Summary

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Finally the big week has arrived, the upcoming CPI release and Fed meeting are likely to set the tone for the remainder of the summer. Following the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) defying market consensus and increasing rates by 25 basis points last week, the question is whether the Federal Reserve will follow suit at Wednesday’s meeting. However, recent economic data and dovish remarks from Fed officials have indicated that they are likely to skip a hike in June, the July meeting will be a different matter.

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Stocks closed modestly higher in a week of relatively subdued trading ahead of the Federal Reserve’s policy meeting and rate announcement on the following Wednesday. The week was notable for the S&P 500 Index moving into bull market territory, or up more than 20% off its mid-October lows. In this newsletter, we will delve deeper into this issue, so that the reader can draw his or her own conclusions.

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Last week was a relatively weak week for economic data. On Thursday, the Labor Department reported that weekly jobless claims had jumped to 261,000, well above expectations and the highest level since October 2021. Continuing claims fell back unexpectedly and hit their lowest level in nearly four months. From Europe, revised data showed that the eurozone economy shrank by 0.1% sequentially in both the first quarter of this year and the final three months of 2022, meeting the technical definition of a recession.

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Apple’s annual developer’s conference also made headlines as the world’s most valuable public company unveiled its first major new product in several years, a virtual reality headset. Investors seemed to react negatively to the USD 3,500 price of the device, but the stock recovered some of its losses later in the week.

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This week's news and highlights focus on the crypto market. The bitcoin price has dropped to around $25,000, down 5% to its lowest level since March and mirrored by declines seen by the ethereum price. However, other top ten cryptocurrencies Bnb, Ripple, cardano, matic, Dogecoin and Solana, have all suffered far larger declines, losing between 10% and 25% in mere hours, a true Bloodbath!

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The cryptocurrency market fell 7% below $1 trillion on June 10th, continuing its decline in the week that saw the industry's biggest exchanges, Binance and Coinbase, facing regulatory actions by the U.S. Securities and Exchange Commission (SEC). The tokens deemed "unregistered securities" in the SEC lawsuits were among the worst performers. 

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Rumors spread through social networks, large holder or fund exiting its positions or an attempt to drive prices lower to cover shorts. To be honest, we do not believe that a large holder has decided to liquidate its portfolio all at once and at the moment of least liquidity in the market. In any form whatsoever, last weekend's move is not good news, and not just because of the lower prices. It reminds investors how thin the market currently is, and how prices could be manipulated. In turn, we must not forget that a designation as an unregistered security could make tokens harder to trade if exchanges shy away from listing them for fear of irking the SEC.

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Macro and news

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U.S Macro data

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In a week absent of any key U.S. economic releases, the main highlight was the BoC's surprise rate hike. After being the first major central bank to pause its hiking cycle back in January, the bank raised its policy rate by a quarter point to 4.75%, the highest since 2001. The main takeaway is that the BoC and other central banks want to ensure that monetary policy is sufficiently restrictive, and they aim to achieve some type of landing (an economic slowdown) to tame inflation.

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The Labor Department reported that weekly jobless claims had jumped to 261,000, well above expectations and the highest level since October 2021. Continuing claims fell back unexpectedly and hit their lowest level in nearly four months.

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Investors appeared calmer than they have in years, after the United States suspended the debt ceiling in time to avoid a default, allowing investors to breathe a sigh of relief. The Cboe Volatility Index, or VIX, last Thursday closed at its lowest level since January 2020. CNN’s Fear and Greed Index reached “extreme greed” on Thursday.

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Recent economic data and dovish remarks from Fed officials have indicated that they are likely to skip a hike in June. That’s different from a pause, since it suggests that the central bank could raise rates as soon as July after taking a break this month. The key as always will be Fed Chair Jerome Powell at the post-meeting press conference.

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Fed fund futures indicate traders have priced in a near 80% chance that the central bank will hold interest rates in the 5%-5.25% range, according to CMEGroup's Fedwatch tool. However, they see 50% odds of another 25-basis-point rate hike in July.

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Last month, the Fed approved the tenth interest rate hike in just over a year, the swiftest monetary policy tightening that the central bank has undertaken since the 1980s, with significant repercussions not only for the stock and bond markets, but for the economy and consumers. In its May FOMC meeting statement, the Fed removed language about the need for “additional policy firming” in order to achieve inflation goals. That’s helped sustain the majority view in the market that a pause will be announced this week.

