NFLX & Chill

Time for 2s and snooze is over. Use that cash to buy the market.

Easing market jitters have prompted the AI FOMOists to push the NASDAQ to new highs. Driven by glimmers of hope on the oil export front in the Middle East, combined with weaker-than -expected jobs data, buyers returned. Expectations of an October FED rate hike disappeared, and with it the bears. But underneath the hood, the market has stalled. Breadth, correlation, and diversification measures are all at year-to-date lows. Consumer cyclicals, Financials, and Interest-sensitive names are all in the tank.

So why be bullish? Simple - when it comes to the right time to buy the market, you won't want to. And by the market, I mean everything that isn't AI-related. Let''s review.

Breadth

Rather than a sign of weakness that leads to a major decline, oversold breadth is a buying opportunity in a bull market.

Correlation

The current market cycle has been led by a narrow subset of mega-cap AI stocks. That has left many stocks behind. But the bottom is now forming in this measure. This is an opportunity to diversify away from the leaders to the laggards.

Implied Correlation

Quality Theme

The best way to time the market is to get long and stay long. As a macro swing trade guy, this hurts me to say, but buying quality stocks and holding through the market's gyrations is a winning formula. The Quality trade is now well behind the market, as Momentum has dominated. It looks like a good time to buy this theme.

Quality ETF vs SPY

So rather than obsessing about the midterms, a run on the banking system, or SpaceX robots rising up, we should be accumulating good quality stocks at these knocked-down prices.

Netflix is a perfect example. They have a strong franchise that has lost some revenue momentum, but critically, not their pricing power. With a large moat due to the cost of content acquisition, they will produce consistent long-term profits. And they report next week, which is usually a catalyst for a short-term dip. At a forward PE below 20, buy the dip.

Netflix

One potential catalyst nobody is talking about is a mid-cycle slowdown that reverses FED tightening expectations. All the focus has been on the 'gold-rush' effect on capital spending from the hyperscalers and its effect on GDP. This has masked the broad deterioration in auto, housing, and consumer discretionary spending. Look at Walmart, McDonald's, and KB Home stocks this year. Pathetic!

So this is a catalyst for monetary easing that is hiding in plain sight. Stocks usually rally into economic weakness as the Fed responds with stimulus. Higher fuel costs are creating sharp demand destruction that will reverse market expectations for interest rates.

The bond market is a screaming buy right now. It has been on the front page all year, and very few bulls are left standing. At the highest real yields in twenty years, it's time to rebalance the 60/40 portfolio. Watch this week's bond auction for clues. It should go better than expected if I'm right about the weaker-than-expected economy.

I've always said the stock market is the only store in the world where people run out when a sale is announced. Quality stocks that have been put on sale. Don't run out of the store! Buy the quality trades like NFLX and chill.

Risk Model: 4/5 - Risk On

In a perverse way, the lagging sentiment has been a source of comfort for the contrarian in me. If everyone is bearish, there are lots of potential buyers. That's why I use this measure as a confirming variable. I think this measure will confirm a new uptrend once weaker data reverses rate-hike fears.