Morning Notes – 5/4/2022

Good Morning:

• Well. Fed day has arrived. The Fed is expected to catch up to the bond market and raise interest rates by 1/2 of 1% (otherwise referenced as 50 basis points).
• It will be the first raise of such magnitude since the 2000 stock market peak, an admission that the Fed is behind the curve – way behind.
• The hike is baked into the cake, so the market should be poised for a relief rally, maybe back to the 21 or 50-day lines on short-covering, at least initially.
• Maybe this time investors will take the opportunity to buy protection when it is cheap over the next few sessions, instead of when it is too late as we saw over the past week.
• If there is a variable today, it will be the forward guidance on balance sheet reduction and future rate hikes.
• The NASDAQ 100 is already throwing a divergent buy pattern and we have a green algorithm buy alert signal arrow on the S&P 500 Index weekly chart – positives to be sure.
• If a rally ensues, what does that mean?
• If you are a bull, you point to the decimation in the broad market over the past year – popular names from the last bull phase that are down 50, 60, and in some cases 90% – think Peloton (PLTN), Zoom (ZM), and the zippy ARKK funds.
• Then you point out that the generals are the last to go, and at least three of them went – Facebook, Amazon, and Netflix.
• But since the stock market is no longer connected to fundamentals, and has become an instrument of Fed Monetary Policy, it is much tougher to call a bottom. But I will go out on a limb and suggest that we may have a tradable low.
• Still, as you will glean from our monthly letter to be published in a few hours,  the stock market has not exited the nosebleed seats. That is a huge and unsustainable disconnect from the decimation in bonds.
• So I do not believe that this will be “THE” low – just “A” low.
• Topping is a process in the initial stages. It takes a while and the market throws a lot of decoys along the way.
• But for the moment, futures were quiet overnight, and are up slightly to 4185. I expect a calm session today until the 2 pm EST FOMC events commence.
• Following that, I see key resistance at 4200-4210 (SPY 420 equivalent) with 4284 as the next resistance point.
• Support shows at 4125, then 4110 (SPY 410)

• Assuming Powell does not spark any more fear than already present in markets, a relief rally will function to provide some breathing room.

• The flip line to positive Gamma is now 4300. It might take a few days to get there, but that is my line in the sand between the usual short-covering rally and, perhaps, some real institutional buying.

•  Ultimately, if the market fails to recover 4300,  there is a higher likelihood of a reversal back down to test recent lows, perhaps into the May 20th monthly and June quarterly options expiration.

• If Powell does drive stocks lower, even temporarily, I would expect a rather quick test of 4000-4050 for now.

• Let’s see how it goes. But If all goes according to plan, the Founders Group will pick up a long swing trade in the S&P 500 Index this afternoon.

A.F. Thornton