The Stock Market Bottom | A Dangerous Warning.

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for the courses expiring tomorrow hey

everyone me Kevin here still sick meet

but anyway uh well let's talk about why

all of a sudden the market is rallying

this is like really bizarre but we had a

terrible inflationary numbers this

morning everything missed expectations

like everything was worse than expected

and the market is not selling off like

it had been I mean the NASDAQ at what

point dropped three percent and now all

of a sudden it's just recovering and now

it's actually positive 1.8 percent the S

P 500 was down over two percent now it's

up two percent Tesla was down as much as

four percent intraday and now it is up

two percent

what so let's try to make sense of

what's going on there are a few reasons

that I think we could be seeing this

sort of rally and we got to talk about

whether or not this is just a bear

Market relief Rally or what's happening

my first suspicion is that a lot of

people went into the CPI report shorting

and with put contracts so derivative

shorting now why does that matter well

because those shorts paid off handsomely

this morning right at Market open those

shorts paid off very very well we hit

new lows on the S P 500 on the NASDAQ

and on many stocks in fact Tesla was at

levels that we hadn't seen since the

Shanghai shutdowns in the summer that's

pretty remarkable and so in my opinion

there's this potential that we could

have seen in the market of short

covering that is people shorted they

made money on their shorts and then

bought back their shorts creating buying

pressure at the same time as those

BuyBacks were happening and we started

to see some of that rotating back to

green the buy the dip audience likely

came in retail has still not been a net

seller this entire year and even though

retail is running out of money to buy

with and the amount of money that

they're investing is declining on

average we're somewhere around 900

million dollars a day now instead of 1.2

to 1 0.5 billion dollars according to

Vander track so we're definitely seeing

you know substantial decrease in the

amount of money that the dip is being

bought with but you still have a lot of

people on the sidelines ready to buy the

dip so potentially right as we saw that

short covering I wouldn't be surprised

if we started seeing oh nope Bottoms in

this is my opportunity to buy the dip

now be careful because these sorts of

short covering relief rallies don't tend

to last so don't feel like just because

there might be a short covering relief

rally markets are definitely at a bottom

that's not the sign that you want to

look at you'd be more accurate to say

something like hey after midterm

elections markets usually perform better

than they do before midterm elections

sure that is more true after all we have

a beautiful chart on exactly that

showing us how beautifully markets tend

to perform after midterm elections

compared to before on screen now but

just because there's a short-term sort

of relief rally after a sort of a crash

that had a lot of short sellers going

into it not not necessarily indicative

of of a certain bottom indicator but

there's more let's talk about the more

part now another interesting thing

that's happening is we're actually not

seeing the vix the volatility index

really hit these capitulation levels

that you would really expect to Mark a

bottom in fact we've had a declining

trend line here of Peaks for the vix and

it's really remarkable because if you go

all the way back to March of 2020 the

vix ran up to

85. now you do see via the move index

which is basically the vix for bonds

that volatility is like at massive Peak

levels right now higher than what we've

seen in March of 2020.

but in terms of stocks it's actually

been very hard this year for us to hit

new highs on the vix and I think that's

because people see the light at the end

of the tunnel that at some point

inflation is going to go down it's just

a matter of how much is it going to go

down so one of the places that we could

see this or sort of this expectation is

if we look at the St Louis Fred chart

for CPI we can actually see what we need

to lap to see inflation go down now this

is a really cool process so look at this

right now as of September well which is

the report we just got CPI is sitting

over here at a year-over-year change of

8.2 percent right well we have to if we

change this from percentages let me let

me clarify this let's change this from

percentages where right after the

pandemic we basically had almost a

deflation I mean virtually no inflation

here we saw the inflation really take

off when we're comparing to the whole of

Mark March over here February March

April when we're comparing to this hole

we really saw inflation take off from

1.6 percent to 2.6 to 4.1 to 4.9 and so

on we saw a temporary pause in inflation

but then we got hit with Delta and then

we got hit with Omicron and then we got

hit with war like that's that's insane

those are some insane catalysts for

inflation right so let's edit this graph

and change it to a nominal figure and so

what we're going to do is we're just

going to take the index value because

CPI is not calculated based on a

percentage what CPI actually is is just

a base number that adds over time it's

how much did this basket increase in

cost every single month right so when we

change it to this number what's

interesting is we can actually compare

ignoring percentages for a moment what

level do we need to be at next year to

be at zero percent inflation and what

you'll notice here is that the steepness

between in May of 2020 and June of 2020

is pretty substantial but ignoring the

percentages for a moment look how this

growth in inflation has actually stalled

CPI only went from an index rate of 1375

approximately to 1381.

