Navigator Oracle™ Weekly Stock Market Update - 3/20/2022

The weekly Navigator Oracle™ is BluPrint Quantitative Strategies’ adjunct to its signature Navigator Oracle™ monthly market letter and stock market thesis. The weekly forecast is available complimentary to the public on Monday mornings, and can be sent directly to your email if you register here.

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Summary in Kamala English

After everyone got too scared last week, the market turned around and headed up again after a tough couple of months. I know this doesn’t make sense on the surface, but what happens is that the market goes up because the scared people have already sold out. Once they are out of the way and stop squawking, mainly buyers are left, and the market starts rising again.

It gets better, though. Once the market starts going up again, the same sellers start fearing that they will miss out on the new gains, having already sold at the bottom. So they jump in with both feet, and the market continues a little higher before it dumps them again. Eventually, these people run out of money because we take it from them, but there is always a new crop waiting.

Much of the technical discussion below is about how we measure all this stuff. We try to figure out when to buy, sell, or hold our investments to take advantage of these ups and downs. But you get what is going on, and that is good enough.

For now, the stock market will zig and zag and try to digest the last few days of gains. But it will likely keep going up for a bit unless someone does something stupid in the Russia/Ukraine conflict or we get into a spat with China over their desire to take over Taiwan. Only time will tell – it is hard to predict these things.

The market has been especially difficult lately because people are concerned about inflation ruining our economic recovery from the Pandemic. No doubt, you are paying higher prices for everything. It irks all of us because inflation comes from our government printing money to pay its bills. After all, it spends more than it takes in.

Fewer people want to buy stocks when they fear inflation. Inflation eats into business profits just like it does with your family budget. Stocks are not worth as much when business profits fall. It doesn’t help when people like us have less money to buy stuff from businesses because things are more expensive. And to add insult to injury, the government wants to raise interest rates to try to stop the inflation they caused in the first place.

Inflation is a sneaky way of taxing you without running it through Congress. You pay higher prices for everything and the government (whether through sales or income taxes) gets its percentage of the higher dollar figures. Historically, most countries that do this end up collapsing.

A lot of the problems we face right now are because countries around the world are losing respect for the United States. We are not responsible with our finances. Yet, every country in the world depends on our U.S. Dollar to be sound money. We agreed to that after World War II and to use our military to protect other democracies and their shipping.

We have not been a super reliable military partner lately either. We intervene when we shouldn’t and mislead partners when we should be helping them. For example, we promised to help Ukraine if they agreed to give up their nuclear weapons after the Soviet Union collapsed. Heck, we promised to help them even at the end of last year. But when Russia came calling, we welched on the deal.

Worse still, our leaders have used some of the conflicts like Afghanistan and Ukraine as graft and bribery operations to rob the treasury and funnel money to family, friends, and supporters. When the graft is exposed, formerly respected leaders, like CIA directors, military, and politicians, sign letters they put in prominent newspapers to lie about the graft and hide it.

Most likely, the letter signers are in on the graft and theft of funds from the American people. A lot of them are communists that have infiltrated our government. There was a whole list of them in the New York times when they lied about Hunter Biden’s laptop, Those people need to be the first to go. So many people are in on the graft these days; we can hardly believe anyone or anything, including the American press. It is disheartening.

Some countries are shopping for a better deal lately – maybe with China. About every 80 years or so, natural processes thankfully come together to purge the system. Unfortunately, these periods can give us an economic whipping. Things get bad enough that the charlatans are finally exposed, jailed, or thrown out on their ears.

We find ourselves at the beginning of that purge now, so things seem a bit weird. We will get through it; we always do. Nothing can beat the wisdom and will of the American people. But it will be rough sailing for a while.

It seems that when you think life should be easy, it isn’t easy. But when you accept that life can be difficult, it gets easier.

If you want to go deeper, my technical discussion follows. I am a total math and computer geek. But if you learned how to invest and trade, there is not much that you would want for in life. And you cannot beat the personal freedom. But like anything, it is hard work and takes a while to learn.

