Navigator Oracle™ April Market Letter

The Navigator Oracle™ Monthly Market letter is our month-to-month price action perspective on the stock market. We trade market-generated information (MGI) as quantitative investors rather than opinion. Most opinions about financial markets, including ours, are educated guesswork and likely reflect our biases. In that sense, what is our opinion really worth? And does the market care what we think anyway?

There will be good arguments for the market to rise or fall on any given day – that is what makes it a market. Still, there is no harm in crafting a narrative to try and make sense of what the algorithms show us, as long as we don’t take ourselves too seriously or get married to any particular forecast.

The Narrative

We hear it every day on the news – and experience it in real-time. Inflation is out of control. We hear that a tight labor market is leading to wage inflation. Interest rates are exploding higher, and the yield curve has inverted. Energy and food prices are rising parabolically, and there seems no end in sight.

The Fed supposedly plans to bring on a recession and stock market crash to squelch the wealth effect and rein in demand. This is aimed at helping to suppress the inflation the Fed helped create. Investors fear that corporate earnings will decline. The Military-Industrial Complex tells us that Russia will nuke Ukraine, then us.

I get it, but why is the stock market rising in the face of all this terrible news? The market is only 5% off the all-time highs. Is it possible that things are not as bad as they seem? Will positive surprises on any of these fronts bring us to new highs? Is it that hard to kill the bull market?

Of course, nobody knows the answer to all of these questions. And yes, it is hard to kill a bull market. But more than likely, this latest rally is a bull trap.

Many investors don’t believe that the Fed will do what it says or cannot do what it says. After all, it is an election year, and Fed Chairman Powell would be tanking the economy right into the mid-term elections. That would not show much appreciation for his reappointment by the current President. He might even align himself with the Wokesters for all we know, and the inflation is a purposeful strategy to try to rescue our debt-ridden U.S. Government.

But I take Chairman Powell at his word. He has an ego and cares about his legacy, which is already bad enough and won’t improve if he fails to follow through on this inflation fight.

And like the transports last week, the stock market may be poised to roll over anyway. We get that from Dow Theory, now more than 100-years old. The transports are not confirming the rally and may lead the market lower. And that is somewhat surprising, considering that carriers have a lot of pricing power in the current circumstances.

And looking over at the credit markets, the picture is equally dismal. Junk Bonds, often a leading indicator for stocks, look a lot like the transports. They have rolled over again, failing to confirm the recent stock market rally and raising credit default concerns.

And the credit markets remind me that Paul Volcker had it easy compared to current Fed Chairman Powell in many ways. Volker “only” had to break the back of inflation but had a unipolar world order and the rise of Eurodollars to support him.

Today, Fed Chairman Powell is fighting climate Nazis who love higher energy prices and don’t care that they have risked our national security pursuing their dubious climate agenda. Powell is fighting a leftist regime that wants to surrender our sovereignty to a global government and leave us with no (or perhaps wide-open) borders. We are living in surreal times.

In the meantime, the Biden regime believes we can print money in perpetuity under their so-called “Modern Monetary Theory.” Doesn’t it seem like everything terrible for our country is good for them, their anti-American values, and their depopulation goals?

These American Marxists would destroy our country and reboot it in a Chinese, authoritarian model. As you can see from the chart above, U.S. Treasury Bond investors are voting with their feet, in the worst bond market collapse in U.S. history.

In fact, what could be better than starving half the world to depopulate? Maybe another Pandemic? How about a good cyber-attack? How is all of this working?

It is destroying our middle class. Without a serious U-turn, the rest of the country will soon look like Chicago, San Francisco, and Los Angeles. Those cities are showcases for leftist governments on steroids. Filth, homelessness, and rampant crime have replaced these modern cities. They have become the dystopian nightmares from a Back to the Future movie.

Yet, here we sit after a year of the regime controlling every branch of the American government. I have never seen our country deteriorate so fast in such a short period. And it is not all Democrats, as many corrupt Republicans are complicit in our decline. And when the United States fails, so does the rest of the world – hence Russia’s bold move into Ukraine. China now eyes Taiwan. North Korea has dibs on South Korea. The slide will catch up to the stock market, if not now, soon.

But even if the Fed dials back demand by raising interest rates, crashing the stock market, and causing a recession, does it help the inflation problem? Because much of this inflation is supply, not just demand-driven, it may take years to right the ship. We are transitioning to an entirely new model based on deglobalization, and it will be less efficient and more expensive.

Supply-related inflation is every bit as severe as too much demand from loose monetary policy. As one example, instead of Russia pipelining fuel to Europe, the U.S. now has to ship fuel to Europe across the pond. That takes more ships, trucks, security, and higher prices. Meanwhile, Russia now sends its supply to China and India, requiring more ships, trucks, and costs.

