Market Outlook Update with Kai Volatility's Cem Karsan
Inside: The Russell plays on, a "demand-push" economy, and money being redirected from "Planet Palo Alto"
“We are taking money away from Planet Palo Alto” amid a wave of populism that will continue “regardless of who is leading the charge [in the White House],” Kai Volatility Founder Cem Karsan said yesterday on Talking Markets. And that path looks quite different over different time horizons:
Cem’s Short-Term Outlook
Continued rally in US Equities: Cem predicts that the US equity market, particularly the S&P 500, will continue to rally in the short term due to several factors including:
The resolution of the election and avoidance of a contested outcome
Unwinding of put options and short interest in call options
Re-leveraging effect due to the increase in asset prices
Volatility Tamped Down: Cem thinks the high supply of volatility in the S&P 500 will lead to volatility compression for at least three weeks, potentially longer. This means that the S&P 500 index itself might not move much, but there will be more price action and dispersion in individual stocks and sectors. “When vol is so well supplied on the S&P, it forces dispersion and dispersion means certain things are going to start flying around outside of the center,” he said.
Rotation into Domestic Sectors: Given the volatility compression in the S&P 500, Cem expects that there will be a rotation into domestic sectors, particularly those that benefit from a strong US dollar and an "America First" policy.
💡“My guess is that the Russell is going to continue to drive higher and higher,” Cem said. “You're likely to see significant continued convexity in that area of the market. Anything domestic, anything that benefits from the strength of the US dollar, anything that benefits from a America first policy, right, will continue to push in one direction.”
Tech Set to Lose Out?: If the Russell continues higher, “something has got to go the other way,” Cem says. He thinks there’s a “decent probability” that could be the “tech piece of the scenario.”
💡“This is a wild call, but there’s a decent probability - not a high probability - that Nvidia is actually topping here,” he said. “It doesn’t look like a top yet, so this is not technical analysis. But something has to go the other way.” So - all eyes on Nvidia’s next earnings report on November 20.
Cem’s Longer-Term Outlook
Populism Will Drive Long-Term Trends: Cem argues that the US is moving towards a populist economic model that will favor median incomes over overall economic efficiency and corporate profitability. This would lead to larger government and increased fiscal spending.
Internal vs. External Inflation: Right now, high services inflation (5.3%) and housing inflation (4.2%) is being balanced out by goods inflation (-.9%). In a populist world, what happens to that balance? Here’s what Cem thinks:
Increased Global Conflict: The potential shift towards an “America First” agenda will lead to greater competition and conflict between countries. This will create opportunities in sectors like national defense and commodities.
💡Commodities not only hold value during inflationary periods, they are also used by countries as “core inputs during periods of populism,” Cem says. “Commodities are a bludgeon. They’re a way to compete and to show your strength over another country.”
Shift from Supply-Push to Demand-Push Economy: Cem says the US economy is transitioning from a supply-push model driven by technological innovation to a demand-push model fueled by consumer spending.
“The question is, is what types of things make money when we are no longer sending money to planet Palo Alto and we're sending money to the people of the planet to consume?'“ Cem says. “It's a completely different type of stimulus.”
💡Areas Cem thinks could benefit here include healthcare, infrastructure, transportation, energy, education, housing and urban development, and national defense.
Rising Yields: Cem thinks the 10-year Treasury yield will reach 6% in the next year, and that “when we do, that will be part of the driver of why this market starts having major issues.” He also thinks “massive QE” is “probably coming” as the Fed tries to keep a handle on the yield curve, but even with that, he says: “My view is that they will not be able to control long on the curve if inflation truly does pick up the way I think it's going to pick up.”
To watch the full episode, right this way.
Enjoy,
Maggie
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and determine if an allocation to oil aligns with your overall financial plan.