In yesterday’s celebration of easing global tensions and the accompanying short-covering rally, a 10% wholesale inflation report floated right by, and the stock market seemed to ignore it. When the street mistranslated the President of Ukraine’s comments a few days ago (to mean Russia would be invading Ukraine today), the stock market dipped but did not even get close to the January low.
And then there is this: the Smart Money is bullish, and the Dumb Money is bearish.
Institutional fund flows are positive, but they understandably show a preference for stocks that have already been correcting for a year and are down 50%. Bitcoin, an asset I follow to measure “risk-on” behavior, has been outperforming the S&P 500 the past few weeks. However, Bitcoin could also be the beneficiary of fund flows related to global tensions, including Canada’s draconian implementation of Marshall Law and bank account seizures. They need to control the racist truckers threatening Democracy! By the way, I am running out of conspiracy theories because they all keep coming true.
The point is, there are lots of reasons that the market should have already puked here, but it hasn’t. The demand rose out of the nominal 20-week cycle low, which I pointed out might have arrived ahead of schedule on January 24th. It is technically due about now.
Typically when the cycle low comes in early, the market retests it closer to the due date. I believe that is what is happening now. Given the history of corrections and bear markets, there is only a one in five (20%) chance that this is one. Most bear markets are associated with recessions. While everyone can opine about what the Fed might do or the yield curve, we are not in a recession yet. We have mixed indicators at the moment. Nobody can know for sure what comes next.
I have already stated that I believe inflation is peaking. I stand on my record. When I predicted the inflation we have now (more than a year ago), the crowd was on the other side. Inflation has a cycle like everything else (5.5 years trough to trough). I don’t want to give away all my secrets, but my cycle indicators for the Consumer Price Index show we are near a peak.
The prognosticators tell us that this is the highest inflation since 1982. Does anyone remember what happened in 1982? The stock market began the greatest bull market in history until the 2000 Dot Com bubble burst. The inflation spike may sell headlines, but the pundits miss a few details. Sure, there are many differences between 1982 and now, but we need to look past current headlines.
Even if the stock market is putting in a long-term top, and I believe it is, it is a process. Only on one occasion did the market crash to the bottom of the 100-year channel, 1929. It isn’t logical to plan portfolios around a single, outlier event. I am looking for a trading range to establish itself first. Perversely, there may ve too many hedges to allow the market to fall much below 4300 before Friday’s expiration.
For all of the reasons mentioned above, I believe we are getting close to a tradable swing low bottom. Let’s see how the day goes. I prefer to enter closer to the Weekly Expected Move low and projected lower channel line around 4300. Then, we could ride the move up to test the middle or top of the range potentially.
The market can still get a lot uglier here before it bottoms, and it may do so. But we need to keep an open mind to all possibilities. When traders and talking heads get panicky as we have recently seen, we are closer to a trough than a peak in my experience.
The main task the rest of this week is to get through the monthly options expiration on Friday.
Day Traders
Be mindful of the retail sales numbers and Fed minutes coming out today. The cash indices were wedging into the close yesterday, indicating a potential decline before any further rally. But realistically, the market does not have a lot of conviction in either direction.
Continue to expect high volatility (a close roughly 83 points in either direction from the open). Resistance starts first at 4470 and then at 4500. Note that the IWM and QQQ are close to their Weekly Expected Move highs (208 and 358, respectively).
There is some support around 4450, including the 200-day line, with strong support at 4400. Unlike recent monthly expiration drawdowns, Friday’s expiration is still put heavy, and the decay of the puts should help support markets into Friday’s monthly options expiration and close.
Either way, S&P Futures 4400 should remain as solid short-term support.
Although overnight futures tested levels above yesterday’s range, they are in balance. There is no indication of how prices will react near the open (other than the rising wedge pattern mentioned above). With Fed minutes also looming, better trades will develop later rather than earlier in today’s session.
While the overnight activity took out yesterday’s double top at 4451 and fell back into range, buyers still have the potential to get active on a retest of this area. Yesterday’s regular session activity left an unfilled gap (top is 4436 and bottom is 4420) and an untouched volume point of control (VPOC) around 4394.50.
S&P Futures 4500 is a formidable obstacle, but positive gamma kicks in above it. Watch the VIX, as relief in implied volatility could help drive the market through 4500. The likelihood is that this area will not clear until next week. The volatility trigger is at 4470 – meaning positive gamma kicks in at the level.
Today, I will use the overnight low at 4441 as my bull/bear bias line.
A.F. Thornton