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Desinflation on its way

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It has been half a year since headline inflation peaked. Presently, a strong disinflationary trend is underway, particularly pronounced in the US, and quite striking in the Eurozone. Favorable base effects, substantial easing of food, energy, and electronics price pressures, normalization of the global supply chain, and easing of business investment demand are all at play. We believe markets are far from fully appreciating this major disinflationary impulse which brings important implications for macro portfolios.

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Eurozone macro data

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The Eurozone falls into a mild recession; retail sales falter; German industry worsens.

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Revised data showed that the eurozone economy shrank by 0.1% sequentially in both the first quarter of this year and the final three months of 2022, meeting the technical definition of a recession.

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Flat eurozone retail sales in April indicated that consumption remained weak.

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Germany’s industrial sector also continued to deteriorate. Factory orders unexpectedly fell 0.4% compared with March, while industrial output grew 0.3% sequentially, less than the 0.5% uptick expected by economists.

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UK macro data

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The UK’s two largest mortgage lenders, Halifax and Nationwide Building Society, reported that house prices fell significantly.

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China macro data

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The private Caixin/S&P Global survey of services activity rose to 57.1 in May, up from April’s 56.4, its fifth successive monthly expansion since Beijing lifted pandemic restrictions in December. The Caixin survey of manufacturing activity, released the prior week, also unexpectedly rose to 50.9 in May. The bullish Caixin data countered the official manufacturing Purchasing Managers’ Index (PMI), which contracted in May for a second consecutive month. Index readings above 50 indicate growth from the previous month

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China’s exports fell 7.5% in May from a year ago, trailing estimates and marking the first decline in three months as global demand weakens. Imports shrank 4.5%, above forecasts.

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May inflation figures pointed to rising deflation risks weighing on China’s economy, which is dealing with weak domestic and overseas demand, a sluggish property market, and high youth unemployment.

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China’s much-vaunted economic rebound after its emergence from strict zero-Covid lockdown measures has yet to fully materialize, prompting some economists to speculate that further fiscal stimulus or monetary policy easing could be coming down the pipeline. 

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2023 Recession?

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Before ending this macro part of this newsletter we will analyze some data for the reader to draw his own conclusions about soft-landing, hard-landing or no-landing, remembering that monetary policies and their effects on the real economy have a certain lag. The market lives in immediacy, but the macro takes its time to materialize.

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Let's look at the data and compare time series.

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The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. Businesses and investors can use the index to help plan their activities around the expected performance of the economy and protect themselves from economic downturns.

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Only two recessions have reached at least 13 consecutive LEI declines: those that started in 1973 and 2007

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U.S. bankruptcies so far this year are the highest since 2010. Through the first 5 months, business bankruptcies are at the fastest pace since 2010.

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All of the above are real and not at all promising data and inevitably we need to compare them with previous situations. No two cycles are the same, and this is certainly the case with the current one, which has been affected by pandemic distortions, high inflation and aggressive rate hikes. Many will say, this time it is different, maybe or maybe not. Macro has other times for what the market demands.

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During the early stages of a bull market, the "average" stock, as proxied by the equal-weighted S&P 500, tends to outperform the market-cap weighted index. Similarly, small-cap stocks, which are sensitive to economic growth, tend to outpace large-cap stocks. This year market leadership has stayed very narrow, with just a handful of mega-cap stocks accounting of most of this year's gains. 

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Artificial intelligence (AI) is a wonderful thing and a real “game changer”, but it must be admitted that this last rally has been driven by the excitement and Fomo around artificial intelligence (AI) with certain aromas that remind us of the well-known Dotcom.

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It might be premature to enthusiastically embrace the developing “bull market”. As Lenin said, there are decades in which nothing happens, and there are weeks in which decades pass. The market lives in a state of generalized drunkenness and blindness caused by so many years of ultra-expansionary monetary policies, which to some extent impedes it from being aware of the vast macroeconomic and geopolitical changes we are living through. The hangover always comes. 

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Stocks have never bottomed BEFORE a Recession.

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Stocks have never bottomed BEFORE the Fed stops hiking rates.

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Crypto News

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The crypto market closes one of its worst weeks this year following a weekend crash. This time, most of the major altcoins plummeted, recording huge double-digit losses. The wave shock traveled quickly throughout the market in a horrific bloodbath. Meanwhile, the market capitalization dropped by over $100 billion, dangerously close to dipping below the $1 trillion mark. The SEC officially classified 13 cryptocurrencies as securities, including Cardano, Solana, and Polygon. This decision could lead to many crypto exchanges delisting the assets, thus forcing holders to sell them hastily. 