and so what's remarkable about this is

we could see this rough inflection point

here in June and when we go back to June

of 2021 we'll actually see that the

index level was at 1261. so what's

remarkable about that is if next June

uh we end up getting so well let me just

do that math for you real quick just so

you can see how this works you go from

June of 2021 1261 over here to 1374

watch this 1374 is the new number

divided by 1264. that shows you 8.7

inflation right approximately and what's

needed is if we stay at this inflection

point until June of 2023 or roughly

around there let's say the index read

goes to 1400 because it's growing

relatively slowly well a 1400 new number

divided by 1374 would actually only be

an inflation rate of look at that one

point rounded two percent one point two

percent so this this flattening that

we're seeing of CPI is actually really

neat so look the point of this a chart

is just to say that as we look at CPI

and we compare it back to this slope

because the slope has been rising so

fast of course the numbers are going to

be high when we compare them year over

year now one of the more problems or

localized problems that we have right

now is we are seeing certain segments

like rents and medical services and food

on a month-over-month basis those little

segments are still growing and that's

really bad because you actually have

those individual segments inflecting up

but on sort of an overall level the rate

of inflation going up has definitely

slowed it's not plummeting yet it's not

falling yet we're not seeing that

deflation yet right where prices are

actually lower than what they were

previously but we're clearly seeing

disinflation in that the rate of the

overall trend growth is down so my

belief is that there's a possibility the

market is saying you know what we need

to Rally so everybody has money to

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already know about that so I believe

there's this potential that we have two

reasons for this temporary rally that

we're seeing right now one is short

covering and number two is really hope

it's hopium it's this hope that

inflation even though it's bad now

is this potentially just the last of the

worst like come summer of 2023 if we

stay at this relative flat level is it

not likely that inflation will be

substantially lower and I think markets

are trying to look forward through Q3

earnings and look into the summer I mean

we just reviewed tsmc this morning uh in

the course member live stream we also

reviewed Delta and I have to say those

earnings were great those earnings

aren't telling you anything about any

kind of slowdown and neither of their

earnings from Pepsi yesterday holy

smokes no slowdown over there which is a

concern that could actually prop

inflation up but when we just zoom out

for a moment and actually look at this

chart for headline inflation it is

slowing and markets like to price this

stuff in 6 to 12 months in advance well

about nine months from now we'll be in

actually in about eight months from now

we'll be in June how crazy is that so

we'll actually be having our June 2023

inflation report and we'll probably look

back at that inflection point if we're

still relatively similar around 1400 for

that CPI we're gonna have a really

really low headline read

so hopefully that is true and hopefully

that's true at the same time as we start

seeing owners equivalent rents and

decline that would be great and owner's

equivalent rents will go down as the

housing market goes down I expect rents

will follow down it's just going to take

another six months or so to get there

but again with Peak rents maybe being

somewhere around the fall of 2022 maybe

uh we'll we'll end up seeing those

owners equivalent rents come down six

months later or somewhere around the

spring summer of 2023 but the same is

true here just because there's hopium

about that inflection on Headline CPI

numbers doesn't necessarily mean a

bottom is in but what's my strategy on

this well my strategy is simple stay out

of margin work hard and continue to

contribute to your portfolio in my

opinion it's a lot less stressful than

trying to understand all of the little

fluctuations and anytime There's an

opportunity to go buy at a nice level

I'm going to do that even if it feels

like I'm throwing money into a fire pit

I realized that in a year from now two

years three four years from now I'll

probably look back and go wow wish I

bought more at the bottom

good news though is I've already done

that because I got no money left so I'll

probably be saying darn wish I had more

money to buy the dev at the bottom

anyway who knows but these could be two

potential reasons for somewhat of a

relief rally do keep in mind though we

have an earnings recession likely ahead

of us so while some companies might

outperform especially in my opinion

certain companies like Amex or Tesla or

Lulu companies with substantial pricing

power I do think the vast majority of

earnings are going to be disappointing

we'll see that does mean some potential

further pain for markets alright folks

thanks so much for watching we'll see

the next one bye