Last Full Trading Week of the Year Begins
And the sellers may not be done yet.
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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.
Our View
Inflation is and will be a problem moving forward. Let’s face it, the American people are pessimistic. A Wall Street Journal poll shows a majority of voters think the economy will be in worse shape in 2023 than it is now and roughly two-thirds say the nation’s economic trajectory is headed in the wrong direction. For what it’s worth, I happen to be one of those people.
I remember stepping off a plane coming back from 3 weeks in the UAE in 1996 and thinking to myself, we live in a wonderful land. However, geopolitical shifts, nearly 15 years of quantitative easing, $31+ trillion in debt and Putin’s war in Ukraine are pushing the US into a recession.
It’s funny — but not in a laughing kind of way — but this doesn’t feel like a Christmas holiday.
Our Lean — Danny’s Take
According to JPMorgan, the world’s biggest money managers are set to unload up to $100 billion of stocks in the final few weeks of the year. JPMorgan calculates that Japan’s $1.6 trillion GPIF, the world’s largest pension fund, would have to sell $17 billion of equities to get back to its target asset allocation. The $1.3 trillion Norwegian Oil Fund could move $12 billion from stocks to bonds.
Notwithstanding their losses this week, equities gained over the quarter, driving up their value relative to other asset classes and forcing managers with strict allocation mandates to sell them to meet targets. Bonds are the likely beneficiaries of sales by sovereign wealth, pension, and balanced mutual funds looking to replenish their fixed-income holdings. This is on top of the constant tax selling which has been exacerbated by the Fed’s warning of further rate hikes.
I’m pretty sure we have already seen part of the sell stocks/buy bonds allocation, but the major part of it should be in the final 3 to 5 sessions of the year.
Our Lean: The ES has been down 3 days in a row. From Tuesday’s high to Friday’s low, the ES fell 325 points or 7.77%. I’m sure this is not what people wanted from Santa. I’m also sure the ES is going to get whacked around this week, but I also think today could see some early upside.
Not many talk about it much, but the DAX starting going down around the same time, but is now trying to find its footing and bounce — even if it’s temporary.
MiM and Daily Recap
After taking a beating on Thursday, the ES traded down to 3871.25 on Globex and opened Friday’s regular session at 3096.50. It rallied up to 3912.50 at 9:50 and then made new lows down to 3864.50 at 10:37. The ES rallied up to the 3881.50 level at 11:15 and then made new lows at 3859.25 at 11:59, rallied up to 3874.50 at 12:39, pulled back to 3855 at 1:00. Again, more new lows.
The ES traded sideways-to-higher and then popped up to 3873 at 2:17, but then traded back down to 3857.25 at 2:35. The ES traded 3888 as the 3:50 cash imbalance showed a whopping $5.59 billion to buy and trade 3873 on the 4:00 cash close. It traded up to 3895.50 at 4:41 and settled at 3872 on the 5:00 futures close, down 50.25 points or -1.41%. The Nasdaq futures closed down 137 points or down 1.20%.
In the end, the bears took over the tape a week ago and it’s been all downside since. In terms of the ES’s overall tone, it was all sell programs, but the NQ felt very oversold. In terms of the day’s overall trade, volume was steady at 1.847 million contracts traded.
Technical Edge
- NYSE Breadth: 24% Upside Volume
- Advance/Decline: 30% Advance
- VIX: ~$22.60
It’s the last full week of trading and we’ve had a pretty good run these past few weeks. Let’s not do anything stupid to screw it up going into the holidays and into year-end.
DAX
Weekly look at the DAX, which has suffered three straight weekly declines. It’s now into a few key moving averages and the ~13,800 area.
Not sure it can rebound to 14,200 but that would be a great area for the bulls to regain. For now, 14K is the battleground (I’m not trading it, but I’m watching it).
S&P 500 — ES
After a huge bearish reversal on Tuesday and three straight down days, we may be in store for a bounce. However, I personally don’t think it’s anything more than an eventual “sell the rally” at this point in time.
I’m willing to change my mind, but that’s where I stand right now.
On the downside, I’m watching 3870 to 3872. Below that opens the door down to last week’s low of 3855. Below 3840 without reversing higher could eventually put 3760 in play.
On the upside, keep an eye on 3900 and 3920. Both are potential resistance, followed by 3935 and the declining 10-day moving average.
ES — Zoomed In
One setup I am watching is a rally through the Globex high of 3899 — call it 3900 — and a run into the declining 10-ema on the 4-hour chart (as shown above).
That could set up as a low-risk short trade in the early part of the session. Just a trade, nothing crazy, but worth keeping an eye on.
SPY
On Dec. 6th, we wrote “I also can’t help but notice that open gap down at ~$381, if the selling pressure does pick up over the next days/weeks.”
It’s interesting how those gap-fills can work sometimes, as they act like magnets once the ball gets rolling in that direction.
On Friday the 16th, that gap was filled by a dime before the SPY bounced a bit out of that hole. That said, it’s still below the 50-day and 10-week moving averages and is hard to trust right now.
On the upside, Keep an eye on the 50-day and $386.50, which is potential resistance. Above that puts the gap-fill in play near $388. On the downside, a break of $381 puts the 50% retrace in play at $379.30.
WMT
I did take a ½ size position in WMT ahead of the close on Friday. I have no idea if it will hold or not, but we have a very nice ABC correction down to a key area, as flagged on Thursday.
That’s as WMT tests the rising 50-day, filled the earnings gap and tests prior resistance. You all know I love when a stock tests an active moving average and a prior resistance zone. That said, the environment is a bit trickier, hence the ½ position.
$145-$146+ would be a reasonable trim zone. Stop at $141.
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.
- WMT — ½ size & long from 142.75. Looking to trim $145 to $146+ | Stop at $141.
- CEG — Exit more at $93+. Looking for $95 to $96 for small trim (down to ½). Down to ⅓ if we see $97.50+ Stops at $89 (essentially B/E)
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
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