**Quarterly Overview**

Q3 Overview 2022 – Q4 Outlook 2022 PDF

Q3-2022 Quarterly Commodity Spreadsheet

Stocks and Bonds

Stocks and Bonds Weekly Component Report PDF-11.30.2022

Stocks and Bonds Weekly Component Report Spreadsheet-11.30.2022

Comments:

The stock market continued to rally since November 23 as the market rallied after Chairman Powell said that the December rate hike would likely be lower than in the past months. The Chairman’s speech pointed to a 50-basis point increase in the Fed Funds Rate was a bullish sign for stocks on Wednesday. Stocks moved higher and turned a negative on the week into a positive result. The NASDAQ rose 1.62%. The S&P 500 rallied 1.31%, while the DJIA posted a 1.16% gain. The VIX edged only 0.05% higher to the 20.50 level even though the S&P 500 rallied. We are now in the holiday season. While the stock and bond markets moved higher, trading conditions remain thin with limited liquidity.

Chinese stocks far outperformed the S&P 500 index over the past week, as the FXI rose 9.0%. Chinese stocks had underperformed US stocks for months. The potential for the end of COVID-19 lockdowns and a cordial meeting between US President Biden and Chinese leader Xi at the G-20 likely caused confidence to rise and buying in the ETF that holds leading Chinese stocks that trade in Hong Kong and on foreign exchanges last week. However, new outbreaks put the brakes on the FXI, which resumed its underperformance last week. This week, demonstrations that could lead to an easing in the lockdowns caused optimism and investors flocked to Chinese stocks and the FXI ETF. March US 30-Year Treasury bond futures edged 0.32% higher to the 127-30 level.

The stock market remains highly risky as the trend in 2022 remains bearish. Open interest in the S&P 500 rose 0.45%, while the metric in the long bond futures market moved 2.81% to the downside since November 22 as December futures rolled to March. Stocks and bonds should continue to experience significant volatility. End-of-the-year tax loss selling could become a factor in December, but a less hawkish Fed could encourage buying. Expect volatility, and you will not be disappointed.

Trends:

The medium-term bearish trends in stocks and bonds remain primarily bearish, while the short-term trends have turned higher and followed through on the upside. I continue to advocate hedging equity portfolios with tools that allow for upside participation but protect the downside in the current environment.

As I have written over the past weeks:

“I favor buying the volatility index at the current level. The economic and geopolitical landscapes could cause selling to return in the blink of an eye. The market appears too comfortable over the past weeks, which is always a warning sign for a downdraft.”

Stocks and bonds were in bullish trends in late-November. Buying VIX-related products with tight stops led to small profits and losses over the past week.

Recommendations:

  • Buy the VIXY on price weakness with at least a 2:1 reward-risk ratio. The base level on the VIX is between the 20-25 level, which is the buying zone for the VIXY instrument. At the 25.86 level, the VIX is falling towards the neutral level of the trading range. I have used tight stops on long VIX positions. Small short-term losses over the past months have given way to significant gains. I have used very tight stops on long VIX-related long positions. I will continue to buy VIX-related products with tight stops around the current level.
  • I will follow the short-term trends in the stock and bond market with tight stops.
  • Continue to be extra cautious in the current environment as geopolitical events could impact markets in the blink of an eye.

A Final Note

As we head into the final month of 2022, the OPEC and Fed meetings will determine the path of least resistance of markets across all asset classes. Meanwhile, demonstrations in China could set the stage for an economic comeback in the world’s second-leading economy if the government eases the COVID-19 protocols. In a year where the leading stock market indices have posted significant losses, end-of-the-year tax loss selling could impact markets over the coming weeks.

Commodity prices have come down from the 2022 highs, but the potential for future rallies is high. The geopolitical landscape remains tense as the war in Ukraine continues to threaten peace in Europe and causes the divide between the US/NATO and Russia to widen. China could hold the key to the global economy over the coming weeks if the government does not react harshly to the current demonstrations. Meanwhile, the dust has yet to settle in the crypto arena as the saga of the FTX bankruptcy continues to grip the asset class.

I expect another volatile year in the commodities asset class in 2023. I am a buyer of dips in December and will maintain core long positions into 2023.

Thank you for your continued support!

Warm regards,

Andy Hecht

 

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.