Turnaround Tuesday?

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Tuesday, Aug. 6. The Bottom Line segment of today’s podcast starts at (4:04), with ‘Stocks on the Contrarian Radar’ commencing at (6:31) for listeners who want to skip ahead.

State of Play

Stocks got smacked around yesterday. It was a very ugly day across the board. After the close, earnings from Palantir (PLTR 0.00%↑) impressed, helping sentiment. As we look at our board of indicators for signs of direction at 0640, risk appetite appears to be returning some:

• Stock index futures are pointing to gains, but are off of the highs set earlier in the session. Nasdaq and S&P 500 are up about 0.8%. The Russell 2000, which tracks small caps, is up a little less (+0.6%);

• Cryptos are rebounding as well and this more impressively. Bitcoin is up almost 8% to trade north of $56,000;

• Bonds are selling off for a change and the yield curve has re-inverted. The 2-year yield is up 8 basis points to 3.96% whilst the 10-year is up 5bps to 3.83% (yields move inversely to prices);

• Commodities aren’t doing much. WTI crude oil is up 0.5% to trade around $73/barrel. Copper is down 0.6%.

Today’s Known Events

Earnings kick things off again:

• Celsius Holdings (CELH 0.00%↑), the beverage of choice of millennial anorexics, beat estimates and that stock is rising in the pre-market, up 9% at the time of this writing. This after a drop of some 60% over the last couple of months;

• Caterpillar (CAT 0.00%↑) also beat on top- and bottom-line estimates and that stock is rising in the pre-market;

• Uber Technologies (UBER 0.00%↑) is also out before the open at 0930;

• After the close at 1600 we’ll hear from Supermicro (SMCI 0.00%↑), Rivian (RIVN 0.00%↑), AirBnb (ABNB 0.00%↑), Reddit (RDDT 0.00%↑), and Wynn Resorts (WYNN 0.00%↑ ), among others.

The US reports its balance of trade at 0830. Economists who were surveyed expect a trade deficit of $72.5 billion, down from the $75 billion recorded last month. As Americans are the single largest block of consumers in the world, a US trade deficit is generally a good thing because it means Americans are buying more stuff (they don’t need).

The Bottom Line©️

Was yesterday’s bloodbath an outlier? Or signs of things to come?

Worth keeping in mind that recessions very rarely materialize overnight. It happened with Covid just because the economy was literally forced to shut down overnight. If we weren’t in a recession on July 31, there’s no reason we would suddenly be in one now after a few lackluster economic data points. The likelihood of recession may have increased in the last week, but that just means the probability has increased (though frankly even that is debatable).

Stocks on the Contrarian Radar

Still, it may be worth playing along here if only to take out some hedges against future drawdowns. Because there will, with 100% certainty, be a recession at some point. It may not be for several quarters, perhaps even years, but it will eventually materialize. When it does, it will not be pretty. It never is. The term ‘mild recession’ is only affixed in aftermath. It’s never mild when you’re going through it. At that point, you will want a couple of things in your portfolio:

1. Bonds and fixed income. After several years of horrible returns these have finally started to rebound in recent month, largely due to the Fed messaging that it would be cutting rates. The iShares 20+ Year Treasury Bond ETF (TLT 0.00%↑) is still roughly flat over the last 12 months. That’s the so-called long end of the curve, the long duration Treasuries. Not as risk averse as the short end, but also pay a bigger coupon (that is historically. Not when yield curves are inverted. But the yield curve just uninverted, which may be another good catalyst to get this exposure now).

2. Short exposure to stocks and other things like cryptos. This is more controversial and more difficult (and more costly) to obtain. There are ETFs that provide the exposure but they are a) expensive and b) engineered to drop over time due to something called time decay. Still, The Contrarian yesterday panicked and bought a couple small slugs of ProShares UltraShort S&P500 ETF (SDS 0.00%↑), which is actually a levered inverse ETF. That means it’s even riskier than other inverse ETFs, though it does have a bigger payout.

Obviously, timing can be paramount. If you buy these things ahead of a big rally for risk assets then they will not do well. Now, after such a big selloff, may not be the optimal time for it. But if we get a relief rally today? If that’s what materializes, it could present a good opportunity to buy in. Assuming the economic data points are actually telling and we are in fact getting closer to recession, that is.

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