Hey everyone,

I remember a while back when I first started reading financial market and trading books, the “legends” of the industry would always be on the other side of the consensus to make outsized returns. The problem with that today is that social media amplifies all views across any distribution of probabilities.

An easy example is back in the day you used to be able to trade news with a higher signal. Stan Druckenmiller even talked about how he used to trade price action vs news and then it stopped working.

Today, algos are scrapping every social media platform and overlaying it with momentum models on individual stocks. The game is very different today.

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Where are stocks going?

For those of you who are new, check out the S&P500 primer I wrote which breaks down how to analyze and trade SPX (link and link)

Right now we are in a period of time where estimates for Q4 earnings are set to accelerate.

Here is a chart of SPX (white), SPX earnings yield (blue) and SPX earnings expectations yield (orange):

How should we think about equities and earnings as we move into Q4?

I don’t think we will have any dramatic changes in earnings in Q4. However, if earnings come out above expectations or in line with expectations AND stocks begin selling off, we have probably hit a local peak. This will especially be true if we see a shift in correlation and negative growth becomes the dominant impulse.

Remember, the majority of this move has taken place due to supply. We are likely to see less downward pressure on stocks from the valuation component if bonds begin to make a bottom during auctions in Q4. If you want a comprehensive breakdown of this, see this article: link

Here is the deal, if growth doesn’t completely deteriorate into Q4 (see my notes on this here: link), we could see another rally in stocks before any downward movement into a potential recession in 2024.

There are a lot of “if’s” but knowing the distribution of scenarios and their respective signals is THE WAY to extract premia from the market.

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How am I thinking about trades?

Macro Report/Insights: Long Or Short Stocks?

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