Drop and Pop, So What’s Next?

Good Morning:

• It has been a busy couple of days, as the market rolls into the next major data drops (GDP this morning and the PCE inflation report tomorrow). We also get some employment and durable goods data this morning.
• I did not get a report out Tuesday morning in the midst of mysterious data issues on key NYSE stocks. In a rare instance, a lot of morning trades were busted on the exchange.
• Like the grounding of all of our airplanes for a few hours last week (as has also now occurred in the Philippines and Canada), these incidents smack of cyber attacks and ransom, but the causes have been hidden from the public thus far.
• Of course, the sudden rise in BitCoin might be the best indicator of what is actually going on, as ransom is often paid in cryptocurrency. Those using BitCoin as a “risk-on” indicator may find the coin’s rise problematic if ransom does turn out to be a temporary driver.
• We get our first look at the 4th Quarter GDP pre-market today. The consensus number is +2.6%. I suppose if the number is lower, that would be perceived as good inflation news. If it is higher, perhaps that is good news that the economy is staving off the most anticipated Recession in history.
• So the report is somewhat of a yawner to me. Nevertheless, we took the Navigator Swing Strategy back to cash at yesterday’s close, out of an abundance of caution and with early warning signs (divergences on the highs) of the market topping before the cycles turn into the February/March lows.
• The most important report will be the PCE inflation report tomorrow morning. The Fed places a lot of weight on the report and they meet to set rates next week.
• The market has fully recovered from two gaps in the last two sessions. In particular, yesterday’s gap down was nearly 2%, and the market recovered all of it by the end of the day. The recovery was impressive.
• In my view, the market is trying to put in one more leg up before the cycles catch up. We don’t have a formal Navigator Swing sell signal yet.
• Nevertheless, I am not willing to bet the farm on another leg. It was very unpleasant to hold yesterday as the price temporarily pierced our stop lines and triggers yesterday. So I was done with our latest position by the close.
• We had established the latest swing position at 3939 by the end of the day. We were out at 4035 for a nice gain. And we can reenter if required after the next few reports.
• Look for resistance today at 4075, then 4140. The leg target is now 4150, if it completes.
• Support lies at 4020, then 3970.
• I am always trying to forecast where the pain trade is at any moment. It would still seem that the pain trade is higher. And the contrarian view is that we don’t have a deep Recession, if we have a Recession at all.
• I have already spoken about the fact that there are demographic issues that favor low unemployment, even in a slowdown.
• And don’t discount how much the deficit and war spending can cushion the normal, cyclical forces at work. War is a lucrative business. 

“The first panacea for a  mismanaged nation is inflation of the currency, the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Ernest Hemingway, Notes on the Next War”, Esquire, September 1935.

• So if the market continues higher, and the anticipated cyclical dip comes in higher than the October low, you will know why. There is nothing new under the sun, right?
• But there will be a day of reckoning, and the more we put it off the worse will be the reckoning.
• I will be in the Trading Room for the first few hours this morning.
• With all the mishmash of reports, it will be best to wait for the first hour to complete before taking positions.
• At this writing (8:19 am EST), there will be a Gap Higher and Gap Rules are on the table.

A.F. Thornton