Forming the Volatile Range

The past week provided information towards what the next 4 weeks of trading should be like.  The volatile chop range between SPX 4270 and 4430 was resolved with an explosive move to the upside to 4590, signaling the bottom was found for the intermediate term.  That move gave us the upper bound of the new range, 4590.  The selloff on Friday likely formed the lower end of the new consolidation range, but its still to be determined, as the pullback is just 2 days, and could last another couple of days.  In the bigger picture, we're still trapped in the post waterfall decline/fear based volatile trading regime.  That means we're likely to have a retest of the 4250-4300 zone that was defended by the bulls sometime in the next few weeks, after the countertrend consolidation runs its course.  This consolidation could run anywhere from 2-4 more weeks of trade between roughly 4420 to 4600.  After that consolidation, I am expecting another strong selloff testing the support zone around 4300.  

That selloff in late February/early March will likely be fueled by demand for March quarterly expiration puts ahead of the first Fed rate hike on March 16.  Last week, the ECB also threw their hat into the rate hiking ring, hinting at a rate hike later in the year, as they follow the Fed like headless chickens, looking for direction.  The big dates for March are the ECB meeting on March 10, and the FOMC meeting on March 16.  Investors will be wary of loading up on stocks in front of those potential fear events, creating an environment for a risk off selloff. 

The relentless rally in crude oil is more meat for the bears, as higher commodity prices will keep the central banks on a hawkish path, talking tough and eventually having to act tough.  Those hoping for one of those 2021 style V bounces are still looking in the rear view mirror, and not adjusting to the new environment of higher inflation leading to central bank action, not central bank inaction.  

In 2021, Powell was still stubbornly dovish.  He's made a hard pivot towards the hawkish side, and expect him to signal more rate hikes at the March meeting, in order to get the market to keep the May rate hike on the table.  At the moment, March is automatic, but May is still up in the air.  Unlike 2015 when Yellen put in a one and done crying rate hike, Powell is facing higher inflation and rising commodity prices, with much more excess liquidity than back in 2015.  3 straight rate hikes in March, May, and June cannot be ruled out.  After June, Powell probably starts QT at the July meeting and doesn't hike, but probably will go back to another hike in September, with hints of quarterly hikes until they reach ~2% Fed funds rate.  That's my base case scenario.  Of course, a vicious stock market waterfall decline during those hikes could derail Powell's plans, but its going to have to be SPX under 4000 before Powell gets the message from the market and pauses. 

Europe is still reeling from last week's hawkish message from Lagarde.  European government bonds got destroyed last week.  Its funny how investors criticize negative rates in Europe as being counterproductive but then freak out when the ECB actually signals rate hikes to start getting out of negative territory.

On the bullish side, you had commercial hedgers cover SPX and NDX shorts and undo the massive sales of the previous week.  Also, in dark pool activity, the DIX (dark pool index) remains very elevated, showing smart money investors are still accumulating shares.  These type of continuous elevated DIX levels were last seen in the spring of 2020.  So its a real battle of bullish positioning data for the past week, and continued hawkish signals from central banks amid rising energy prices.