February’s “Best Buys” Are China, Energy, and the VIX

Traders exhibited some indecision today as the market grappled with dire Intel earnings and a cool inflation reading. The S&P 500 slightly dipped by 0.2% after reaching another record high on Thursday. The Dow Jones Industrial Average showed a modest increase of about 30 points or 0.08%, while the tech-focused Nasdaq Composite slipped by 0.4%.

Tech stocks lagged behind, particularly impacted by Intel’s disappointing first-quarter outlook, which cast a shadow over the recent AI-driven market optimism. Intel’s shares dropped significantly during the afternoon, affecting other tech companies like AMD and Nvidia.

Amidst this, the PCE index for December brought some positive news. Core PCE, the Federal Reserve’s preferred inflation measure, fell below 3% annually, marking the slowest growth since March 2021. This, combined with recent robust U.S. GDP data, fueled hopes for a softer economic landing.

Next week, the Fed will convene for its first policy meeting of the year, with wide expectations of maintaining steady interest rates. However, recent positive economic indicators could lead to rate cuts later in the year, potentially starting as soon as March. The CME Group’s FedWatch tool shows a 46% chance of a cut in March, which is down 48% yesterday despite the favorable PCE index reading. And that’s well below last month’s 70% odds of a cut.

Investors are also dissecting today’s earnings releases to further gauge the health of the market’s top stocks. Colgate-Palmolive stood out with strong results, driven by performance in Latin American markets. Conversely, Visa provided a conservative revenue-growth forecast, hinting at a slowdown in U.S. payment volumes, possibly signaling a broader economic slowdown.

The S&P 500 is poised for its 6th consecutive record high close, up 2.5% YTD, despite a recent uptick in yields and shifting rate-cut expectations. Today’s cool PCE numbers have left the S&P relatively unchanged, suggesting much of this is already factored into current prices.

Analysts remain split on whether stocks can go much higher from here without hitting a selloff first. Goldman Sachs’ Scott Rubner expressed an unconventional viewpoint, stating, “I am so bullish on stocks right now, that I am turning tactically bearish in February.” Rubner’s concern stems from not being able to pinpoint a specific reason for a potential sell-off, coupled with ‘extreme’ market positioning.

Rubner is closely monitoring several key factors:

1. Next week’s “superbowl of earnings” where 32% of the S&P 500 reports, including major tech companies like Microsoft, Google, Apple, Amazon, and Meta.

2. February’s typically challenging seasonality for risk assets.

3. Hedge fund bearishness, with significant selling pressure in various scenarios.

4. Increasing market leverage opposite declining liquidity.

5. Historically low hedge costs, suggesting potential for hedging strategies.

6. Opportunities in China and energy stocks, with recent significant inflows into China funds and potential for energy equities to catch up.

These are all topics we’ve touched on over the last week, with emphasis on oversold Chinese stocks and a stunningly low VIX. Both the Chinese large-cap ETF (FXI) and the VIX could be set to burst higher. Moreover, they would benefit greatly in the event of an S&P dip. After all, the cash needs to go somewhere, so why not beaten-down Chinese stocks that are about to benefit from nearly $300 billion in stimulus?

As February approaches, bulls probably need to be a little more picky than usual. And that might even include buying some protection through an historically “squashed” VIX.


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