Inflation and Interest Rates

Meanwhile, the S&P 500 index has gone nowhere for two weeks but seems to be in a small topping pattern, with volume surging on some down days. The NASDAQ 100 has already tagged its mean at the 21-day exponential moving average. The S&P 500 has held up better with its energy and financial exposure. 

Nevertheless, the S&P 500 may still tag its 21-day line this week as well. The S&P 500 index futures 21-day line is at 3867, right around the January high. But the topping pattern projection (assuming the pattern grips) could be as low as 3800. I guess we can split the difference and hope to hold the 3850 level or so (which Is where I would first be watching to deploy cash). We will let the algorithm have the final say – but those are some good target points. 

On the first chart above of the S&P 500 Index futures, I have marked all the key levels for the week, and threw in a couple of lines illustrating a 5% and 10% correction from the peak of prices last week – should the market break down further than the 21-day line (in green).

In the background, problems are developing in the Silver ETF (SLV), similar to Gamestop’s (GME). The paper (options) trading around the SLV exceeds the SLV shares available to cover the options. Compounding the problems are delayed deliveries of the metal supposedly due to a physical shortage (I don’t automatically believe the manipulating hedge fund talking heads or their tools in the financial media on this shortage). This reminds us of the considerable and outstanding Gamma (options leverage) risk on many stocks, not to mention record margin debt. 

There is so much leverage out there that you would need an umbrella to shield the falling pieces if it starts unwinding – especially if triggered by systematic risk associated with the delivery or accounting for Gold and Silver in the ETF trusts. 

The whole Gamestop scenario might have been a harbinger of what is to come. Anyway, those are the issues on my mind tonight. I want to pick up the XLE and XLF if we get a decent downdraft. I would be expecting rates to peak short-term in the 1.5% zone. Don’t forget that the Fed looms large in the background with their “yield curve controls.” Whatever that means, I am not sure the stock or bond markets will like it.

There will come the point where buy the dip stops working. There is no evidence yet that non-risk assets are ready to assert themselves over risk assets. Nor is the next major cycle due to peak quite yet unless it is incredibly early. This is a minor cycle dip we are in currently – likely a 20-day cycle unless the 20-week cycle did not bottom February 1st, as expected.

I will be out tomorrow morning. So my next commentary will be Tuesday. For now, the models and algorithms are still in cash – and I know I will sleep better tonight as a result.

A.F. Thornton