But don’t forget about Friday’s expiration either.
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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
This morning is the CPI print, which is shaping up like a binary event. Of course, the FOMC rate decision is just a day later, so there’s a lot for investors to digest. If the number comes in hot — like the PPI number did on Friday — then the Fed will likely be forced to talk a hawkish stance, regardless of whether it goes with a 50 bps or 75 bps hike.
For what it’s worth, the market is pricing in a 50 bps hike (with odds of 73.5%). Those odds might change based on the CPI number, but not the Fed’s decision.
Lastly, I’ll just say this: everyone is talking about the Fed and inflation and no one seems to be talking about the $3.7 trillion in options expiring on Friday.
A few notes from this article stood out to me:
Tony Pasquariello, Global Head of Hedge Fund Coverage for Goldman Sachs’ Global Markets Division, said he can’t see the argument for lasting, significant upside: ‘With QT and negative earnings revisions just starting to really kick in — alongside money market rates that are assuredly heading higher — we’re going into 2023 with a stock market that charges an 18 multiple for the prospect of 0% earnings growth.’”
That said, JPMorgan notes that, “If CPI prints 6.9% or lower, the print could be the technical end of the bear market.”
From the article linked above, the bull case also calls for a bit of a rebound year in 2023. At least for the 60/40 portfolio. Bonds are having one of their worst years on record, while the 60/40 is having its 7th worst year since 1900.
Of the prior 10 worst years for the 60/40 portfolio — ranging from -8% to -31%, while 2022 is at -13% thus far — only one time (1931) were the returns for next year negative. Further, only once were the gains limited to a single digit return, with the average and median gains standing at 13% and 17%, respectively.
Our Lean — Danny’s Take
On Monday, rates climbed 1.3%, the S&P rallied 1.4%, the dollar eked out a gain, the VIX jumped almost 10% and bonds (via the TLT), which opened higher by 1.5%, closed higher by 0.32%.
Someone is wrong here and most experienced traders will tell you its equities, but we’ll see. Bret said last week we could be setting up for a binary event with the CPI and FOMC. That’s not unreasonable.
@sentimentrader “Traders have never spent so much on expectations for a crash. Last week, all traders across all U.S. exchanges bought to open $4.20 (lol) in put options for every $1 in call options. That’s double what they spent during all the other panics over the past 22 years.”
I’ll just say this. It’s hard for markets to “crash” when everyone is gearing up for it.
Our Lean: First, we’re going to let the reaction happen at 8:30, and then circle back with an update. Taking a position ahead of an unknown event is akin to a lotto bet — a gamble.
That said, I do expect a wide trading range today. Last month, the S&P rallied 205 points in a single day on the CPI print. The upside is loaded with buy-stops all the way up to 4075 to 4080. 4130 is in play above that. A 100-point drop on the downside gets us back to 3925.
MiM and Daily Recap
The ESH23 traded up to 3983.50 on Globex and opened Monday’s regular session at 3976.25. After the open, the ES traded down to 3969 at 9:40, chopped around in 10-handle trading range and then broke out and traded up to 3992.25 at 11:27. After a couple of failed runs at 4000, the ES started to run the buy stops from 3998 up to 4013 at 3:12. The stops went from 3998 up to 4012 and after a small pull back, the ES then ran up to 4023.25. The ES traded 4017.50 as the 3:50 cash imbalance showed $413 million to sell, traded 4025.75 on the 4:00 cash close, and settled at 4019.75 on the 5:00 cash close, up 51.50 points or +1.4% on the day.
In the end, yes, the CPI number and the Fed rate hike are going to be big, but I think the $3.7 trillion in options that expire on Friday may be the biggest event of the week. I am sure the Fed will rock the boat, but the big show is Friday. In terms of the ES’s overall tone it was a slow chop to the upside until the final 90 minutes. In terms of the ES’s overall trade, volume was high at 2.12 million contracts traded (but much of that can be attributed to the roll).
Technical Edge
- NYSE Breadth: 70% Upside Volume
- Advance/Decline: 65% Advance
- VIX: ~$25
As Danny said, we’ll circle back with an update after the CPI is out of the way. However, I’ll put a chart of the futures up, because that’s what will be in focus ahead of time.
S&P 500 — ES
Daily on the left, weekly on the right.
We’re up another 30 handles going into the event, as the ES breaks the two-day range to the upside and pushes through the 200-day. I will just say that, while we could have a positive reaction, I would feel better about some lotto calls if we had cooled off into the event, rather than rallied into it.
If the buyers are wrong, we could see an 80 handle drop to 3965 is a flash. Below that puts 3920 back in play.
If the buyers are right, 4110 is the high from this month and where the declining 50-week moving average comes into play. That’s 60 handles higher from current levels. Above that puts 4150 in play, which is the 78.6% retracement.
Nasdaq — NQ
On the upside, a bullish reaction could get us to 12,140 to 12,150. Above that opens the door to the declining 200-day.
On the downside, 11,450 to 11,460 has been key support. Below that puts 11,315 in play, then 11,120.
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.
- IBM — Daily-up over $147.17 was the entry. $145.50 is our stop. Trimmed ⅓ at $149.50+ (pre-market is fine). Ideally down to ½ if we see new highs over $150.50.
- Stop at $145.50 or B/E for less aggressive traders (B/E Stop hit). $145.50 proving to be a great stop.
- CEG — Trimmed ⅓ at $93. Raise stops from $86 to $89. Looking for $95 to $96 for small trim (down to ½). Down to ⅓ if we see $97.50+
- Ulta — Booyah! Down to ½ or ⅓ here — likely ⅓ as per yesterday’s update. I’d love to see $488 on the remainder.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
Relative strength leaders →
- LNG — keep an eye $150
- CAH
- Retail — TJX, WMT, ULTA
- SBUX
- DE
- CCRN
- AMGN — Gapping down on the day. See how it handles the 10-week moving average. $265 to $267 is the breakout level and the 50-day moving average.
- MET
- GIS
- REGN
- CI
- MCD
- ENPH, FSLR — solar has strength
- VRTX
- UNH
- MRK
- XLE — XOM, CVX, COP, BP, EOG, PXD (Weekly Charts)
Economic Calendar
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