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This week, the U.S. Securities and Exchange Commission (SEC) sent shockwaves through the crypto market by charging Coinbase with operating illegally, widening its crackdown on the industry after suing the world's largest crypto trading platform, Binance, accusing it of a range of violations that include mishandling user funds, inflating trading volume and evading regulation.

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Binance US has made the decision to temporarily suspend U.S. dollar deposits and has announced an upcoming pause for fiat withdrawals, potentially starting from June 13. The exchange cites the need to take action in response to what it describes as "extremely aggressive and intimidating tactics" from regulators in the United States. Binance US has also delisted eight Bitcoin pairs and two BUSD pairs, while temporarily pausing its OTC Trading Portal services.

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Last week, U.S. lawmakers introduced a bill into Congress that proposed a "functional framework" designed to provide regulatory clarity for bitcoin and crypto companies in the country. The new U.S. crypto bill, after several attempts to pass crypto legislation in previous sessions, proposes cryptocurrencies offered as part of an investment contract would fall under SEC oversight, while those that qualify as commodities would be overseen by the Commodity Futures Trading Commission (CFTC).

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Credit ratings agency Moody’s has downgraded its rating of Coinbase from stable to negative following the SEC’s legal action against the crypto exchange for allegedly operating as an unregistered securities broker. Coinbase shares have plummeted 15.7% last week.

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The fifth-largest stablecoin by market capitalization TrueUSD (TUSD) lost its dollar peg in the early hours of June 10 after a pause in minting activities through its technology partner Prime Trust. TUSD minting and redemption services via other banking partners remain unaffected. “We want to assure you that our partnerships with other banking institutions remain intact, allowing for seamless transactions,” the announcement says.

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It’s unclear if the halt in minting is related to recent rumors of insolvency surrounding Prime Trust. The company, a fintech infrastructure provider based in Nevada, laid off a third of its staff in January. It was also acting as a middleman for Binance US, holding its customer funds through banking partners amid the debanking of crypto businesses in the United States.

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Cryptos: spot, derivatives and “on chain” metrics

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The actions of the SEC continue to negatively affect the dynamics of digital currencies. By calling many tokens securities, the regulator provoked another collapse, against which Bitcoin lost 5% of Saturday's high and collapsed to the level of $25,425. Bitcoin's dominance rate or share in the total crypto market capitalization rose early Saturday, nearing the 50% mark for the first time since April 2021. Tether, the world's largest dollar-pegged stablecoin, also likely benefited from Saturday's risk aversion. Its dominance rate jumped 5% to 7.82%, the highest since Jan. 8th. Global market capitalization fell to the psychologically important level of $1.05 trillion.

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The cause of Saturday´s plunge appears to be a decision by some of the biggest crypto market makers and trading firms to dump their holdings. These firms’ large holdings, combined with an illiquid trading environment following the SEC declaration, likely led to an especially steep drop in prices.

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After the failure of the bearish imbalance of the upper value area marked in red the market tried to accumulate and reverse the bearish momentum, however the Vwap anchored at the highs has acted as severe resistance since these local highs generated in April. The market is in danger, losing the Vwap anchored at the impulse´s lows would open the door to look for the nearest lower volume node, the $23000 level.

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Our bias remains bearish due to the aforementioned dynamics and we will rotate to full bearish in the short term with the loss of the aforementioned Vwap. The ball is in the bulls' court, if they want to turn this situation around they must conquer in a vigorous way and showing real strength the Vwap anchored at the local highs and the high volume node $28100.

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Bitcoin 05/06/23 10 min chart

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Bitcoin 12/06/23 10 min chart

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Moving further down the timeframe, to analyze the recent minor dynamics, we observe that the previously mentioned minor cumulative structure has failed in bullish imbalance and a sell control has been established on the Vwap anchored at the local high. At the same time we are below the Vpoc (volume point of control) of that structure, the weakness and sellside control is evident. To turn the tables, demand must recover and consolidate the Vpoc and the Vwap anchored at local highs.

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Moving up the timeframe is where we observe that a break and test  in two legs of the upper red value area can actually materialize and this would have major implications on the lower core value area. We are still at a key moment. Bullish imbalance or failure of the main lower value area. An imbalance is desirable to always occur above the highs of the range, any deepening of the price to the lower value could seriously jeopardize any bullish approach.

