Alright you degenerates...
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Earnings season is right around the corner, which means we’ll finally see if the “economic deterioration” everyone’s been worried about comes to fruition. Market participants have been obsessing over the macro backdrop for the last few months, citing worsening fundamentals as a reason to stay away from equities. However, players may be pressing the panic button too early. A lot has changed since last quarter’s earnings, and many traders aren’t positioned for good news. While Hedge Funds have gotten more aggressive lately, they remain underexposed compared to historical averages. If earnings come out better than expected across the board and surpass expectations, institutions must scramble for exposure before the market gets away from them. CTAs are in the same boat; they are currently short index futures. Since they are trend followers by nature, they will chase strength and add exposure as the market climbs higher.
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We always discuss how sentiment can shift in the blink of an eye; China and Emerging Markets is our favorite example. Since $KWEB has doubled off the lows, many articles have been published about China’s dominance in the world economy and how it’s a family favorite going into 2023. Not too long ago, analysts deemed the sector “uninvestable” and strongly advised against investing in any stock that had a correlation to China. Now, those same analysts are overweight China AFTER the huge run. This situation is an important lesson in sentiment and a prime example of how emotions factor into the game. No one will feel amazing trying to catch a falling knife, hence why sentiment is always worst right as a stock is bottoming. When looking for opportunities, negative sentiment is viewed as a green flag, not a red one. You've probably missed the move if everyone on TV is already bullish.
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While we’ve been monitoring the flow for opportunities, it’s hard to discern whether the latest batch of activity is accumulation or just earnings hedging. All last week’s top bets coincide with earnings; we’re better off waiting after the reports to pounce on any action. A telltale sign of accumulation is when players aggressively buy into post-earnings weakness. After earnings, all the hedging is out of the way, and it’s much easier to identify new action.