Our View – Who’s Going To Buy Our Bonds?
Who in the world is going to buy US bonds? Not the world’s largest holder, Japan, which has been selling for months.
According to BMO Capital Market’s recent data, the largest overseas holder of Treasuries has offloaded almost $60 billion over the past three months. While that may be small change relative to Japan’s $1.3 trillion stockpile, the divestment threatens to grow.
That said…who’s bonds are better bets than US bonds? The German 10-year is still under 1%, while its 1-year and lower duration bond yields are still negative, so it’s a mixed outlook in fixed income.
Last week, @Macrocharts posted this AAII Bull-Bear Spread on sentiment as it neared historically low levels. That didn’t (and doesn’t) guarantee a low or a sustainable bounce from here. But it is something that generally accompanies those events. It’s just something to keep an eye on.
I understand that there are a lot of folks that are watching their stock investment accounts take a beating. Like always, the question is, “is this the big one?”
I don’t think so.
However, we are in a full-fledged pain game and there is more pain to come. Let’s be realistic. At the high, the ES was up more than 620% from the March 2009 credit crisis lows and gained 27% in 2021 alone (after ending the year higher by 16% in 2020). So some air had to come out of this at some point. Is it painful? Yes. Is it going to last forever? No.
However, there is too much uncertainty for any sustained rally right now.
Our Lean
The S&P rallied 156 points from the post-Fed low to the afternoon high. While I can’t rule out higher prices, MrTopStep has a rule that the ES trades sideways to lower after a big up-day. In most cases, this does not lead to a broader decline.
Throughout the year, I have talked about the bear market of 1974 and how the markets sold off and then rallied hard, only to reverse back down to lower lows. I know the lean is not going to be correct all the time, but if that type of pattern fits now, we should pull back, rally, then fail at some point in the next several days.
If that doesn’t happen, it looks like 4330 could be in play and if the futures rally above there and hold, 4380 could be the upside target. In this tape, you have to open to several scenarios going into the day.
Lastly, I want to do a 45 minutes webinar exclusively for the Opening Print subs. Is that of interest? If so, just like the story, leave a comment or hit reply.
Daily Recap
Yesterday, it was all about the Fed. The ES opened at 4176.50, upticked 3 to 4 points, then sank 37.50 points until it bottomed in the low 4140s at 11:30. From there, the ES powered higher by ~44 points into 2:00 when the Fed announced its 50 bps hike.
The ES shot up 21 points in 90 seconds and fell over 37 handles a few minutes later. From 2:00 until 2:35, the ES traded in volatile 20 to 40 point swings until it bottomed at 4146 and then exploded higher.
The ES rallied for more than an hour straight, tacking on 156 points going into the 3:50 MIM reading at ~4298. The cash imbalance showed $2.2 billion to buy and the ES inched up to 4303 before closing at 4297 at 4:00 and settling at 4286.25 at the 5:00 futures close.
In the end, the ES climbed 126 points or about 3% on the day. In terms of the ES’s overall tone, it was one giant buy program in the afternoon. In terms of the ES’s overall trade, volume was solid at 1.72 million contracts traded.
- Total Range: 160.25 points
- H: 4303
- L: 4142.75
Technical Edge
- NYSE Breadth: 87.7% Upside Volume (!)
- Back-to-Back weeks of 80%+ downside volume
- NASDAQ Breadth: 82.2% Upside Volume (!)
- VIX: ~$26
The VIX is calming down and the market reacted well knowing the “worst of the worst” is not coming from the Fed. There are still some long-term and intermediate-term questions and concerns, but for now, the markets reacted well to the Fed.
The move sent the S&P and Nasdaq exploding higher.
The former climbed all the way up to our upside targets near 4300, while the latter tacked on 350+ points after going daily-up and rallying to our range in the 13,500 to 13,700 area.
The question now is, will this be our low to work with and how long will it last?
Game Plan — S&P, Nasdaq, Bonds, Individual Stocks
Selfishly, I’d love to see another 80% upside day. Realistically, I know how difficult that will be to achieve. If the market could do it though, the bulls would gain some meaningful momentum.
Personally, I like that the market is coming into the session under a little bit of pressure. It’s easy to navigate than a big gap-up that loses all of its steam in the opening 30 minutes.
S&P 500
“Keep in mind, we could fly all the way up to 4300 and that only gets us back to last week’s high.”
We hit this area yesterday and it was clearly resistance. Last week’s high was 4303.50 and so far, this week’s high is 4303. However, the ES closed above the 10-day for the first time since April 20th. Bulls want to see that observation remain true.
If we can go daily-up and weekly-up over 4303 — either today or tomorrow — it opens the door to the 50% retracement and 21-day moving average. Above that and the key 4375 level could be on tap, along with the 50-day.
A little cool-off from yesterday wouldn’t be unexpected, but I’d love to hold 4250 on the downside.
SPY
“On the upside, I want to see a push up to $420.50 — the 61.8% retracement. If it doesn’t reverse, the SPY can climb to its declining 10-day, then potentially $430 if it really has some gas in its tank.”
We hit all of these levels yesterday. Like the ES, I want to hold the 10-day moving average should we dip/cool off a bit today. Also like the ES, it was the SPY’s first close above the 10-day since 4/20, so it would be nice for that observation to remain true for more than a day.
If we go daily-up over $429.66 and weekly-up over $429.64, then the $433.50 area is in play next — the 50% retracement and the 21-day moving average.
Nasdaq — NQ
“If we rally post-Fed…the 13,500 to 13,700 area could be on deck. Near the latter, the 21-day comes into play.”
The NQ climbed to 13,555 and is dipping. After yesterday’s action, we just want to see how this shakes out. The NQ is holding the 10-day. Over 13,550 without a fade lower opens the door to 13,700 and the 21-day.
Above that and yesterday’s “Big Picture” levels start to come into play near 14,000 to 14,300.
Individual Stock Trades
Unfortunately, I did not get an entry in MCK. There were too many moving parts to yesterday’s trade in the indices and it just didn’t work out. Those who did though got to our first target near $320.
These were the setups in MCK and WMT.
We were watching a few others last week — like DOW — but man, that high VIX situation made it tough. I’ll be honest with all of you, I’m a little salty to not be in that one either!!
At least the index trades and TLT have gone our way in a big way.
DLTR
If we do and it doesn’t fade, that puts $170 in play for our next trim spot, followed by $175 to $177 as our second.
If the daily rotation doesn’t set up, I don’t mind waiting for an undercut of this week’s low at $160.15 and a tag of the 10-week. Not trying to make it complicated, but just laying out a few scenarios.
MAR
Trading $180 in the pre-market now, daily-up over $181.60 could open the door to our first trim zone in the $185 to $186.50 area.
Our risk would be the session low, particularly if it opens up in this area near $180.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Numbered are the ones I’m watching most closely. Bold are the trades with recent updates.
- WMT — First target is $155 to $156 for ⅓ to ½ trim. Next tranche at $158 to $158.50. Stop still at $150.
- MCK — (I Missed MCK. for those that didn’t, $320 was the trim spot from the setup earlier this week. → Now B/E stop, with the next trim spot at $323 to $325, followed by $328 to $330.
Relative strength leaders (List is cleaned up and shorter!) →
- AR — booming to new highs.
- WMT
- PEP
- KO
- MCK
- BMY
- JNJ
- DLTR
- DOW — explosive lately.
- VRTX
- PG
- MAR
Economic Calendar
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
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