I am sure many saw yesterday's price action after a 4 day pullback and are assuming that we have another one of those 2021 style V bottoms and we go straight up from here. I don't expect it to be that simple this time around.
The main reason being monetary and fiscal policy. Its pointing to the obvious, but the answers are usually right in front of us if we don't get caught up in the noise of the daily headlines. 2021 was a bazooka fiscal + monetary policy year. Just like 2020. So people get used to it and lose sight of the power of that 1-2 money spew combo. The rate of change in 2022 is deeply negative for both fiscal and monetary. That is the big monster under the bed.
The stock market always looks forward, but the stock market "experts" keep talking about how growth is going to stay strong because of the leftover unspent/saved stimulus money, stronger job market, earnings will be strong, less supply chain problems, interest rates are still low, etc. That's looking in the rear view mirror. Earnings are a lagging indicator. Jobs are a lagging indicator.
Twitter provides a steady data stream, and most of it doesn't add much value but occasionally you will find some good nuggets. Here is one from yesterday:
It agrees with my past observations, that you get the best bottoms when everything is selling off together. Right now, you are seeing some sectors doing really well (financials, energy) and some sectors doing really poorly (tech, semiconductors, biotech). Dispersion is bearish when the markets are weak. That's why the Hindenburg Omen, although with its fair share of failed signals, is usually a canary in the coalmine when you see lots of highs along with lots of lows when markets are around 52 week highs.
We got a sharp intraday reversal off of oversold conditions yesterday. SPX 4580 was voraciously bought up by dip buyers and it closed up 90 points off the intraday lows. That is not common. It doesn't give you the all clear signal, but it does tell you that there are still a lot of buyers underneath waiting to buy at cheaper levels. At the same time, with the market now pricing in a more hawkish Fed with at least 3 rate hikes and the start of QT later this year, you have a definite psychological ceiling above for the time being, at least until you a get more of a washout and cleanse of long positioning. I did use the weakness to enter a long in SPX, and looking to sell around 4720.
Considering the above, and the lack of fear yesterday, I don't expect any V bottoms and expect the market to stay choppy, within a 4550 to 4750 range until the FOMC meeting on January 26. I don't feel comfortable shorting because of 1. put call ratios are above average levels. 2. possibility (even if small) of getting stuck in a V bottom grind up higher. Playing the long side during this chop, but don't want to hold long for more than 3 trading days, aware of the risk of another downdraft.
Treasuries trading very weak, reminds me of 2018, when you had a hawkish Powell and speculators heavily short and the market kept going lower anyway. Would not surprise me to see 10 year yields go to 2% by March, but reluctant to short. Not really a tradeable market, too early to go long, and the short side is too crowded for my liking.
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10 comments:
Broken New faith from the FED.
i agree likely not a V bottom. I would not be surprised to see a down move very soon. Though hoping for a quick good pop before that
Added more long SPX this morning. Will start selling if we get to the 4700-4720 area.
That seems like a change in view from your post yesterday? Anything changed today that made u comfortable adding to longs and only start selling ard 4700-20 as opposed to get out
I was looking to add yesterday at lower levels, and it ran away from me at the close. Yesterday was a semi cleansing of positioning, especially in tech, so it looked like a short term floor was made and I liked the odds of buying pullbacks today after yesterday's V bottom. When it went back to 4640, I added because the morning dip looked like selling ahead of Powell testimony rather than a real selling wave. Am lightening up a bit here, but will wait to sell most of it closer to 4700.
Just sold my SPX long around 4700. It could go up another 20-30 points and it wouldn't surprise, but not much meat left on the bone on the long side in the short term, and still expect another down move before making the final bottom.
thanks well played. I got out of my shorts too early and was busy at work when the long @bottom opportunity was there - missed it. will wait for a better entry on either side.
I have begun to like my snow long term put spreads, a position I have built over long time. will sell some levered oil and add more to short snow/zs/ponzi names for 3/6mos out planning
Also messed up the short play, had so much potential, and didn't make much on it. I actually think oil goes much higher, so I wouldn't sell oil names right now. Bullish on energy for the 1st half of this year.
oil overbought in near term. trimming as been sitting on big positions for long. will reenter on correction. I think oil can go to 100 even 150 sometime in 2022/2023. The o &uck moment has not arrived yet when people realize how much imbalance there is and how long it will take to fix it. spring may be
I am on the outside hoping to get in on energy on any pullback. But it looks strong as an ox, didn't even flinch on hawkish Fed and equity selloff over the past few days. Shrugged off Omicron like it was a gnat. I think $100 is a chip shot this year. $150 is another story, but that looks doable by end of 2023.
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