Mid-week market update: After this week’s brutal sell-offs, the stock market is oversold enough for a bounce. The VIX Index has risen above its upper Bollinger Band, which is an oversold market condition and short-term buy signal.
If the market action in the past year is any guide, the potential for the S&P 500 is the 4720-4750 zone.
Relief rally ahead
There are other signs that the market is due for a relief rally. The CBOE put/call ratio spiked to 1 or more in the last two days. These have been good indicators that risk/reward is tilted to the upside in the short run. In the past 18 months, the bullish resolutions of these buy signals (grey bars) have greatly outnumbered the bearish resolutions (pink bars).
Remember the carnage in the NASDAQ? The ratio of NASDAQ 100 to S&P 500 has become sufficiently oversold that the NDX is due for some better performance.
Not out of the woods yet
Despite the signs that the market is about to undergo a bounce, psychology may not be sufficiently washed out yet. Even as the put/call ratio rose to panic levels, the term structure of the VIX Index is showing a mixed picture. The 9-day to 1-month VIX inverted yesterday, indicating fear, but the 1-month to 3-month ratio remained upward sloping. These readings are not consistent with a durable bottom.
Similarly, the Fear & Greed Index is on the greedy side of neutral territory. Panic bottoms don’t look like this.
I had highlighted the sell signal from the intermediate-term breadth momentum oscillator. In the past, declines from this signal have ranged between 5% and 10%. The latest downdraft in the S&P 500 has only been -3.8% since the initiation of the sell signal. The bear leg from this signal may not be over.
Breadth indicators remain wobbly. All Advance-Decline Lines have broken down below their upside breakout levels, indicating broad-based weakness.
Opportunity and risk
In the short run, the market backdrop is more balanced between opportunity and risk. The effects of the Omicron wave appear to be peaking. Case counts in the UK, US, and Canada are starting to roll over, which is good news.
Q4 earnings season is proceeding. The market will experience both upside and downside volatility as individual companies report. The good news is forward EPS estimates are rising across all market cap bands.
On the other hand, Russia-Ukraine tensions are not abating. Russian troops are massing on the Ukrainian border in Belarus. The White House has warned that an attack could happen “on short notice”. US Secretary of State Anthony Blinken is scheduled to meet with Russian Foreign Minister Sergey Lavrov on Friday in Geneva. Neither side has indicated any hope of breakthroughs. The markets are understandably on edge and the tail-risk of an invasion could materialize at any time.
Don’t forget that the FOMC meeting is next week. Hawkish expectations are rising. The market expects four quarter-point rate hikes this year. Some strategists have even called for a half-point hike in March. Watch for signals about a reduction in the size of the Fed’s balance sheet from either the FOMC statement or from Powell during the press conference.
Subscribers received an alert this morning that my inner trader had closed his short position and stepped to the sidelines. He believes that the intermediate-term outlook is bearish and he will wait for a rally to re-enter his short position. While the market is oversold, the magnitude of downside risk far outweigh any short-term upside potential.
Cam:
Gold and silver had a decent move today to the upside. Any thoughts? I did trade it but only for a short term trade. No idea if there are any long term ramifications of the breakout.
The precious metals are going to move with real rates. Much depends on Fed policy. We should get more clarity next week.
I have no additional insights.
I was quite surprised as well. Gold broke through 1835, a critical level for technicians.
Real interest rates have been negative for a while. I wonder if this had to do with the war noises in the Eastern Europe.
But then channeling Chamath, Russia seized Crimea in Feb-Mar of 2014. I don’t think that had much effect on the stock market.
Awesome timing on the short!
I’ve been a subscriber for years. But I never received trading alert. How can I receive your trading alert?
You just have to subscribe to email notification of new content. I’ll do that for you now.
Thank you!
H&S in the consolidation from early December would target 4300 in s&p…not sure how that works if the head is not a recent high. It’s amazing how just a little dip feels. In sept this was a new all time high.
One possible scenario is a bounce to 4600->followed by a decline to 4400 or lower->followed by a rally to 4700 or higher.
