Morning Notes – 5/18/2022

• But the question remains – where is this market, and should we continue to wade in after being stopped out with a nice profit yesterday?
• The theory behind investor sentiment is that when sentiment is overly negative, the selling is close to complete, and there will be mostly buyers left.
• Retail investors are usually overly net short the market by this time. A short-covering rally typically starts the ball rolling north again.
• Then, as the market recovers, FOMO kicks the rally into high gear as the institutions join the fray.
• Of course, these are bull market tactics, and they have served me well over the years.
• The market is experiencing extreme bearishness lately, with the CNN Fear and Greed Index as low as eight last week.
• With this in mind, the Founders Group took the Navigator Swing Strategy to a 90% invested position in SPY calls Monday at 4019.75. We had managed to move our stop up to 4065.25 yesterday before getting stopped out in the volatility that followed Fed Chairman Powell’s speech.
• There is also a rising wedge pattern on the hourly S&P 500 index chart, which needs to resolve before we reenter. And there is formidable overhead resistance, though a positive reversal pattern may indicate that the market may be able to labor through some of the resistance. (See yesterday’s Morning Notes).
• But the question remains, is bearish sentiment a reliable contra-indicator in the current market environment?
• My biggest concern right now is the shortage in diesel fuel, which is about to grip the northeast. Both Pilot and Love’s travel stops are warning truckers of potential rationing.
• We have shipped a lot of our diesel fuel to Europe to help them through their crisis. This creates shortages on the East Coast. Now, the West Coast will try to help the East Coast and the shortage will spread west.
• Nearly everything in our Country is transported with diesel fuel. Trains, trucks, you name it. Even gasoline has to be transported in trucks that use diesel fuel.
• I was laughing to myself this morning. In my heyday, I had a 70-ft Yacht. When I bought it, diesel fuel was .065 cents a gallon (this was around 2005). The vessel held 3,000 gallons.
• Granted, it was expensive, but I could still use my Amex card to fill it up for less than $2,000. Can you imagine now? it would cost $19,000 to fill. And with boats, you measure fuel used by the hour – not mile.

• The point is that this diesel shortage is a very serious threat to the economy, and will be making headlines soon. Rationing will elevate concerns. If you are thinking of ordering anything to be delivered by UPS or FedEx, the sooner you order the better.

• Yesterday, Bank of England chief Andrew Bailey issued an ‘apocalyptic’ warning about food prices and admits he is ‘helpless’ to do anything about inflation… while urging Britons NOT to ask for pay raises.

• My point in raising these issues is that while Wall Street’s mood may be apocalyptic, it is well-justified.
• In a bull market, bullish sentiment can remain elevated for long periods. Though we don’t get as much practice at bear markets, bearish sentiment can remain elevated for long periods in a bear.
• So our best strategy for the foreseeable future is to scalp gains wherever and whenever possible. Bearish sentiment is helpful, but it is not the same, reliable indicator that it was in the raging bull market.

Batten down the hatches and stock up. You will be glad you did.

A.F. Thornton