Technically it looks good and is not yet great.

Renaissance Macro’s Jeff deGraaf joins Danny Moses on his on the Tape podcast to share his technical view of the markets.

Jeff deGraaf: The market that continues to defy gravity

Here are some notes if you don’t want to watch the episode:

Bubble Watch and Market Cycle

• Current Call Status: The market has “blue sky expectations” (especially around AI), creating the conditions for a bubble. However, DeGraaf believes we are still in the future “second inning,” not near a large doll. [23:02]
• Semiconductors: This sector has met the “double over two years” bubble watch condition, but the 35% correction that took place during the rally makes the measure less easy. [23:34]
• Why the bubble won’t burst yet:
  • Missing indicators: There are no crazy new issues (SPACs, IPOs) yet. [24:33]
  • The Fed Factor: Bubbles usually don’t burst when the Fed does starting a easing cycle (expected soon). The Fed has not yet raised concerns about asset prices, which typically happens about six months before a market peak. [26:22]
• Yield curve and liquidity: The current environment is the most normalized (less intervention) in 15-20 years, which he considers extremely bullish for shares. [32:06]

Building on Jeff’s point about market normalization.

Jeff deGraaf’s claim that the market is in a more “normalized environment” than what has happened over the past 15 to 20 years focuses on the reduced level of central bank intervention and the subsequent behavior of the markets, especially the yield curve.

Here are some of his points as we expand on them:

1. Shift from market oppression

The extended period of abnormal market conditions followed the Great Financial Crisis (GFC), including:

• Quantitative Easing (QE) and Yield Curve Suppression: The Fed and the Treasury Department actively controlled the price of money and pushed interest rates to “unnaturally low levels.”
• Bastardization of markets: The intervention essentially controlled the price of money, leading to an environment in which asset prices were artificially influenced.

The current ‘normalization’ started after 2022, allowing a more natural pricing process to take place.

2. Indicators of standardization

• Natural Pricing of Money: The pricing of money today “seems to be at least more naturally priced than artificially priced.”
• Bank reserves: The banking system now operates at the bottom of what is called a system extensive reserve regime. The Reverse Repo (RRP) facility has been exhausted and reserves, while still high ($3 trillion), are at the lower end of that wide range. This is another step towards a more normalized environment.
• Steeper yield curve: The curve has steepened, which is a market response to the more natural pricing of money and fewer central bank interventions.

3. Global and sectoral implications

The lack of intervention and the resulting steepening of the yield curve have had a counterintuitive effect that DeGraaf highlights:

• Bullish for stocks: Historically, the steepening of the curve may have been seen as competition for shares, but in this new context it has proven so extremely bullish for shares.
• Financial sector in Europe and Japan: The European and Japanese financial sectors, hit hard by years of repression and low interest rates, have been “absolutely torn” since normalization began, demonstrating the market’s positive response to a more natural interest rate price.

He concludes that because the market operates with fewer interventions and the pricing of money is more natural, the current environment is in fact a “pretty good place,” and he is not overly pessimistic.

Gold and strategy

• The golden test: Gold is in a zone similar to the 1979-1980 period, indicating extreme caution. [18:32] DeGraaf uses a simple technical test: Has the net worth doubled in the past two years? If so, it’s a “tornado watch” (conditions are ripe). [19:05]
• Strategy in a Bubble Watch: Traditional technical signals (such as a breakdown) yield too much profit. The best approach is to initiate selling at dollar costwhich involves systematically shaving off profits to break a potential peak. [20:45]

Volatility Outlook

• VIX: Volatility (VIX) is overbought and starting to decline, which is good news. [35:31]
• Volatility at the end of the year: He expects one more volatile end of the year than normal, because a repricing of credit risks (as in the case of private credit issues) will increase the “volatility temperature”. [35:58]

Small Cap: Technically Bullish on Healthcare, Frothy on Technology

1. General Outlook (The Bullish Thesis)

• Response to lower rates: Historically, short-term interest rates are lower outside the fifteen-year period following the financial crisis Very good news for small caps. The Fed’s expected easing cycle supports this.
• Expand: Small caps are crucial to the current “unnatural expansion cycle” of the market.

2. The most encouraging area: healthcare

• Technical Breakouts: He sees “really nice graphs and breakouts” on the healthcare side of small cap.
• Neglect as a catalyst: This sector “has been languishing for a long time” and has endured an “extraordinary period of neglect”, suggesting that the current outbreaks have a strong basis.
• Biotechnology: He noted that biotech (large cap) had also officially broken out and delivered a bullish trend signal on both a relative and absolute basis, supporting the overall positive outlook on healthcare.

3. The area of ​​vulnerability: high beta

• Extremely high beta: Small-cap tech is where he sees a specific area of ​​vulnerability, primarily through the lens of high beta stocks.
• 100th percentile risk: The one-year return difference between a high-beta stock versus a low-beta stock is in the 100th percentile– meaning it is at an unprecedented, extreme level.
• Mean reversion warning: Since the beta is a classic series with mean reversal (the trend is not eternal), this extreme value indicates that caution is needed.
• Tactical Lead Indicator: Historically, the beta factor has tended to peak approximately three months before the market itself peaksmaking it an important area to watch for signs of a reversal in the broader rally.

Technical view of key market sectors

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