Thanks JC @allstarcharts for the cool Fibonacci T-Shirt!
S&P 500 rallied 114% from the March 2020 pandemic low to
the January 4, 2022, all-time-high. Fibonacci retracement sequence shows
S&P tracing out the 38.2% retracement at 3800. The 50% retracement around
3500 sits near the top of that fall-2020 swing bottom and the 61.8% retracement
level around 3200 is near the pre-pandemic highs.
Where it bottoms is anyone’s guess. We
have relayed some of ours. Bottoms are not necessarily a technical level on
chart or fundamental valuation, they are a perception, an exhaustion of
selling. There are still too many bottom callers out there. When we start
hearing, “should I sell, should I sell,” that’s more likely the bottom. Perhaps
it’s when somebody big blows up or goes bankrupt. When the market harpoons a
big whale. Maybe a crypto guy, a hedge fund like Long Term Capital Management
or big public company like Enron or investment bank like Lehman.
Remember we are currently in the midst of the weakest two
quarters of the 4-Year Cycle, Q2-Q3 of the Midterm Year, but this sets up the “Sweet
Spot,” which runs from Q4 of the Midterm Year through Q2 of the
Pre-Election Year, averaging gains of 19.3% for DJIA and 20.0% for S&P 500
since 1949, and 29.3% for NASDAQ since 1971.
Whatever it is that creates or signals the bottom we still
expect a classic midterm bottom over the next several months. It could be here
like 1970 or it could come in June like 1962 or October like 1974 and so
many others or somewhere in between. Either way, patience and fortitude are in
order. Stick to the system. Our April
7 MACD Sell Signal was fortuitous, and our stops took care of most of the
rest. For now, cash is still king as we wait for that fatter pitch.
Today’s selloff has put the
major averages in the red for the week in addition to recharging the bears. If
history is any guide more weakness and volatility is in store for the remainder
of the week.
May’s monthly option expiration
is mixed over the longer-term since 1990. DJIA has been down fifteen of the
last thirty-two May monthly expiration days with an average loss of 0.07%. OpEx
week has a slight bearish bias with DJIA and S&P 500 down 17 and up 15.
More recently, DJIA has
suffered declines in 11 of the last 13, monthly expiration weeks. S&P 500
has one additional weekly gain since 2009, down 10 of the last 13. NASDAQ has
declined in 8 of the last 13. The week after has been best for S&P 500 and
Next week after options expiration
is more bullish with S&P and NASDAQ up 10 of 13. Next week is also the week
before Memorial Day which also leans bullish with S&P up 13 of 18.
May has delivered much more than its usual market
volatility. Stocks rallied strongly out of the blocks. NASDAQ jumped 3.2% on
the third trading day, May 4, up 5.1% for the month. Then the bottom fell out.
NASDAQ dropped 12.3% over the next five trading days. Bargain hunting came in
over the past four days rallying NASDAQ 5.5%. In the chart here we have put
2022 on the right scale to highlight the trend since the moves in May 2022 have
been about 10x the historical average. As you can see despite the increased volatility
this year stocks have tracked the typical May Seasonal Trend rather closely. The
market is still negative for the month. But if the trend continues the market
has a good shot to turn positive for May. But many support levels have been
broken and this appears to be a bear market rally.