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Bitcoin 05/06/23 4h chart

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Bitcoin 12/06/23 4h chart

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We are very expectant about the evolution of risk assets following the debt ceiling agreement. An agreement means the Treasury will be able to refill the Treasury General Account (TGA), this will suck a tremendous amount of liquidity out of the markets. Liquidity is probably the most important variable in these times for risky assets. This chart speaks for itself. Bitcoin vs Wresbal (Reserve Balances with Federal Reserve). 

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Despite the recent turbulence in the cryptocurrency market, Ethereum continues to consolidate above the important zone discussed in previous newsletters and which is perfectly delimited in the chart The Vwap anchored at the highs is a hard resistance zone, as seen in the chart, we would like to see a good sign of demand strength crossing this Vwap. We have neutral bias and we are aware that the time now begins to play against it, since the conquest of an area has to be accompanied by subsequent strength to undertake a price discovery.

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Ethereum 05/06/23 4h chart

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Ethereum 12/06/23 4h chart

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We will closely monitor the evolution of BNB as a measure of risk perception. BNB is the cryptocurrency coin that powers the BNB Chain ecosystem. BBN is one of the world's most popular utility tokens and it is used primarily to pay transaction and trading fees on the Binance exchange. It is Binance's flagship token.

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At first glance we note that the Vwap anchored at highs has never been exceeded or practically tested since late 2021. The vigorousness with which the Vwap anchored at the local lows of June 2022 has been broken through makes us aware of the major weakness on this token. Clearly the area to watch is the historical support at $220, from there Binance could be in serious trouble.

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BNB 12/06/23 4h chart

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Binance continues to have a really impressive market share and is a risk in itself. We will be very close to the developments, everything related to the SEC and the American regulator is not a one-day story.

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Net outflows from Binance are more significant than when the CFTC sued the exchange in March 2023. However, net outflows so far are smaller than what the exchange has experienced in other periods of "stress".

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Crypto trading volumes unusually low

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We believe it is appropriate to include again in this newsletter last week's on-chain metrics and analysis. Low trading activity, low volume and dwindling liquidity in the order book are some of the main reasons for these recent aggressive movements in the ecosystem.

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Data from on-chain analytics shows that non-stablecoin digital assets have seen historically low levels of monthly trading volume of late, with Bitcoin and Ethereum, in particular, dropping to the second-lowest threshold since 2019.

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Daily trading volumes are lower across the board as crypto finds itself stuck in a relatively sleepy market. The Block's data dashboard indicates that the 7-day-moving average for crypto exchange volumes has hit its lowest level since the beginning of the year.

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The decline in volumes follows news that major trading firms are scaling back their activity in the market. On May 9th, Bloomberg reported that Jump and Jane Street have pulled back from crypto trading because of regulatory uncertainty in the U.S. Jane Street, for its part, is scaling back globally, according to the report.

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The exit in trading by Jane Street and Jump Crypto, has the potential to disrupt the fragile flow of liquidity across the industry. Liquidity has still not recovered from Alameda's collapse, and a slowdown with two of the biggest surviving market makers could weigh on liquidity even further. We might see it in the future if brokers, payment providers and other actors looking to source liquidity start shifting offshore or to Europe and Asia.

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Market depth, a metric used to measure liquidity on exchanges by assessing how much capital is required to move a market, slumped by more than 50% following the collapse of FTX and has failed to recover despite a rise in crypto prices. The more illiquid the market is, the bigger the price jumps can be to both the upside and downside.

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This decline in overall liquidity is paired with a heavy decline in stablecoin trading volume, which according to CCData fell in May by 40,6% to $460 billion. This represents the lowest monthly trading volume by stablecoins on centralized exchanges since December 2022.

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DEXs share of trading volume in the spot market exceeded 20% for the first time. We could say that the main reasons for this increase in trading activity on DEXs and decline in CEXs are the U.S. crackdown and regulatory uncertainty seen in many countries and a surge of interest in meme coins, many of which are traded on decentralized exchanges only.

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In recent months, investors have been withdrawing their funds from centralized exchanges, causing many to experience record outflows. Even Binance, the largest cryptocurrency exchange by trading volume, was not immune to this trend. DEXs have been showing a bullish trend in trading volumes, with Uniswap and SushiSwap leading the way.

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Decentralized exchanges are still in their early stages of development. They can be more complex to use than centralized exchanges and have less liquidity, which can make it harder to find trading pairs and execute trades. Despite these challenges, the growth of decentralized exchanges over the last few years has been impressive. The rise of DeFi and the increasing awareness of the risks associated with centralized exchanges will likely continue to drive the growth of decentralized exchanges in the coming years.