A.F. Thornton

Narrative

As a quantitative investor and market technician, I trade and invest based solely on market-generated information (MGI) rather than opinion. Most opinions about financial markets, including my own, are worthless or become so in time. Still, there is no harm to crafting a storyline to try and make sense of what the algorithms show us, as long as we see the tale in perspective for what it is.

We are in a bear market or trading range rally likely driven by the rumor/hope of resolution or cease-fire in the Russia-Ukraine conflict and coming from peak to trough price slaps in markets including China -50%, European Banks -40%, Emerging Markets -30%, Big Tech -20%, and High-Yield -8%.

Oil or wheat prices may be good proxies to monitor for advance notice of resolving the crisis and inflation. Peak oil should equal a cease-fire and peak inflation. Oil recently reached $130 per barrel and settled Friday at $108. So $130 is the threshold high.

At the moment, however, I don’t believe that the inflation, interest rate, or recession shocks are over or have peaked. We will continue to experience sharp short-covering rallies sometimes supported by institutional repositioning as now. But I do not believe that the ultimate lows in stocks or peaks in credit spreads have been seen.

Inflation always causes recessions, real wage growth is negative, retail inventories have been rebuilt, mortgage rates are rising, there is a big risk that the labor market recovery stalls this summer, and then there is always China invading Taiwan -perhaps the last shoe to drop in this dystopian topping process.

If that is not enough to keep the bear from hibernating, the yield curve is inverting, Consumer Confidence has collapsed, the Fed won’t backstop Wall Street, the amount of private and sovereign debt is staggering, and equity valuations are still expensive.

Periodic short-covering may drive rallies, but financial markets will react quickly and negatively to bouts of monetary tightening, not to mention China invading Taiwan or any use of nuclear weapons.

But for the moment, spring rally drivers are China’s verbal stimulus commitments last week, putting a floor under their GDP and lowering risks of an immediate Taiwan intervention.

Also, nearly $250 billion should flow back into equities before 3/31 from quarter-end rebalancing required to bring classic 60/40 funds back into formulaic equilibrium. But counter that a bit with entering the stock buyback blackout period which removes about $1 billion per day in equity purchases.

Finally, the seasonal turn for stocks, and particularly the NASDAQ 100, is mid-March and the intermediate cycle low is now confirmed as we had suspected at the 2/24 low. The daily chart has moved back into an uptrend but now encounters weekly mean resistance. But the market appears to have tailwinds as further discussed in the health checkup below.

S&P 500 4400 is now the key pivot line. Above it, volatility contracts and positive gamma should lead to more conventional market behavior – buying dips and selling rallies. Below 4400, rallies and declines are exaggerated by negative gamma, and the negative bear bias begins to reassert itself.

The Weekly Expected Move range, also our macro sandbox for day trading this week, remains elevated with the low at 4470 and the high at 4560.

A Reprieve to Get Your Act Together

In case you haven’t noticed, our corrupt political gangster class is pushing us into another war. The press is tossing around words like “nuclear war” as if it were a holiday party.

A survey this past week showed 35% of the U.S. population in favor of a nuclear war with Russia. Why would anyone even want such a survey? Who in hell are the 35% that seem to support just about anything in any survey? Even China and Russia have volleyed nuclear threats this past week.

With Russia now showing off hypersonic missiles in Ukraine and telegraphing their capabilities to the world, let me be blunt. Get your act together if you haven’t already.

I have been telling you about the Fourth Turning and 80-year cycle for almost two years. I have been warning you for over a year that inflation was coming. I have been alerting you to buy small denomination gold and silver coins to potentially use as money in a collapse.

Even since the Biden Regime’s botched Afghanistan exit, I forewarned that Russia would invade Ukraine, and China would eventually invade Taiwan. Putin went to China before his invasion and he now has a new bromance with Xi. Xi now gets to watch a dry run in Ukraine to plan his invasion of Taiwan. Xi must think it is Christmas with the gift of both Biden and Putin in his sphere of influence.

