The WEM low is the magnet we expected this morning on the S&P 500 and has drawn the market back up from yesterday’s puke into the close. And yesterday’s spike low at the close has been negated thus far. Moreover, I like the positive divergences on the hourly S&P 500 ETF (SPY) chart.
Perhaps the close might tell us something positive today. But Ukraine remained a wildcard after Biden’s missteps at his press conference yesterday.
Lacy Hunt has a new article this morning pointing out how consistently negative real interest rates (such as we have now) have led to recessions in the past. You can calculate a good “real” rate proxy by subtracting inflation from the 10-year treasury rate. Conservatively, that puts the real interest rate at -6%.
Unemployment claims jumped today – comforting the bond market. So while last year at this time I was worried about inflation, I am still leaning towards inflation peaking. At these sovereign debt levels, economic growth is already challenging without help from the Central Banks.
With the punch bowl being drawn away by the Fed and the Eurodollar curve already inverted, the risk of recession begins to loom large. At this point in the market cycle, the risk of recession calms inflation and interest rate fears and gives Central Banks around the world some flexibility.
Anyway, let’s see how the divergence on the hourly chart manifests today. I would be more bullish if there was more fear. If this were a typical intermediate low, the fear should be higher. On the other hand, the nominal 20-week cycle is not usually a big dip. We are more likely to see that at a nominal 40-week low along the typical bullish path.
While we took out a lot of critical support levels yesterday, it is always possible that it was a flush of all the stops sitting a few ticks below, and we will come back up into range. If so, we could establish some longer-term swing positions.
We started the week looking for the rescue operation. The rescue has been on weak ground – but the week isn’t over.
Anyway, I thought I would pass on the positive hourly divergence as a bit of good news since I have not had much encouragement to pass along lately. The Algo has flipped back to buy – but it is on the hourly chart only. That did not get us too far last Friday, but I will continue to take some brief trades here and there to bide my time in front of the screens.
I want to remind everyone that the recent playbook has been a swing low on the Friday (tomorrow) of monthly options expiration or the following Monday, and then a turnaround on Tuesday. Here, with the Fed announcement on Wednesday, we might see an additional 24-hour delay. But most of the time, we rally into the Fed meeting, though times are changing.
Also, keep in mind that the S&P 500 may still be looking to establish the bottom of what will become a new trading range. We have peeled off about 10% on the large-cap indexes which is a good start back to reasonable valuations.
Stay tuned.
A.F. Thornton