Mid-week market update: Subscribers received an alert on Monday that my trading model had turned bearish. Despite the positive reaction to the Microsoft earnings report, which is holding up the NASDAQ today, there are plenty of signs beneath the surface that the stock market is weakening.
The failure of the S&P 500 to hold its MSFT led gains today is disconcerting. Three of the four defensive sectors are
either in relative uptrends or staged upside relative breakouts, which
is an indication that the bears are seizing control of the tape.
There are other cautionary signs.
Cracks in the bullish edifice
Cracks are appearing in the bull case. Even though Big Tech is performing well today, the sector topped out relative to the S&P 500 in early April. Moreover, relative breadth (bottom two panels) are weak.
As well, regional bank stocks have violated a major support zone, which may be a signal that the bank crisis may not be over.
In short, a variety of unrelated factors are flashing cautionary signs. After several weeks of the S&P 500 unsuccessfully testing resistance at about 4160, it may be the bears’ chance to try and push prices downward. Whether this is the start of a major correction, or just a minor pullback, is an open question. Goldman Sachs estimates that systematic macro hedge funds are in a crowded long position in equities. Any sustained weakness could spark a selling stampede and could be the catalyst for a deeper correction.
My inner trader has taken a short position in the S&P 500. The usual disclaimers apply to my trading positions:
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXU
The debt ceiling situation is getting worse with the GOP bill totally trashing Biden’s major legislative victories. The gap on each side is so wide.
Various T-bill and default swaps are leaping in distress.
Most investors are thinking, “The GOP can’t be that crazy.” I’m not so sure. Are you?
Republicans have admitted that the House bill is only the opening salvo in negotiations and not intended to be real legislation. Just posturing.
Not sure if it even passes at this point.
It passed today. Default swaps leaped.
It’s the only bill out there that averts default. Senate does not have sixty votes to pass their own bill. Ball is in President Biden’s court. Will he drop it? CDS rates are going up a lot more.
Politics influences economy and the markets but longer term macro issues are just as crucial for the long term health of our economy. We all know about the ballooning debt in USA and globally. We must become more rational about the issue. Listen to Larry Summers and others who cautioned about the multi trillion dollar stimulus by both parties.
I wonder who is crazier-continue to print or slow down the presses a bit.