate the economy and cutting bank lending rates (again). Historically PPI falling below zero (red line in chart 2 below) has not proven to be a strong indicator of global economic growth.
*Tradingeconomics.com
*Tradingeconomics.com
Examples of High Speculation
The following are charts that have been highlighted by two reputable sources, Keith McCullough CEO of Hedgeye Risk Management, and Tier1 Alpha. Links to their Twitter handles can be found in the resources. In short, the data is skewed heavily to the Call side (long positions) and the high volume corroborates the aforementioned speculation.
The first chart below highlights the largest Call option volume since February 2nd (2023), which I previously highlighted as a “particular point” in time here, and November 5th, 2021. Not going to post a chart of the SPX, but take a look at what happened following both of those dates. Hint, one was the end of a historically large expansionary economic cycle, and the other was right before the recent credit event in March of 2023. According to Keith McCullough, both of these days highlighted in history, the VIX was rising along with the price of the S&P 500. This is generally an unusual event.
*Keith McCullough Tweet (link)
The Second chart below highlights the sheer Call option volume of 1.8MM for the SPX. This is an all-time high.
*Keith McCullough Tweet (link)
Today is the largest June options expiration in history (according to Tier1 Alpha). There are $2.2T notional S&P 500 contracts that will expire.
*Tier1 Alpha Tweet (link)
Conclusion
This week, we discussed US industrial production slowing to cycle lows (along with the 10-2 yield curve), China industrial production slowing, China PPI decelerating to new cycle lows, and Call option data which demonstrates high levels of speculation. I am still in favor of raising liquidity (cash) where it is possible and selectively taking/ actively trading short positions (do not short and hold) where it makes sense. There are plenty of opportunities and there is always another bus to catch. Please do interpret this as having zero long positions, that would be silly.
I understand that readers need to get back to reviewing their friends and family’s recent stock pitches. Who would want to miss out on +954%?!?!? Thank you for taking the time to read. Remember to be patient and act incrementally.
Happy Friday,
Aaron David Garfinkel
Resources
US Industrial Production (Tradingeconomics)
Great info! As usual
Good read. Beware of stock picking szn.