And they have hit hard at every opportunity for a week now.
Our View
Rather than me doing the View today I’ll let Howard Marks from Oaktree do it. He has been around for over 50 years and is an extremely bright man. His piece is called Sea Change, with a few key excerpts below:
In my 53 years in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today.
What are the factors that gave rise to investors’ success over the last 40 years? We saw major contributions from (a) the economic growth and preeminence of the U.S.; (b) the incredible performance of our greatest companies; (c) gains in technology, productivity and management techniques; and (d) the benefits of globalization. However, I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all.
Inflation and interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years…The course of interest rates will largely be determined by the Fed’s progress in bringing inflation under control. If rates go much higher in that process, they’re likely to come back down afterward, but no one can predict the timing or the extent of the decrease…
I believe that the base interest rate over the next several years is more likely to average 2-4% (i.e., not far from where it is now) than 0-2%…But, for me, the bottom line is that highly stimulative rates are likely not in the cards for the next several years, barring a serious recession from which we need rescuing.
Our Lean — Danny’s Take
All rallies are being sold — clearly — and we are seeing the effects of the end-of-the-year asset allocation we talked about in Monday’s lean.
We had that huge bearish reversal on Tuesday (the CPI print), then four straight days where sellers dominated the tape.
There have been opportunities on the long side, with four rallies in excess of 10% (and two of those were almost 20%) this year. However, the overall trend has been down all year as the Fed continues to hold its hawkish stance.
The #KISS of this all is, don’t fight the Fed and how many times have I said, “I’m not here to fight city hall?” There’s too much tightening out there — from the Fed, BoE, ECB, BoJ, etc. — for the bulls to fight.
My friend David Zimmer recently wrote:
Powell just got a bonus in the inflation fight. Japan announced it will issue around 35.5 trillion yen ($258.52 billion) in new government bonds for the fiscal 2023/24 annual budget, adding to the industrial world’s heaviest public debt. More importantly, The Bank of Japan just tweaked its ultra-dovish policy setting the stage for a pivot; Japan may be getting ready to tighten. Everything from reassessing its target inflation rate to widening its range on interest rate yields is on the table. Japan’s debt markets were limit down on the move and their equity futures were down as much as 3.0%. On our side of the globe, whereas in situations of this nature, while you would often see a “flight to quality” instead you are seeing US debt instruments sell off, the Dollar trading lower, and equity futures continuing their slide albeit all off their bottoms as this is being posted.
Our Lean: So far, every rally has been temporary and investors continue to unload into them. The ES is shaking off its overnight dip. If it can stay above yesterday’s low (3827), then 3855 is in play. Above 3855 and 3880, then 3900 could be in play.
Below 3827 and the overnight low near 3800 is in play.
I have been less and less bullish this month, which is something that bothered some readers. But this mess isn’t over yet.
MiM and Daily Recap
The ES traded up to 3899 on Globex and opened Monday’s regular session at 3880. After the open the ES traded up to 3883.25 and dropped down to 3862 at 10:07, rallied up to ~3782 and then dropped down to new lows at 3848.75 at 11:41. For most of the next 2 hours, the ES remained in a 10-handle chop range, then broke down to new lows at 3827.25 at 3:03.
The ES traded 3837.50 as the 3:50 cash imbalance flipped from $350 million to sell to $185 million to buy and traded 3943 on the 4:00 cash close. The ES settled at 3841.75 on the 5:00 cash close, down 22.50 points or 0.85% on the day.
In the end, the bears continue to rule the tape, especially when there is a $100 billion dollar year-end rebalance and the Nasdaq is weak. In terms of the ES’s overall tone, it’s been simple if you are bearish: Sell every rally. In terms of the day’s overall trade volume, was lower at 1.32 million contracts traded. Call it what you like, but there is a big unwind going on.
Follow @MrTopStep and @BretKenwell on Twitter and please share if you find our work valuable.
Don’t Forget: The Long-term performance of the S&P 500, some longer-term setups, and 5 red flags that showed up before the 2022 bear market.
Technical Edge
- NYSE Breadth: 27% Upside Volume
- Advance/Decline: 29% Advance
- VIX: ~$22.40
Apple continues to move lower, while Tesla just hit a new 52-week low. It seems like the latter is trying to bounce from significant support, but keeping an eye on these stocks makes sense for sentiment purposes. Not to mention, Apple carries a $2+ trillion market cap.
At some point, the market needs to find its footing, even if it’s just to a relief rally before another sale.
S&P 500 — ES
3827 is the “go, don’t go” line in the sand. Above it and last week’s low and the overnight high are in play near 3855. That’s also where 10-ema comes into play on the 4-hour chart.
That’s followed by the 50-day near 3880, then 3900 and 3920. I don’t think we’ll see 3920 today, but that is a brick wall in my mind.
On the downside, below 3827 puts the overnight low in play at 3803. However, I can’t help but see the significance of 3750, while the 61.8% retracement sits at 3761.
SPY
We got the tag of the 50% retrace we were looking for yesterday and now the SPY is just sort of lingering in this $379 to $381 area.
Last week’s low is becoming imperative. If the bulls can regain this level, we could push back into that $386.xx to $388 area, where we find the 50-day and 10-week moving averages and the gap-fill from Friday. I’d be a seller at this zone, initially.
Below last week’s low (at ~$381) and the SPY remains vulnerable to more downside.
DIA
The Dow has had the best relative strength of the four major indices. A move over $350.50 could get us to $355.
Below $325 and the 200-day sma opens the door down to $317.50 and $310.
Dollar — UUP (DXY is fine too)
The dollar has been struggling, but as you can see on the weekly chart, it could be coming into some support. A strong rally here could deal a real blow to the S&P.
For the UUP specifically, keep an eye on last week’s low of $27.95. An undercut of this level, a tag of the 50-week moving average and a reclaim of $27.95 could get us in a low-risk long.
More aggressive buyers can just get long on this morning’s dip, but I’d prefer to see some sort of more favorable R/R line up for us. That said, buyers could just use a stop-loss in the $27.50 to $27.70 range.
Open Positions —
- Numbered are the trades that are open.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
- TLT — Trimmed down to our final ¼ or ⅓ at $108.50. A complete exit is okay too. Those still holding can fish for the $110 to $111.50 area. Stops raised to profitable at $106.
- Great trade and finally stopped on the last portion if anyone had runners
- WMT — ½ size & long from 142.75. Looking to trim $145 to $146+ | Stop at $141.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- LNG — keep an eye $150
- CAH
- SBUX
- DE — gap-fill & 10-week at ~$413
- AMGN
- HON
- LMT, RTX, NOC
- MET — weekly
- GIS
- CI
- MCD
- ENPH, FSLR, CEG — solar has strength
- VRTX, UNH, MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
Comments are closed