Every trade is a bet based on probabilities.
Cam,
High-growth and no profits in sight stocks (and small- and micro-caps) such as owned by ARKK have lost the most over the last year or so.
Any guess if they can rebound along with Nasdaq in this rebound from the oversold condition?
They should rebound, but that’s just a wild-eyed guess.
I wouldn’t want to be long these stocks for too long. The juice has gone out of speculative growth.
That sounds reasonable. Thank you.
Not too long ago, the Fed expected the inflation to be transitory with some justification as most of the inflation was driven by the shortage of goods (and supply-chain issues), a problem capitalism can easily solve by producing more.
I find it intriguing that the Fed now wants to accelerate the pace to reduce asset purchases, raise interest rates as well as shrink balance sheet – all actions to be initiated within a few months. I just don’t find this to be credible.
It didn’t work out so well the last time JPow attempted to do so. I understand there is a political imperative to manage inflation before the mid-term but you don’t want to crater the 401(K) balances of your voters either when you are seeking their votes.
I am expecting a dovish Fed to emerge in coming weeks and months. We’ll see.
I think inflation is in the cards.
I think that the bottlenecks can be sorted out if those in charge really want that, so I don’t think that will be permanent.
As far as bringing manufacturing back home, that will take time, and how much of it will be automated? Smart machines are deflationary.
As far as wages go my guess is things will plateau and won’t cause persistent inflation. Between demographics and automation there is a deflationary pressure. How much of the poor wage growth was caused by outsourcing so more people competed for the service jobs with low pay? I know unemployment was low, but they don’t count those who gave up. Labor participation is down.
I think that the inflation of the future will be resource depletion, whether it is fossil fuels, metals, etc it will get more expensive to get them, energy will be more expensive. Nuclear fusion and mining asteroids, it’s going to take a while.
I think the guys who say we will go back to deflation are right. But if they want to do annual helicopter money then we get inflation.
Sanjay you forgot it is not capitalism. It is politics that contributed to the supply-side problem that Biden does not want to touch. It involves unions and ESG cohorts which are his vote bases.
ESG cohorts demand high gas prices so everyone is forced to go drive EVs. Southern Cal port congestions arise from union’s underhanded handling of containers at deliberately slow speed. Truckers waited whole day at the ports sometimes without hauling one container.
And then last year CA passed laws banning independent truckers hauling containers inside state borders. Guess what? Those independent truckers don’t want to join unions. So they got fu**ed by unions and legislators. Now the ports are already very slow, and on top of that there is a severe shortage of truckers, because of unions.
Did you see the sabotage of rails to derail Union Pacific trains so the thieves can steal the packages, in LA, no less? Yesterday Biden got on TV to demand Powell to solve the inflation problem. Yeh Powell can engineer demand side destruction to reduce inflation, and kill the economy along the way, if he caves.
Be extra-diligent. There are still 3 years left for this guy. In 20+ years staying in US, this is the first time I am thinking about moving to another country.
I might be stepping into a minefield, but I think the lack of investment in things like shipping containers and semiconductor manufacturing during the “tradewar” before the pandemic is also contributing to some of the capacity constraints we are seeing.
They seem to be following the strategy that Powell referenced to in the footnotes of his 2020 Jackson Hole speech:
https://www.chicagofed.org/publications/working-papers/2019/2019-07
Letting inflation run hot and removing the deflationary bias from expectations is part of their strategy, they are going to react less agressively to an inflationary shock.
Also from https://www.dnb.nl/media/tnvlvco0/presentation_bianchi_melosi_rottner.pdf:
For instance, if the central bank does not respond when inflation is within the range, specifying a range between 1.5 percent and 2.85 percent closes the bias
Yes, in long run, I think deflation will be a huge issue. Technology is deflationary. And AI/ML and automation are even more deflationary.
I agree the future inflation will come from natural resources. We haven’t invested in new mines or oil fields enough while the demand continues to drift higher. The world needs more energy, more metals and more food, not less.