Similar problems arise with food, and some export countries want to hoard their supplies and keep them home. I hope our politicians will be smart enough to do the same for us. Wait, did you say China and Bill Gates are the largest owners of U.S. Farmland? I wish I were kidding.

Bill has some lab-grown meat and other experiments he wants to sell you. And as Bill is one of the chief proponents of depopulation, you shouldn’t worry?

And what about the Chinese-owned crops grown on their U.S. farms? The crops are not bound for America. There are 1 billion hungry mouths to feed in China. Should this be legal?

We have gone from the efficient “just in time” movement of goods to “just you wait.” Inefficiency costs a lot of money and leads to higher prices – plain and simple.

The coming deglobalization and decentralization will cost plenty on a global scale. As I said, this will take years to correct. Get used to the inflation, as it will be with us for some time.

The road ahead is tough and challenges the financial markets. As with most turbulent periods, there will be winners and losers. The math will either drive markets up, down, or sideways depending on the index weight of new leadership.

Sideways is what we experienced the last time we had rampant inflation and a slowing economy. See our Current Stock Market Thesis for the forecast.

But sideways means half the market is rising and the other half is falling. There is plenty of opportunity in such circumstances.

The Price Action - Market Generated Narrative

Charts are as close as we get to roadmaps in this endeavor. Study them carefully. We try to mark the most important points and levels. Nothing is more accurate than MGI to guide you.

Let’s start with the March positives from the monthly chart above. Keep in mind that monthly candles are a slow-moving train. In the monthly candle for March, we see the low and high coming in slightly higher than in February. Price is holding the 5-month line, and the candle recovered most of the February losses. The performance is impressive, to be sure. Cycle theorists now believe that the March low was also the 18-month cycle low.

I am showing the next short-term cycle low arriving around the May 2nd Fed meeting. Coincidence? Highly unlikely.

There have been buyers between the 21-month line (green) and the 5-month line (red) – leaving spike lows on the chart for February and March. In particular, buyers have been strong below 4375. However, we also know that most of these buyers covered short positions. That is not the same as long-term, institutional investing.

From the monthly and longer-term perspective, price is still in a long-term uptrend, holding in the upper half of the 2009 bull market channel and the upper half of the 100-year price channel. There are very few periods over the years of more than two or three successive down months – so a green candle for March is not an unusual pause after red candles for January and February.

But March had some negatives too. We are coming from nosebleed territory outside the 3-ATR K-bands and at the multi-timeframe intersection of channel tops. In similar cases, the price will dip below the K-Bands, and often rally back toward the 2-ATR K-band before it rolls over again. That process appears to be underway now and also explains (or causes) the rally.

We can draw a downtrend line from the January and March peaks. We can also calculate a Fibonacci target at 3500, a 1.618 projection of the current downtrend, and the middle of the 2009 bull channel. I am calling 3500 our first intermediate target if the downtrend continues. See our Current Stock Market Thesis for more details on this target.

The January and February monthly candles have a massive 500 point range due to the increased volatility. As I often preach, every candle is a trading range. We can use the February low around 4100 and the March high around 4600 as a default (wide-birth) breakout range. But you can twiddle many thumbs while the market runs around in a 500 point candle range, waiting for a breakout.

For now, it is easier to use the March candle to define the upside breakout because we don’t have too far to go to take out the March high at 4630. If we saw acceptance above 4630, the worst case is a test of the all-time-high and a trading range.

The best case would be a melt-up to new highs. I cannot eliminate that possibility, but it would not be my most probable forecast.

Getting down to the bottom of the range is a lot of points from here. Given that 4470 to 4500 is where so many key levels congregate, any acceptance below 4475 is somewhat ominous even before we get to the bottom of the two previous monthly candles and the 21-Month line just above 4100.

Also, since the February and March, candles have established a 500-point balance range; breaking the bottom projects an equal, 500-point measured move down from 4100. That also places a target at 3500. So the 3500 level target results from several traditional measures.

Conclusion

My takeaway from March is that we are still in a long-term uptrend, while the intermediate trend remains broken. Perhaps that is the chief distinction between a correction and a bear market. Until the long-term trend breaks, traders have merely wounded the bull market with a standard (and long overdue) correction.

A break above 4631 virtually assures a retest of the January high and likely new highs. New highs would be the most confounding path to Wall Street. I don’t expect new highs, but I cannot exclude extending the current rally.

We will drill down to the lower boundaries on the daily and weekly reports, but the more time the market spends below 4500, the more challenging it gets to hope for a test of the old highs. Break 4100 and 3500 is the next train station.

It is too early to make projections from the 3500 target if price gets there. The level may form the bottom of a new trading range, and we will start back up again.

Stay flexible.

A.F. Thornton

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Navigator Oracle™ April Market Letter