Will there be a fakeout?
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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
The Fed delivered another 75 basis point hike. While Powell did say that the size of future rate hikes will likely decrease from here, he left a hawkish tone going forward. Specifically, he said we will need a restrictive environment for quite some time to bring inflation down. Additionally, he said rates will likely have to go higher than previously thought.
There are a lot of complaints about the Fed and I agree with most of them. But I will say this: Powell did do some needle-threading yesterday.
He did not thread the needle that jumpstarts a stock market rally, but that’s not what the Fed cares about. It wants to be able to slow down the rate hikes, but have investors take them seriously. That’s what yesterday’s meeting seemed to do.
As for the S&P 500, it did not take the news too well.
It fell 2.5% yesterday and closed at the low. It’s now down 3.6% for the week, while the ES is down 4.4% the week when accounting for this morning’s 0.75% decline.
In yesterday’s Our Lean I wrote: “Every rate hike has eventually been followed by a drop so far this year…what makes today different?”
There are times where the S&P can reverse the prior day’s Fed move. I don’t know that this is one of them, but the reaction certainly wasn’t good yesterday.
Our Lean — Danny’s Take
The Fed hiked yesterday, now the BoE raised rates by 75 basis points this morning too. We’re in a world of tightening that doesn’t seem to have an end in sight. Even though we’re in a seasonally strong time of the year — both annually and in regards to the election cycle — the markets are just being dogged.
I hate being bearish, but this is the reality.
The dollar is roaring this morning and bonds are puking. Both are correlated to equities in that sense, suggesting stocks will again be under pressure unless there’s some alleviation on one of those fronts.
Our Lean: I’m not in a hurry right now.
We bought the dip on Monday, sold the rip on Tuesday and as noted above, came into Wednesday cautious expecting a drop. Now on Thursday we can afford to wait and allow the ES to show us its hand.
That said, I do have a few levels to note.
On the upside, I’m watching 3765 to 3768. Above that puts 3782 to 3785 in play, then 3800.
On the downside, the 50% retracement is at 3715. Maybe the ES can find its footing between 3700 and 3715. If so, we might be able to fish a long out of it, but if not, 3650 could be on tap.
Daily Recap
The ES traded up to 3881.50 on Globex and open Wednesday’s regular session at 3856.50. After the open, the ‘chop’ started right away with a drop-down to 3840.25 at 10:00 and traded up to 3850.50 at 11:00.
The market was under pressure most of the day, with shorts covering some of their positions in the 2pm Fed announcement, when the ES traded ~3853 coming into the event.
The ES sold off to 3839, down about 13 points, then rocketed higher to ~3900. The ES dipped back down to 3872 at 2:18, then ripped to the session high of 3907 at 2:35. Then it was the sellers turn, as the ES fell 66 points down to 3841 just a few minutes later, bouncing almost 50 points to 3889.50, then coughed up roughly 90 points and fell to 3808.50 at 2:54.
The ES puked again down to a new low at 3778.50 at 3:33 and rallied up to 3794.25 at 3:38. The ES traded 3782 as the 3:50 cash imbalance showed $690 to sell and traded 3767 on the 4:00 cash close.
In the end, the ES marked its third straight daily loss, this time at the hands of the Fed. In terms of the ES’s overall tone, the sellers dominated the tape late. In terms of the ES’s overall trade, volume was higher at 2.13 million but still below the 20-day average.
Technical Edge
- NYSE Breadth: 12% Upside Volume (!)
- Advance/Decline: 20% Advance
- VIX: ~$26.50
Yesterday’s update called for a significant trim in the oil trade and for the dollar, said: “UUP bulls can consider a small trim at $30.25. More aggressive players can wait for $30.50.”
We didn’t have our stop hit, but with a high of $30.15, we also didn’t have a situation to trim into. With this morning’s gap-up — the DXY is up 0.70% and the UUP is trading $30.40 — I would look for another trim either in the pre-market or near the open.
The market doesn’t need everything to go right, just something to go right. Right now it’s fighting mostly disappointing earnings, a huge slump in big tech, rising rates, high inflation and tightening from global central banks.
Our Relative Strength list looks great but there are now questions as to how well these will hold up *if* the S&P is going for another ride lower. I want to see how the ES responds. If the names hold up, I will send out a separate email of fresh charts for them.
S&P 500 — ES
As mentioned by Danny, we’ve had a really stellar start to the week, so knowing how these “day after the Fed” sessions can resolve, I’m not too inclined to put my neck out there and force something to happen.
On the downside, I see the ES leaning into the 21-day moving average, which was resistance in Q3, and support last month. If it can find its footing here, then that’s constructive and could put yesterday’s low in play up in the 3760s, followed by 3780.
On the downside, I’m mostly focused on the 50% retracement. If it can’t hold and the ES loses 3700, then the 3640 to 3665 zone is in play — call it 3650.
I’m willing to — no, happy to — sacrifice a day or two of action to get a “bigger picture” sense of where the market wants to go.
SPY
I will just say this about the SPY.
It’s gapping down toward/near the 21-day moving average. If they buy it off the open, there could be a quick scalp on the long side. Maybe they can fill the gap near $374.75.
That being said, I’m in no rush to take on unnecessary risk.
The 50% retracement stopped this rally in its tracks on the way up. Will the 50% retracement on the way down then stop the decline? The 61.8% comes into play at a more interesting spot on the chart near $364 to $365, but let’s take a wait-and-see approach to see what sticks.
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 $78.50
- UUP — Trim on open down to ⅓ to ¼ position. $29.65 stop or B/E on remainder, your choice.
Relative strength leaders → So many stocks need a reset back to short-term support (10-day ema) →
Top Picks (these have been Robust lately):
- LNG
- MCK
- CAH
- CI
- CCRN
- GIS — Weekly-up
- LPLA
- REGN
- ENPH — it’s back on the list.
- VRTX
- UNH
- MRK, AMGN
- XLE — XOM, CVX, COP, BP, EOG, PXD
- TJX
- NOC
Economic Calendar
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