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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
Musk let go of thousands of employees at Twitter, while Meta announced large-scale layoffs — it has 87,000 employees. In fact, all of FAANG has now either cut jobs, paused its hiring, or both.
On Sunday, Apple warned that production of its iPhone production slowed as China laid down more Covid-19 restrictions. MSFT, GOOGL, and AMZN all logged new 52-week lows last week and when we think back to earnings, remember that Apple was the only mega-tech stock to rally on its results.
The other five — MSFT, GOOGL, AMZN, META, and TSLA — all moved lower. On Meta specifically, “Shares are off more than 70% this year — making it the worst stock in the S&P 500. Nearly $700 billion in market value is gone — more than 496 S&P 500 stocks are individually worth.”
What’s my point? Big-cap tech, the typical leaders in the bull market, are tumbling right now. AAPL has been one of the “bull market generals,” but it too is finally starting to waver. The silver lining is, it’s what we need to see in order to have some capitulation and a market low.
x
While we cannot rule out some dead-cat bounces, we also believe that it’s going to be hard to reverse the tech stock weakness. With another rate hike coming in December and the Fed’s latest mindset of “higher for longer,” tech will continue to weigh on the S&P.
Our Lean — Danny’s Take
The midterm elections are on Tuesday and another batch of government inflation readings is due on Thursday. Economists expect headline CPI at an annual rate of 7.9%, a moderation from September’s year-over-year increase of 8.2%.
It’s also a full slate of talking Fed heads this week, with about half-a-dozen members on the calendar over the next few days.
Combined, all of these events should continue the never-ending volatility.
Our lean: The 50% retracement from last week’s low to the recent high comes into play around 3815 (3816.25 to be precise). I think that’s a good area to sell if we see it today. At the very least, the ES will either plow through it or fail and we’ll know who’s in control. The Technical section below lays out other reasons why we will look for a sale in this region.
As always, don’t be stubborn if you’re wrong. Let’s see if we can bag an early win this week like last week.
Daily Recap
The jobs number came out at 8:30 and it was higher than expected and the ES initially faded about 40 points. But then it rallied 75 handles in the 9:30 open. After the open, the ES rallied less than 4 points, then puked 52 handles.
Another big rally occurred off the lows, as the ES climbed 67 points to a new session high, before falling 89 points to a new session low. A series of 20 to 30 points rips and dips occurred until just after 2 pm before the market went into FRY-day mode and ultimately climbed 70 points just after 4pm.
In the end, the ES was literally all over the place with two separate 100 points moves up and down. In terms of the ES’s overall tone, it was hard to figure out who won. In terms of the ES’s overall trade, volume was steady all day at 2.4 million contracts traded.
Technical Edge
- NYSE Breadth: 74% Upside Volume
- Advance/Decline: 71% Advance
- VIX: ~$25.25
I’m no economist, but after the Fed’s hawkish tone on Wednesday, the stronger-than-expected jobs report didn’t help matters. I don’t like when we enter a “good news is bad news” rhetoric, but that is where we are with the labor market.
With the CPI results due up on Thursday, it will — as usual — be a huge focus for investors.
S&P 500 — ES
Keep 3705 to 3710 circled on your charts this week. If it continues to hold, that’s a win for the bulls. But it will be a level that the bears desperately try to break.
On Friday I said, “If we see 3815 I am a seller.” That’s the 50% retrace Danny mentioned above. Now though, we also have the declining 50-day moving average at ~3810.
The Trade: I am coming into today looking at a potential fade. I would like it a lot more though if the S&P would tag the 50-day and/or the 50% retrace and trade BACK BELOW Friday’s high of 3805.50.
That would leave us with 5 to 10 points of risk and give us a clear setup to work with.
If bulls gain some steam, 3845 to 3850 could be in play.
SPY
I would love to see a push up to the $379.50 area here — where we have the 50-day moving average and the 50% retracement — then a fade back below Friday’s high ($378.87).
Guys & Gals, this would be a clear reversal trade if I’ve seen one. That doesn’t mean its win rate is 100% but it gives us a very clear risk/reward.
If we see the setup, I’m a fader and initially looking to get some cash flow in my pocket, then see if there may be some weakness going into the midterms and let us ride part of it lower.
But let’s not get ahead of our skis and see if it even triggers first.
QQQ
“I don’t care what anyone else says, the QQQs look downright sick, as mega-cap tech continues to suffer.”
$267 is the line in the sand. Below that and the Qs are a tough buy. Below $259 and the October low at $254.xx is in play.
Nasdaq — NQ
Remember when we were talking about ~10,950 acting as support? Well, it’s acting as resistance now. If the NQ can reclaim 11,000, then 11,070 is in play next, then 11,170.
On the downside, a break of 10,750 puts last week’s low in play at 10,636.
The NQ doesn’t have as many overhead resistance levels near Friday’s high as the S&P does, but it too could set up as a fade-trade if we get an early push on the open.
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.
- Italics show means the trade is closed.
Open Positions
- GIS — Down to ⅓ to ½ after $82 trim. Next trim is $85 to $86, but seems less likely given the climate. Stop at $78 if you’re still in.
- UUP — We are out anywhere between ⅔ and ¾ of our position here. $29.65 stop or B/E on the remainder. Your choice, great trade.
Relative strength leaders →
Top Picks (these have been Robust lately):
- LNG
- MCK — great reset at 10-ema
- CAH — monster move.
- CI
- CCRN
- GIS
- LPLA
- REGN
- ENPH, FSLR — solar has strength
- VRTX
- UNH
- MRK, AMGN
- XLE — XOM, CVX, COP, BP, EOG, PXD
- TJX
- NOC
Economic Calendar
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