Are you listening? Do you believe me yet?

Nothing about the situation at hand is normal. It would help to prepare yourself and your family for an emergency. Keep your car gas tank full. You cannot charge your Tesla when the power grid is down. Extra food and water come in handy when the stores are empty and closed.

Intelligent people plan for the worst – then hope for the best. If you want some preparation coaching, I highly recommend watching the new documentary “End Game.”

We have been experiencing a somewhat stealth bear market that started in February 2021. Over the period, global stocks retraced 15-years of gains, pivoting just above their 2007 highs.

The timeline is similar in the broad U.S. stock market, though U.S. stocks did not carve as deep a trough as their global cousins. Still, the Russell 2000 and Nasdaq 100 met the minimum -20% threshold.

One only needs to look at recent gogo stocks for the bear perspective

If you don’t know your symbols, here are a few highlights: Beyond Meat (BYND) -76%, Shopify (SHOP) -70%, PayPal (PYPL) -69%, Bed, Bath, & Beyond (BBBY) -55%, Pelaton (-84%), Facebook (FB) -52%, Netflix (NFLX) -52%, and Disney (-34%).

So my point is that one hopes we are coming out of the bear market and maybe it is so. If the market wants to repair itself and recover, it could move on to new highs. I just don’t see that happening quite yet. More importantly, I don’t need to be right about the forecast.

The best strategy is to follow our Navigator Swing Trade™ strategy and signals. The Navigator Algorithm™, 35-years in the making, uses dynamic learning, market intelligence, and MGI to respond to any environment with the requisite buy and sell signals to make money and avoid losses. You might even consider using the signals to profit from market declines in the weeks ahead. They may present nearly as often as market rallies.

But to enjoy the wealth we create together, you need to survive our current political nightmare and anything our dubious ruling class might throw at us. Give yourself and your family a crisis checkup before it is too late. Can you survive for three to four weeks without power if there is a cyber attack on our electric grid?

Monthly Thesis Quick Review

Harkening back to our monthly publication and master thesis, I will continue to return to the 1965 to 1984 Dow chart below because it is the only period of stagflation I can recall.

We came off 20% interest rates in 1982 into a deflationary tech and productivity boom that continues today. We ended the Cold War in 1985 with the peace dividend, positive supply shock, and deflation. But the new Cold War likely establishes 2020 as the secular low in interest rates and inflation.

The 2020s are likely to be marked with quick and volatile boom and bust cycles like the 1970s due to the coming stagflation. I can only speculate, but the long-term mean lies well below us and the market will get there when the true bear unleashes. I prefer a lengthy sideways path, over a 1929 style crash. That crash overshot the mean in a 90% decline, which is even more unpleasant than moving sideways into the mean over a number of years.

Once stagflation reality set in in 1974, small-cap value, real estate, and commodities worked well through 1981. Commodities got overheated a week ago, so we need to be patient for pullbacks to get involved. And we should keep an eye on the Russell 2000 small company index for relative strength.

I well remember how much people hated stocks in 1982 before the great 1982 – 2000 bull market began. Nobody believed in buy and hold. I was just a kid, but that is when I first started trading. When the Dow hit 1,000, you sold. At 500, you bought. A 60/40 balanced portfolio got hammered, just as it has in the first quarter of this year.

I will do more research on this, but I would peg our analogous location as about 1970 on the chart below. Recall that our next four-year cycle low arrives in 2024 – we are only halfway through this one.

Stock Market (S&P 500 Index) Health Check

Let’s start the weekly health check with the price chart and just bottom-line it. The weekly chart tracks the intermediate trend, which continues to point down. We remain in a buy signal on the daily chart, but we are at the inflection point for a confirmed intermediate trend reversal. On Friday, the market came right up to the mean when it ran out of runway at the close (which is better than running out of steam).

