Jeremy Grantham
Robert Jeremy Goltho Grantham is a British investor who was the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, a Boston-based asset management firm. GMO had more than $118 billion assets under management as of March 2015. Jeremy Grantham is one of my all-time favorite investors and traders and predicted the Japanese crash of 1989, the dotcom bust of 2000, and the global financial crisis of 2008. I am hoping he is wrong but I would not bet on it!
He has been “warning of a ‘superbubble’ in the U.S. since last year, arguing the S&P 500 is set to be cut in half as an era marked by exceedingly risky investor behavior begins to fade.” The economy can survive a crash in tech stocks — as evidenced in the early 2000s — but it can’t survive a housing crisis, a market that faces a “day of reckoning” at some point.
Our View
Everyone holds off in life — whether it’s buying a car or selling your home. It’s human nature. Sometimes it pays to be patient and sometimes it doesn’t. If you were holding a home and wanted to sell during the credit crisis, you got lucky if you didn’t get hurt badly.
But history has taught us that overreacting in the stock market can have disastrous consequences for your long-term investment retirement accounts. For the last 40+ years, Warren Buffett’s “buy and hold” has made investors millions despite the bumps in the road. If you bailed out of your stock positions in 2008 into early 2009 there was no getting those stock prices back.
So when is this decline going to end? As I said earlier in the year, September or October could be when we bottom.
Our Lean
I know it sounds a lot easier than it is, but as I have repeatedly said this is far from over.
Below is a copy of something I put in the Opening Print Google doc about 6 weeks ago to remind myself of some basic trading rules while in the ES is in a downtrend:
- Do not get fooled into getting bullish when the ES goes up
- All rallies are DEAD cats no matter if it’s an hour rally or a five-day rally and should be sold.
- ADJUST. Lean to selling the early rallies after an ES rally.
- Just like on the upside; the trend is your friend and that trend down right now.
I have absolutely no doubt the ES can bounce. In fact, the PitBull thinks the ES can rally today and Wednesday. That said, the S&P closed below 4000 for the first time since March 2021. That’s not all though. Remember how I was saying the market was feeling disjointed? Well…
Bitcoin dropped down to $31,000 and is 54% off its all-time high, crude oil fell 6.1% to $103.09 and logged its worst day since March, lumber prices fell to their lowest level in 2022 as the highest mortgage rates in 13 years slows housing demand, nat gas plunged 12.5% and is now down 22% in two days.
Almost every day the MIM is “large to sell.” The MIM is a great way to follow the money flows. It’s an indicator to what the big institutional accounts are doing, which is liquidating and raising cash.
Our lean, MrTopStep has a rule that says the ES goes sideways to higher after a big down day. Clearly the ES is oversold but it’s going to need the Nasdaq to firm up. If the futures do rally and the bonds start falling, our lean is to sell the rally(s).
The big question? Can the ES fall 6 weeks in a row? We shall see!
Daily Recap
The ES opened at 4055, rallied to 4069 in the first ten minutes as it looked like we might bounce after a big-downside-breadth open. We didn’t. The market flushed lower by 71 points, bottoming at 3997.50 at 11:30, before rallying 47.50 points to 4045 just before 12:30.
Lo and behold, it was just a selling opportunity though, as the ES fell almost 50 points, undercut the low by 2 points and stabilized between 4000 and 4020. It staged a 35-point rally off the 2:30 low, rallied to 4030 just after 3:00 and rolled over into the close, falling ~49 points into the 3:50 cash imbalance reading.
The MIM showed $550 million to sell and the ES sold off down to new lows at 3970 before bouncing in the closing minutes to finish at 3987.50 on the 4:00 cash close. The ES settled at 3989.50 at 5:00, down 132 points or 3.2%.
In the end, things have gone from bad to worse quickly. In terms of the ES’s overall tone, the last few days have been some of the worst I have ever seen. In terms of the ES’s overall trade, volume was high but not huge given the size of the move, at 2.14 million contracts traded.
- Total Range: 129 points
- H: 4099
- L: 3970
Technical Edge
- NYSE Breadth: 94.3% Downside Volume (!!)
- Second 90%+ downside day in three sessions
- NASDAQ Breadth: 84% Downside Volume
- VIX: ~$34
Yesterday we opened with more than 90% downside volume and a TICK reading below 1700, yet couldn’t get a bounce going.
Two 90% downside days in three sessions is noteworthy and there’s been plenty of downside days in the last few weeks. Sentiment is trashed as investors throw in the towel and/or get short. Bonds made new lows but reversed and closed higher on Monday.
A bounce is coming. The question is when and for how long.
Game Plan — S&P, Nasdaq, Bitcoin, Individual Stocks
FYI — there are a ton of Fed speakers today, (see calendar below).
S&P 500
On the downside, the 3962 to 3970 area is key — the Globex low and Monday’s low. If we break these measures and can’t reclaim them, the 3900 area could be on the table.
On the upside, let’s see how the ES handles last week’s low at 4056, assuming it can even get there.
Above 4056 and 4100 is back on the table, followed by 4160 and the declining 10-day moving average.
SPY
The “half-back” of yesterday’s range — the 50% retracement — is near $401.50, which is around where the SPY is trading in the pre-market this morning, up about 0.8%.
After a big down day, a gap-up into yesterday’s 50% to 61.8% retrace zone is not the most attractive setup I’ve ever seen. On the plus side, bonds are adding to yesterday’s reversal rally.
Over $402.60 — the 61.8% retracement — and we’ll be watching last week’s low near $405. That’s followed by $410 to $411, then $413.
QQQ
Above is an hourly look at the QQQ, which is gapping higher by about 1.6% this morning. That move is putting it near $302, which is where the declining 10-ema and 61.8% retracement of yesterday’s range come into play.
I’m not necessarily saying this is a short right out of the gate — assuming we open around this area — but it’s definitely something I’m keeping my eye on from the short side and how I’ll be trying to play it unless it blasts right through this zone.
If the QQQ pushes through this area — and it could! We are due for a bounce — then yesterday’s high at $306 is in play. That’s followed by $310 and $313.
On the downside, a fade puts $300 in play, followed by $298 and then the lows near $295.75.
Bitcoin
Down on the day but up almost 7% from the lows, Bitcoin is bouncing from a major support area.
You don’t have to trade bitcoin or crypto, but like other assets, it’s worth knowing. If this “risk-on” asset gets a move on, then we could see a follow-through rally in other tech names.
On a bounce, see how it handles $33,000. A larger rally could put $37K to $37,500 on the table. A break below $29,000 does not bode well for Bitcoin.
AR
Relative strength leader under pressure. Let’s see if we undercut $30.85 and tag the 50-day. If we do that and reverse back up through $30.85 to $31, it could get a nice trade going on the long side.
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.
- DLTR — B/E stop just to protect profits after a nice move on Friday. → trim on any push into $164.
Relative strength leaders (List is cleaned up and shorter!) →
- AR
- WMT
- PEP
- KO
- MCK
- BMY
- JNJ
- DLTR
- DOW
Economic Calendar
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.
