Morning Notes – 3/24/2022

Morning Notes – 3/24/2022

S&P 500 Index Futures - Navigator Algorithm System Status
S&P 500 Index Futures - Navigator Algorithm System Status

Good Morning:

  • It wasn’t a bad morning until I read that the Bidenista sanctions are out to mess with my morning coffee. “Mega Emergency” Unfolds For World’s Top Coffee Growers As Fertilizer Costs Spike.
  • Did you know that coffee changed the world? See “Coffee and the Enlightenment.
  • I rarely get out from behind my computers, so gas prices at $6 a gallon haven’t bothered me much. But messing with my coffee forces me to rely on our algorithms almost exclusively. I often get up at 2:00 am, for heaven’s sake!
  • The housing market announced yesterday that it might be leaving the party early with sales down and mortgage rates up. Time to sell, wait to buy?
  • The S&P 500 tagged my 5-day line entry point overnight. Unfortunately, I was asleep, and I don’t do my best trading when I am unconscious, so I missed the long entry. I am still looking for one more loop higher.
  • As previously noted, the next few days will have little to do with fundamentals. Month and quarter-end are approaching. Month ends tend to have markups, and quarter ends have rebalancing. This quarter comes with the added twist: bonds got smashed this quarter. Now stocks have recovered somewhat.
  • Before stocks recovered, I thought the balanced funds would be adding to stocks. Now it is the reverse.
  • Many funds have relative weighting mandates between bonds and stocks – these funds must add to their bond balances.
  • How does this rebalance affect quarter-end?
  • In this quarter, we saw massive growth takedowns, ramps in inflation, rate hike expectations, a war in Europe with enormous implications for commodities, particularly energy, and sanctions that could starve millions in the weeks ahead. 
  • The net result: the S&P 500 index is down a mere 6% from all-time highs and back to 187% of GDP.
  • And that tremendous monetary tightening? China has put a floor under its stock market and is intervening. The Fed’s balance sheet just made a new all-time high last week. And the European Central Bank keeps printing every week with no signs of stopping:
This is a chart of the ECB Balance Sheet at 3-23-2022
This is a chart of the Fed Balance Sheet still making new highs at 3-23-2022.
  • So other than one measly .25 bp rate hike, nothing’s happened on the monetary tightening front other than the market itself tightening financial conditions.
  • Real negative rates still rule the world and the next Fed meeting is not until May.
  • So they’re actually doing absolutely nothing on the inflation front other than giving hawkish speeches.
  • Perhaps, then, the stock market’s temporary strength can be explained by a Fed that is all talk and no action. It is an election year, after all, and the current regime can ill afford any more damage to their polls in the form of higher interest rates.
  • We will know more about the future when all eyes turn to earnings in April. We will watch for pre-announcements as well. Forward guidance is everything now. 10% wholesale inflation for two months in a row means either a hit to earnings, higher prices for consumers, or both.
  • Futures are up slightly to 4477 after a quiet overnight session. Our volatility estimates (0.86% from open) and key trading levels remain in line with yesterday. Resistance is at 4500-4510. Support lies at 4473, and then 4450.
  • My best judgment, for now, is that the bear is taking a nap, but can wake up at any moment. We will take it a day at a time until then.

A.F. Thornton

AF Thornton

Website: https://tradingarchimedes.com

A.F. "Arthur" Thornton is an expert in logic, risk/reward quantification, market fractals, pattern recognition and asset class behavioral analysis with 34 years devoted to developing algorithmic and quantitative trading systems. In addition to trading his own capital, Mr. Thornton designs custom algorithmic and quantitative trading systems for a small and exclusive group of exceptionally qualified traders.

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