A big weekly bull bar closing on its high increases the odds that this corrective phase or leg is probably over. However, the market may continue in its eight-month trading range indefinitely. The next target for the bulls is the February 2nd high at 4577 on the S&P 500 Futures and 458 on the SPY. Two closes above that high increase the odds of a retest of the all-time highs now adjusted to 4799.75 on the June Continuous Futures contract (roughly 480 on the SPY).

Bulls need to close this week above the mean with another bull bar to confirm the reversal higher. The stronger the bull bar and the higher the close, the better the odds are that this corrective phase is over.

The weekly candle did sweep four weeks of losses, closed above the five and 50-week lines, and qualified as a pivot. The price reversal is an excellent start towards a trend reversal.

Still, the weekly mean points down and will act as strong resistance in a downtrend. Until price conquers the mean, any return to the mean still qualifies as a bear market rally.

Given that we know most of the gains were short-covering and the surprising lack of volume support on a quadruple witching expiration week, the market remains in an intermediate downtrend and “prove it to me” mode.

Other Checklist Items

Each week, we also cover a checklist of items to help us assess underlying market health and trends. We examine cycles, seasonality, and sentiment for context. We look for reaction to trendlines, chart patterns, Elliott Wave, moving averages, volume, and breadth. A number of these technicals are marked in the chart above.

March 15th is the typical seasonal turn favoring higher stocks prices, and the market has bottomed the intermediate cycles as is evident in the cycle semi-circles above. The next intermediate cycle low is due later in May, but we should have tailwinds until then.

Negative sentiment reached levels we have not seen in a long time at the 3/15 low. which is bullish. And there is plenty of cash on the sidelines to fuel a rally. High cash positions should be positive for a sustained reversal, unless a balck swan event presents, perhaps associated with the Ukraine conflict.

The primary downtrend line on the daily chart has broken decisively. It would be nice to have a successful retest of the break from current overbought levels. But at least the daily chart has reversed into an uptrend. Weekly chart resistance also coincident with the 50 and 200-day lines on the daily chart will be short-term obstacles in shooting for the Februuary 2nd highs.

We broke out of a falling wedge pattern which projects a move back to its base, also the February 2nd highs discussed above. We came into the lows with some positive breadth divergences as far as New 52-Week Highs and Lows, and the percentage of stocks above their 50 and 200-day moving averages, though the NYSE A/D line is still following price and presenting no positive divergences.

Finally, as mentioned above I would have preferred more of a volume spike for the week, but perhaps the diminishing volume on each prominant spike low on the daily chart this past month is a positive sign in an of itself – as seller enthusiasm diminished.

Conclusion

We have reviewed fundamental narratives that may support prolonging the bear after this rally completes, and we continue to allow for a trading range as experienced in the stagflation of the 1970s. But narratives rarely coincide with reality, and price action always overrules them.

Financial markets will react quickly and negatively to bouts of monetary tightening, not to mention China invading Taiwan or using nuclear weapons. But short-covering rallies will rescue them from time to time. Even in the most optimistic view, beaten-up stocks need time to form bases before we try to catch them on their way back up.

But for the moment, spring rally drivers are carrying the market higher, and they can be powerful. With most technicals providing market tailwinds and our daily algorithms green again, the next challenge should present at the February 2nd highs.

Still, price does have to conquer the weekly mean, and I don’t mean to minimize the task. This week’s price action will telegraph success or failure on that front.

S&P 500 4400 is now the critical pivot line. Above it, volatility contracts and positive gamma should lead to more conventional market behavior – buying dips and selling rallies. Below 4400, dealer hedging and negative gamma exacerbate rallies and declines, and the negative bias begins to reassert itself.

The Weekly Expected Move range, our macro sandbox for day trading this week, remains elevated, with the low at 4470 and the high at 4560. While I expect some consolidation at Friday’s high, I plan to buy pullbacks until the trend reversal stalls or fails.

A.F. Thornton

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Navigator Oracle™ Weekly Stock Market Update – 3/20/2022