I don’t understand how the administration, the ESG crowd and the Europeans could force the energy companies not to invest in energy without having a plan to offset that loss with buildup of renewable sources. We still need fossil fuels during the transition period.
One of the main planks of the Biden administration is reducing the inequality. They will support unions. The problem is that inflation is very regressive and hurts the lower income people the most. The Fed is partly responsible for the asset inflation but I doubt we can fault them. We were looking at an abyss back in March 2020. They had to rise above and beyond to see the economy doesn’t collapse. A fast pivot from that policy stance is too risky. JPow, one step at a time and slowly…
I view the this afternoon’s reversal as a major positive.
(a) There was already enough negativity on Wednesday morning for me to begin scaling into index positions. Even more so at the close/after hours, when I added to positions (including a couple of ex-US sectors). Cam’s post later in the day reinforced the idea that while prices may not have bottomed, they nevertheless represent decent entry/reentry points.
(b) Normally I would have closed positions into morning strength. I didn’t think it was necessary – and paid the price. Yet rather than close my positions, it feels more appropriate to add to them – which I’ve done after hours.,
(c) Further support comes from Hulbert’s latest sentiment readings (which were presumably published prior to the afternoon reversal):
https://www.marketwatch.com/story/a-bullish-sign-nasdaq-investor-sentiment-is-worse-now-than-it-was-in-march-2020-11642705184?mod=mark-hulbert
So if/when the indexes rally again, it may be for more than a day or two.
A week and a half ago I was up +1.1% ytd. Now -0.5% ytd.
Some Nasdaq numbers to put in perspective:
1. 50%+ of members -50%+ from most recent high
2. 19.24% of members above 200DMA
3. 15.31% of members above 50DMA
All historical numbers on the downside. But they can go lower before rally.
Is this the sort of front running for a few hikes? Maybe something else too. Maybe market is also discounting lower earnings and geopolitical risks.
Green shoots.
Omicron surge waning in San Francisco.
KCBS reported this morning that import volume at the Port of Oakland hit a record high in 2021 despite supply chain issues.
Excesses are being wrung out in the markets. Overly bullish sentiment is being replaced by overly bearish sentiment. It’s been that way since homo sapiens came into being.
SPX now -8% from the high.
Nasdaq is down 1.5-20.% while 10-year yield is also down ~10bps. Strange! Is the action mostly driven by OpEx?
I wouldn’t be surprised to see a green close.
Pretty dreary action. I’ve been in this neighborhood many times over the years, and generally expect things to get better around the corner.
If you listen to Bob Dylan, you’ll recognize the lyrics. After the ambulances go and we see Cinderella sweeping up on Desolation Row – that’s generally when it’s time to go long.
Good sign that SMH and IWM were among the first to go green.
Yup! I hope ARKK would also put in some sort of bottom here.
I agree we might be putting in at least a short-term bottom today. Having said that, I doubt if there will be meaningful rally until we are past the FOMC on 26th.
Some of the components of the Fear and Greed Index are not updating. Hence the Index is not showing the level of anxiety. Some individual stocks are trying to stabilize. Markets don’t normally bottom on a Friday. In any case, if you are trading with the trend one should be selling rallies not trying to catch a falling knife.
Damn. I should have stuck with my bounce to 4600->followed by a decline to 4400 or lower->followed by a rally to 4700 or higher scenario.
So what now? Well, had I not opened positions earlier there is no doubt I would be opening positions now.
I don’t trade cryptocurrencies but I do follow the conversations of those at work who buy and sell. Another tell that speculative sentiment is taking a hit.
We’ll never hit the exact lows in either sentiment or price, but we really don’t need to.
If it seems that the market has become better (and more sophisticated) at faking us out, it’s probably because it has. After all, traders have become more sophisticated, and the market is nothing more than the aggregate buys/sells of all traders.
I would give 70/30 odds of a decent bounce next week. And if so, I would also give 70/30 odds of SPX +5% to +7% or QQQ +8% to +12% over the intermediate term (2-4 weeks).
Just an opinion, but one based on the kinds of moves frequently seen in 1999 and 2000 when negative sentiment reached current levels.