Good morning:
We are coming into Monday morning with nuances that will make day-trading challenging today. We are on high alert for a swing buy signal for swing traders.
The bear case currently rests on three pillars — excessive valuations, inflation, and a hostile Fed. Most are quick to add a fourth, “Recession.” While I am sympathetic to all four and lean bearish myself, I would also caution that the end of the world only occurs once for each of us.
There is evidence in positioning, short interest, put volumes, surging CDS, and rising cash levels that we are approaching panic levels. The risk is not so much that the bears are wrong as they appear overly eager.
For day trading today, I would ride a rally up to +1.5% on the upside, and then look to short. Or, if the price drops by -3% on the downside first, I might consider shorting. Anything in between is neutral.
News:
• The Fed has scheduled an emergency board meeting at 11:30 EST. Panicking British, Japanese, and Chinese Central Banks motivated the emergency. The Fed may have to slow down its rate hikes amid signs that the corporate bond and U.S. Treasury markets could break.
• Oil prices are surging again as OPEC looks to cut production. Armageddon or inflation? It is always something, right?
• A plethora of Fed Governors will speak today, coincidence?
o Bostic at 9 EST
o Barkin at 11:45 EST
o Mann at 14:00
o George at 14:15
o Williams at 15:10
• I am unsure if the Fed will adjust the speech times per the emergency meeting. But the Fed is set up to communicate whatever comes out of the meeting.
• US ISM reports come out ½ hour after the opening, including prices paid and manufacturing. The consensus is around fifty-two. Lately, we have seen mixed economic reports, with the economy slowing but no symphony of indicators yet.
• The PCE (inflation) number Friday was unhelpful – and contributed to stunting the morning rally.
Strategy:
• We went into the weekend neutral as the calendar quarter ended Friday, but nothing has changed. The bears have not made material progress for seven sessions. I still see them as trapped.
• It only makes sense to be short at these levels if you expect a crash. And the shorts could be right, but I don’t like the odds.
• I see a falling wedge structure on the daily chart, normally portending a rally.
• The market is holding near recent lows on a boatload of shocking news – last week alone, we saw (i) three central banks around the world hiccup, (ii) Russia annexing part of Ukraine, and (iii) the sabotage of the pipeline that brought Europe 30% of its energy. Bond markets were teetering everywhere.
• The stock market had a negative week, but it should have crashed already if it were inclined to do so. Is it another Fed pivot hope floor? That could easily give way depending on any Fed announcements after today’s emergency meeting.
• Unless the market crashes soon, equity indexes may deliver another rip-your-face-off short-covering rally. Given that the final calendar quarter of the year starts today, FOMO could kick rapidly into high gear on a rally. That is my base case – even if there is too much news risk to day-trade today.
• But as all of you know, I keep an open mind and will switch on a dime if necessary.
• Overnight traders ran the stops under Friday’s low and brought the price back into Friday’s range. The bears did not make any progress.
• Sentiment indicators are in the zone for a short-covering rally as well.
• Per the Weekly Auction Analysis chart, we have a low volume node at 3590 or so, which is also the 200-week moving average and makes this a logical place for a bounce. An air pocket lies below 3590 (with two ancient unfilled gaps), giving prices a quick ride down to 3375 if the index fails.
Summarizing my thoughts this morning, the market has trapped the shorts unless we have an all-out crash which is not manifesting in Globex. I also see a buy algo operating at this writing. There is hope that the bond markets are forcing the Fed to slow down and make a “we will maintain stability” announcement per today’s emergency meeting. We will know more after the Fed Governors hit the speaking circuit. But the next cycle low of any significance is ideally due the third week of October – so today would start a short-covering bounce only – absent a major policy reversal by the Fed.
A.F. Thornton