Our View
While the MIM was showing some big sell imbalances in January and a few in February, the big selloffs have not scared away global investors. The data shows that investors have been selling bonds and buying stocks.
According to Bank of America strategists, equity funds attracted $21.8 billion in the week of Feb. 2, bringing the year-to-date total to $106 billion. That’s even as bond funds had their largest weekly outflow since March 2021, while cash holdings also fell.
BofA strategist Michael Hartnett said in his note Friday:
Sinister price action in corporate bonds coincided with big outflows. Not the case in stocks year-to-date. In the past, high-yield outflows combined with large stock inflows have signaled “big tops” — the peak before sustained declines. B of A’s strategist remains bearish on equities, predicting a “rates shock” in the first half of this year followed by a “growth shock” in the second, triggering negative returns for both equities and credit.
I look at a lot of bank research reports and while I’m a cautious bull, I’m sticking with my 2022 forecast for a 15%+ decline in the S&P and for it to close near its highs at the end of the year. So far, the S&P has suffered a peak-to-trough decline of about 12.5%.
My other predictions were for crude oil to trade over $100 a barrel — which is on its way — and that gold would remain “out of favor.” Gold held up pretty well through most of January but has since taken a tumble.
When I look at the ES chart from its early January highs to its current level, I honestly do not get that warm, fuzzy feeling. While the S&P looks great when it bounces, it looks like crap when it falls.
I don’t think investors are going to stop selling out of bonds. Why?
- The Fed is over $9 trillion in debt and is so far behind the eight ball, it is now raising rates
- The love affair between Xi and Putin
- Covid-19 is still running amuck
- Inflation continues to climb and so do energy prices. Clearly, rising inflation is pushing central banks, as they have been more hawkish lately.
Week Ahead
There are two major economic reports I’m watching this week: Thursday’s CPI report — which is expected to come in at 7.2%, the highest since 1982 — and the University of Michigan’s consumer sentiment survey on Friday.
It’s also going to be another busy week on the earnings front with some big names reporting, including: Pfizer, BP, PepsiCo, Coca-Cola, Uber and many more.
Our Lean
The ES futures closed at 4492.50 and the S&P cash closed at 4,500, which is a discount of 7.50 points. If the futures open Monday’s day session at a steep discount to the S&P cash, my lean would be to buy it on the open or the first leg down after the lower open.
The keyword phrase here is “lower open.” If that works, I will be looking to sell any 30 to 40 point rips.
I want to point something out: Volume has been dropping lately and with new money being put to work, I simply can’t rule out another upside rally. However, I just don’t think the rallies will hold.
Further, if the ES closes down today, I think that could set up more weakness this week. It’s a traders market, my friends; if you catch a nice rip, it’s okay to take half off and hold the other half — just stick to dating these positions and don’t get married to it!
Daily Recap
In the end, Friday was all about buying the dips and selling the late-day rips. In terms of the ES’s overall tone, it was firm, but the late-day drop was not a great sign for the buyers. In terms of the ES’s overall trade, volume was steady but not overly large at 1.9 million contracts traded.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Technical Edge
- NYSE Breadth: 62% Upside Volume
- NASDAQ Breadth: 70.7% Downside Volume
Friday was filled with good news and bad news.
After Amazon shares surged more than $400 a share at one point, the stock market came roaring back to life after a bad Thursday and a poor open on Friday.
On the plus side, the SPX and Nasdaq rallied 0.5% and 1.6%, respectively. On the downside, the final hour of trading was not very strong, with the ES falling 48 handles and the NQ falling almost 200 points at one point into the close.
Both index futures closed more than 1% below the post-3:00 pm high. That’s a tough pill to swallow going into the weekend, but it’s not surprising traders wanted to take a “risk-off” approach to the weekend.
Game Plan
Now we need to see if that approach was just that — a de-risking move ahead of a weekend that has various risks attached to it — or part of a larger scheme to “sell into strength.”
We’ve already seen GOOGL pull back from its EPS rally. Will AMZN be next? Just something to be aware of, given the impact these trillion-dollar companies have on the indices.
S&P 500 — ES Futures
On Friday the ES undercut the prior day’s low, then reversed higher as AMZN remained strong and as they bought the dip after the NFP report. The ES double-bottomed around 4443, then followed our sequence pretty well from there.
That was: “Above 4510 opens the door 4528, then 4545 to 4550.”
However, the ES never saw the latter range, as it topped out ~4.5 points above 4528 and reversed to close below 4500.
I’m never in a rush to do anything on Monday morning. We have the whole week to trade and the last thing I want to do is get into a hole early in the session.
The Trade: On the upside, let’s see if the ES can take out Friday’s high at 4532.50, as well as the declining 21-day moving average. That would put 4550 in play, followed by 4575 to 4580.
On the downside, bulls don’t want to lose Friday’s low at 4438.50 and the 200-day. If we do, the ES could see last week’s low.
Nasdaq — NQ Futures
Similar pattern developing here in the NQ, with a potential lower high forming.
Daily-up over 14825 could open the door to 15,000 and the 200-day (provided it can push through the declining 21-day).
If we can’t gain upside traction in the NQ, it keeps the Q4 low and last week’s low in play, with both near 14,367.
If we can keep this higher low structure in place, it could set up nicely for the bulls in the intermediate term.
Individual Stocks & Go-To Watchlist — TSLA, AAPL, AMD, QCOM
There’s a bid in tech and semi’s early today. Many names have been struggling, but are looking at potential rotations higher. The question will be: Can the bids stay strong or will the morning rallies be sold into?
That will have an impact on the indices too.
TSLA
Inside day on Friday — looking for a 2x daily up over $937. Could quickly put weekly-up in play over ~$944, followed by the 21-day moving average.
2X daily down may very well put the 200-day in play.
AAPL
Nice post-earnings reset to the 10-day and 50-day moving averages. Daily-up over $174.10 could put $176+ in play, which would be weekly-up.
Keep in mind that the $176 level has been resistance for several weeks now.
AMD
If AMD can rotate over $125.40, it not only clears the two-day high but also the 21-day. That could open the door to the post-EPS high near $130.
On the downside, a 2x daily-down rotation below $118.50 does not bode well for bulls.
QCOM
Qualcomm could be attractive after that doji close on Friday if we can clear the prior day’s high at $182.41. It could open the door to the $188 to $190 zone.
A move below $175.50 does not bode well for bulls.
Go-To List —
feel free to build your own trades off these relative strength leaders
- UPS — Watching daily and/or H4 10-ema and a potential retest of the B/O area near $220 for a buying opportunity. Great EPS reaction
- VRTX — strong move last week. Daily-up over $244.75 could renew the upside trend.
- Energy — led by HAL, XOM, OXY & many others.
- AAPL — back on the go-to list.
- ABBV
- CVS
- BRK.B
- TD — Weekly-up at $80.45 flagged last week — stunning.
- V & MA — back on the go-to list
- BROS — H4-up would be attractive tomorrow.
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck
Economic Outlook
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