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The short-term solution of moving all activity to off shore may seem a good step, but in the long term it does not seem to be the appropriate solution for the desired institutional entry into the ecosystem.

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Tether's market capitalization hit an all time high even though trade volume is at multi-year lows.On both CEXs and DEXs, daily USDT volume averaged around $7bn in May. A Kaiko report last month raised suspicion about what it termed USDT’s “inordinate” market cap surge because the increase was inconsistent with a plunge in trading volumes to multi-year lows. Other stablecoins’ market cap has generally correlated with trading volumes.

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From Glassnode: “We can see major shifts underway in stablecoins, with USDT supply at new ATHs, whilst USDC and BUSD fall to multi-year lows. Given stablecoins are non-interest-bearing, and regulatory pressure in the US is building, it suggests US capital is now less active in digital assets.”

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Analysis of increasing total number of unique active addresses in stablecoin transactions amidst altcoin market cap decline and SEC lawsuits. The fear sentiment generated by the SEC lawsuits has influenced market participants' behavior and their preference for more stable assets.

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We do not think it is appropriate to think that Tether is going to stay out of this regulatory crackdown. Its lack of transparency, non-existent audit and messy curriculum undoubtedly put it in the spotlight.

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The market as of today is completely dominated by derivatives, we believe that organic growth from spot is absolutely necessary although the development of derivative markets is a sign of market maturity. Cryptocurrency derivatives trading volume on centralized exchanges fell in May, but spot trading volume declined even more, pushing the derivatives market share up to a new all-time high.

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The market share of crypto derivatives trading rose to a record 77,6% even as absolute derivatives trading volume slid 23,3% to $2,15 trillion. Pushing the market share higher was a 40,2% tumble in spot volume to $621 billion.

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The options market is one of the fastest-growing sectors in the cryptocurrency industry. Options trading volumes have increased across global crypto exchanges, with institutional investors increasingly trading crypto options to hedge their books. According to the latest report by Glassnode, the amount of Open Interest (OI) in Bitcoin Options contracts has reached $10,3 billion. Its futures contracts, on the other hand, stood at $10 billion, indicating that the amount of OI in Bitcoin Options contracts has surpassed the futures contracts for the first time ever.

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Options implied volatility is extremely compressed, falling to around 40% for both BTC and ETH, which is the lowest we have seen in many years. Far from being a reflection of maturation and stability, this fall in implied volatility is largely the combined result of the abrupt reduction in the number of large, sophisticated market participants and the increased hurdles to fiat on/off-ramps, leading to significantly lower volumes and higher volatility across all major coins.

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Across the past week, Bitcoin Miners have been sending a significant amount of coins to Exchanges, with the largest inflow equal to $70.8M.  This is the 3rd largest inflow on record, -$30.2M less than the peak inflow of $101M recorded during the primary bull market of 2021.

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The percentage of Bitcoin Long-Term Holder Supply sent to Exchanges remains extremely quiet at 0.004%.This highlights the profound inactivity of the cohort amidst elevated market distress, remaining indifferent to the Binance and Coinbase regulatory charges.

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Bitcoin is leaving the United States.

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Classic markets

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This week is a Quadruple Witch. Stock options, index options, index futures, and single stock futures all are set to expire. This happens only four times a year. And it is also the big macro week, the upcoming CPI release and Fed meeting are likely to set the tone for the remainder of the summer. 

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The market arrives in a state of unparalleled excitement and non-existent risk perception. We're now back into 2021 levels of call buying with significant upward shifts in projections from the major investment firms and with the press aligned with general sentiment. Artificial intelligence (AI) is a wonderful thing and a real “game changer”, but it must be admitted that this last rally has been driven by the excitement and Fomo around artificial intelligence (AI) with certain aromas that remind us of the well-known Dotcom.

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The VIX / MOVE ratio reached its lowest level since 1996, reflecting a stark contrast between stock investors' calmness and rates investors' relative unease. However, it does not appear that the seasonal component of the VIX is in favor of the prevailing sentiment.

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Last week we did not propose scenarios, as we needed to see if the market managed to consolidate the 4250-4300 area. And so it did, a rather anodyne week in terms of market returns. For us, there is no need to stand in front of the train approaching at full speed or to board a train that is completely full and does not seem to know its final destination.

