Buy Signal / Morning Outlook

The Founders Group went to a fully invested position last night with 50% in the NASDAQ 100 and 50% in the S&P 500 Futures. Our entry prices were 3888.50 and 12,750.25. We are using an hourly close below yesterday’s low as our stop. You should wait and watch for my signal this morning on a pullback for those of you who have to operate in the regular session markets.

The S&P 500 broke resistance, and the NASDAQ 100 retraced all of its losses from yesterday in the Globex session. Mostly, however, I am convinced that the panic in the bond market is subsiding, and this will shift preferences back to growth stocks.

Whether we are dealing with the bond market and interest rates or the stock market, volatility peaks in panics. Accordingly, when we see a significant volatility spike, we can assess that a bottom to the correction at hand is near.

Taking a look at the weekly chart of investment-grade corporate bonds below, the SRVIX (Swap Rate Volatility Index) is at one of the highest spikes in its history, almost rivaling the level it reached in the China Virus panic a year ago in March. In the chart, we track the value of investment-grade corporate bonds, which move inversely to interest rates. So when rates are rising, the price of bonds falls and vice versa.

The bonds lost about 25% of their recent value in the inflation panic, a substantial and healthy correction. The spike in volatility, which essentially measures fear, indicates that a bottom in bonds (peak in rates) is close at hand. The spike is evident in the chart below:

The trend in bonds, as it is for interest rates, remains bearish. Bonds have a long way to go to rise back into an uptrend. Perhaps more importantly, interest rates could move into a trading range for a bit. Or, we could see a relief rally. Short-term, however, the panic is subsiding, rates are stabilizing, and this will allow the stock market to move forward into its final, 20-week cycle before the 18-month cycle correction kicks in. That is my best judgment.

I would expect to see profit-taking soon in Financials, Energy, and some of the cyclical/value sectors – with the funds rolled back into growth stocks. The NASDAQ 100 is most favored for this rotation, with the S&P 500 index capturing all sides of the coin.

I will expand this discussion considerably before the end of the day, but I wanted to get the signals out as soon as possible.

Day Trading Outlook

Gap rules are in play this morning, especially #2 and #4. As with any true gap, the early potential for a fade is there. You might short below the first one-minute low or on a retest of the open, should the opening drive be higher. In either scenario, it’s better if the overnight high is not taken out. Target the regular session high first on a short.

Crossing the overnight high on faster tempo and bullish internals would show potential for the market to move higher, confirming the overnight breakouts. As overnight inventory is skewed long but not 100% so, there is potential for this rally. Monitor closely for continuation.

Continue to watch where value develops. Over the last three sessions, it has been higher. A markedly lower value can change the current tone. Note that this will be harder to do once all majors have crossed downtrend lines.

A.F. Thornton

Buy Signal / Morning Outlook

AF Thornton

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Buy Signal / Morning Outlook

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