The Bear Market Is Not Over

The NASDAQ 100 (NDX) has entered a bull market for the second time in less than a year. Yes, you read that right, for the second time, in less than a year. The NASDAQ 100 surged by more than 20% from mid-June to its peak in mid-August. It has done it again, rising by more than 20% for a second time off its October low.

Yes, that is quite the feat, rising, by 20% off a low two times, maybe three times, depending on how you want to count. But let's not mince facts because the NASAQ 100 remains more than 20% off its November 2021 highs.

CTAs

Interestingly, this rally and the summer rally have something in common: commodity trader adviser flow overwhelming the market just as they did when they destroyed the Treasury market, rushing to cover their shorts in just two weeks in the middle of March.

The summer mini-bull market was driven higher by CTA flows, which went from massively short stocks to heavily long stocks, as noted at the time. But guess what? The flows came back, and they were buyers in January, pushing the NASDAQ into its second bull market and turning sellers in February, and now they have turned buyers again.

Based on data (subscription needed) from Goldman Sachs, these CTA buyers should be just about finished with their aggressive buying sometime in the middle to end of this week. On top of that, there will be a wave of data that probably supports the narrative that the economy remains robust, but also around the time that the Treasury General Account should rise again as tax receipts pour in.

TGA

The Treasury tax receipts should push the Treasury General Account held at the Fed higher off its very low levels. Last April, the TGA rose by almost $400 billion, which sucked tremendous liquidity out of the market as the reserve balances fell sharply, sending stocks sharply lower.

On top of the CTA flows, there has been an increase in reserve balance that has been due to the loans made by the Fed to the banks, which is not the same as QE and is not sticky, adding liquidity to the market. But, as activity at the discount window subsidies and loans fall back to zero, it should drain another $100 billion off the balance sheet and reserve balances, sucking even more liquidity out of the market and the changes to the TGA.

Not to mention all that money going into money market accounts, fleeing the banks for better interest rates. That money will most likely head right into the reverse repo facility at the Fed, which will also work to drain reserve balances and even more liquidity from the markets over the next few weeks.

Data

Then on top of all of this, there will be a lot of economic data this week, including the ISM manufacturing and services data, JOLTS, and the BLS job report. If the economy is genuinely sporting a nearly 7% nominal GDP growth rate, as the Atlanta GDPNow and PCE estimates combined would suggest, then the likelihood is that the economy will be strong and will support rates staying higher for longer, push bond yields, and more importantly, real rates sharply higher, and off their depressed levels.

On top of that, instead of financial conditions tightening and credit spreads widening, as I thought they might, given the Silicon Valley Bank collapse, they have eased. Yes, financial conditions have eased and are back to the level seen in late February, as noted by the GS Financial Conditions Index. It is as if SVB never even happened. On top of that, the CDX high yield index has also collapsed this week, confirming that, indeed, financial conditions have eased.

If you get robust data this week, which seems highly plausible given that the S&P Global US Preliminary PMIs for March stunned to the upside last week, then it means that the fantasy of the Fed cutting rates this year will be over very soon.

Rate Cuts

Rate cuts are already being priced out of the market as investors listen to one hawkish Fed governor after another confirms the view that there is likely to be at least another rate hike. Then they will be held steady for the year's balance, just as the dot plot showed two weeks ago.

On top of that, the only reason the Fed held back from going with the more aggressive monetary policy tightening path was the belief that the banking "crisis" would cause some financial conditions to tighten; well, to this point, conditions have eased. If they continue to ease, the Fed will have to switch back to the more aggressive policy path at some point, mainly if the economy stays hot.

Of course, if this is the case, then real yields should rise, and the TIP ETF should fall, resulting in the NASDAQ 100 giving back its recent gains, as it was in the process of doing before the Silicon Valley Bank fiasco.

So yeah, once the CTAs are done buying, it might get a little choppy.

Be patient.

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