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05/06/23 SP500 futures big picture

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12/06/23 SP500 futures big picture

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It is time again to pay special attention to positioning in the options market. The 4250-4300 gamma call wall was respected last week, however the market has managed to rotate the gamma call wall to higher levels. It now sits between 4300 and 4350 points, with the highest notional strike gamma at 4320. 

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The positive gamma exposure (GEX) dragging the market is again a major impediment for the market to move substantially this week. Let us not forget that we have OPEX ahead of us and then the expiration of the large JPMorgan collar trade with the call sold at 4320. This level should act as a magnet and with greater intensity as we approach the expiration date.

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We maintain a neutral bullish bias again with little upside and we will pay attention to a break of 4250 and the zero gamma level (4210) if this is the case, let's not forget that the main catalysts for market movement are on the table, US CPI and FED meeting.

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Gamma Profile 05/06/22

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Gamma Profile 12/06/22

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Observing the strong positive gamma exposure (GEX) that the market is dragging, we insist once again that it certainly seems difficult for the market to break above 4320 without first unloading the fomo experienced during the 2 last weeks. In our opinion, the market has no tailwind for further rises due to the overexposure / concentration and the prevailing fomo coupled with an inevitable reduction in liquidity following the debt ceiling agreement.

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According to the SPX gamma curve, we are again close to the maximum positive gamma point. In this situation the market should experience serious difficulties to continue upwards. We will keep a close eye on the gamma flip level, located at 4210.points. This level could radically change the market context and make volatility kick in.

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Over the past week we have seen a lot of call buying activity on the VIX and the divergence between the VVIX and the VIX itself is beginning to be noticeable.

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Risk asset´s internal metrics

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AAII BULL = 44.5: the highest reading year to date and biggest 1 week move higher since 2021; second biggest increase in last decade. 

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 We're now back into 2021 levels of call buying.

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BTFD "strategies" having one of their best years ever

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Friday “free risk day” at its peak.

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This price agnostic community (CTAs, Vol control fund, Risk parity) is all in and does not care at all about fundamentals, and given a drawdown trigger they can unload their stuff quickly again (most CTA sell triggers are located between 0.5 and 2% lower from current levels).

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While human portfolio managers fret over economic uncertainty and the health of the US banking system, some algorithmically driven hedge funds have been buying stocks at one of the fastest rates in a decade, according to bank trading desks. Quant funds have been piling into US stock markets in response to falling volatility, helping to prop up the market as active managers sit on the sidelines.

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It seems that systematic reallocation has actually been the main source of demand apart from buybacks. The trend among quant funds helps to explain why the US stock market has proven surprisingly resilient this year despite the widespread pessimism, with the S&P 500 gaining 8 per cent year to date. 

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These funds move fast and unemotionally and they are not parsing through earnings or taking a view on the stickiness of inflation, this is about price trends and momentum. There are several types of systematic strategies, including “volatility control” funds, commodity trading adviser funds, and “risk parity” funds. Their approaches vary, but all three rely on realized and expected market volatility as critical drivers of where they allocate assets.

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So although these and other systematic flows have caused the appearance of a "new bull market," we'd urge you not to be fooled by flows, as there are still some critical systemic risks lingering in the background

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Consolidated systematic positioning vs SPX

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Strong divergence between QQQ and TLT. Who is lying?

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To put the "Magnificent 7" into perspective: 7 Stocks in the S&P 500 (AAPL, MSFT, GOOGL, AMZN, NVDA, TSLA, META) have returned 53% YTD. The other 493 stocks have been flat.

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Early-cycle bull markets usually are led by small caps. That is definitely not happening right now.

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The path that markets have followed since October appears different from what tends to happen around major inflection points when looking at duration and strength. If we remain in a bear market, at eight months since last year's low, the rise in equities would mark the longest bear-market rally in history (the average bear market rally has lasted about two months).

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On the flip side, if we have entered a new bull market, the 20% rally would mark the second-weakest start to an upcycle going back 100 years (the S&P 500 has gained 38% on average during the first eight months of a new bull). Also, this would be the only bull market since 1980 that small-cap stocks have not outperformed large-cap stocks.

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The chart below compares the S&P 500’s market cap (blue) and equal-weighted (orange) year-to-date performance. Note how they tracked each other closely until the banking problems in early March (vertical line).

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This is the largest divergence between the two indices over any 64-day time period in history. It started with the bank failures in early March.

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The VIX collapse, from > 17 to <14 also began on May 31. More evidence that this is a "KRE market" as much as a "NVDA market”

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