Miserable market

I wanted to make this post sooner but I've been busy. In my previous post I ended off by saying that the market was ST overbought and to watch and see if the market could manage to find a way to not fall apart as it did prior times this year when in a similar condition. Well, it failed the test miserably. A hotter than expected CPI report sent the market on its way to new lows and sealed the deal for a 75bps hike. There's clear signs of slowing growth ahead and we now run the high risk of the Fed hiking rates by looking in the rear view mirror rather than what lies ahead. Clearly they must be seeing that housing has stopped dead in its tracks and that's the main thing that Fed rate hikes will impact. They've done enough. Yet the rhetoric from the Fed is that they will continue to raise rates throughout the remainder of the year, yet they say they are not trying to create a recession. That's exactly what they will do if they continue on this path and it may already be too late.  There needs to be a pivot soon. After the July meeting they should announce that they may stop further hikes as there are clear  signs of cooling in the economy. They should  say "we don't want to make our decision on interest rate policy entirely based on the latest rear view mirror CPI data while there are clear signs of economic cooling and therefore abating inflation pressures ahead". Don't hold your breath for this because the Fed does in fact have the reputation of making decisions by acting upon rear view mirror data which means they are only gong to pivot when it's too late and the economy is well on its way heading towards the shitter. Could it be different this time? Could they see the writing on the wall and be proactive rather than reactive?  The Fed did say that that they don't want to induce a recession but that's only going to happen if they look at forward looking data.  I won't give Powell the benefit of the doubt. With the mid term election coming you would expect some sort of policy responses to fight inflation whether it be a gas tax holiday, removal of Chinese tariffs, US oil export ban and/or incentivizing more US drilling for oil. These measures may turn out to be fruitless but it could spark a temporary rally. 

I also mentioned last post lingering doubts I had about the market. Despite indicators showing that there's a extreme amount of pessimism there are some holdouts which suggests otherwise. First off is  fund flows. It continues to show lack of capitulation and FOMO anytime the market stages a rally. Last week there was a $16 Billion outflow which is good (to signal pessimism) but given the damage of the market year to date we should be seeing far greater outflows. Another lack of capitulation indicator is positioning from AAII. Although they have been showing record bearish sentiment, it's not being reflected in how they are positioned as they are 67% in equities which is still high. It needs to drop off the low 60's at the very least which is what it did at the end of 2018 after the market had dropped 20% from it's peak. .At the COVID low it got to 55% however, that was after a 35% one month drop in the market and so 55% shouldn't be a target.  Let's see how that changes when their positioning is released at end of month. The other thing that's bothering me is bitcoin. The fact that it was still lingering at 30K told me the excesses and silliness of 2021 are not fully washed out yet. It has since tanked getting as low as about $17.6K  and now back above $20K. All the shenanigans and leverage that have underpinned cyrpto are unravelling. From a pure ST trading perspective, there was enough negativity and extreme selling pressure to warrant a bounce but there's still no shortage of people out there like that smug self-righteous clown Kevin O'Leary and that idiot President of El Salvador who are claiming what a great opportunity it is to buy more. I remember back in 2017 when bitcoin was under $5K how people were talking about it. That's were its ultimately heading and then lower still. Just look at the weed stock mania and the dot com mania to see where bitcoin is ultimately heading. There will be interim rallies no doubt, some of which could be quite vicious.  Just how much is the market and/or economy tied to crypto? There has been a pretty strong correlation of crypto and the NASDAQ for quite some time now but in the last few weeks has decoupled. That's a market positive, but have we really felt the fallout from crypto yet? I don't think we have. Layoffs in the crypto space have been announced. There's got to be quite a few hedge funds that invest in crypto which also invest in equities.

Switching back to market sentiment. That BOA bull-bear indicator I showed before hit 0. That's literally as low at it gets. I remember seeing it at 0 in April 2020, however, I'm not sure if it was 0 in the midst of the carnage in March 2020 and hence early, but even if it was, it was a great long term buy signal . In hindsight we can say that the COVID crash was a major correction in a bull market just like the 1987 crash as it was rather short lived. Until proven otherwise, we have to operate in bear market parameters given that the market has been in a downtrend for several months. In a bear market, negative sentiment can be tolerated for quite some time before resulting in an upside corrective move, just like how in bull markets bullish sentiment can be tolerated for quite some time before a downside correction happens. This is why a lot of the contrary indicators haven't worked as well as before. Only when you get prolonged extremes will it work and it may only result in a ST corrective move. That's where we could be right now. There's enough negativity to suggest a multi-week rally is in the cards.  Bulls  will say that that so much negativity is priced into the market and so we must be near the ultimate bottom. We've been hearing the "it's all price in" argument all year. It's been more wishful thinking than anything. Certainly, there's a high degree of negativity priced in and we are at a point now where just the slightest glimmer of good new could spark a major rebound but as I've been saying all year, you can't give the benefit of the doubt to the bulls just yet. Although there's high negativity, its justified. The spike in interest rates and inflation have resulted in economic damage that we have still not yet fully felt. Again, I understand that the market has priced in this to a certain degree but we were just at 52 week lows last week. That disproves that all the bad new is priced in. One thing I've noticed which is showing a glimmer of hope is how the NASDAQ's advance/decline ratio did not make a lower low last week and is showing positive  divergence.  The NASDAQ was the leader on the downside and it needs to show leadership to the upside. Meanwhile the energy sector has gotten hammered recently. The market desperately needs energy prices and rates to cool off. Oil may have made a double top. The bearish interpretation of this is that it indicates significant slowing global growth which is going to accelerate. The bullish interpretation is that this could signal a much needed relief in  inflation and perhaps the the oil market is becoming better supplied which would give the Fed more impetus to back off should energy prices continue to slide. I admit it's way too early and perhaps naïve to suggest this could be the case.

The bottom line here is this. There's enough to be worried about if you're either bullish or bearish in the ST. In the ST the market is once again oversold and sentiment is quite negative (with some holdouts)  however the bears have macro on their side. Things are incrementally going to get worse economically before they get better. Fundamentals trump sentiment in the medium and long term and there's a real risk that the wheels can fall off quickly because of some sort of blow up.  If that happens we see can see mounting layoffs and collapsing earnings resulting in much lower lows for the market. The word "recession" is on everyone's lips and quite frankly, for good reason.  For the market to start looking beyond the valley and ignore any upcoming bad news it needs to sense an endgame to this rising rate cycle at a point where it's not too late for us to avoid a painful recession. It's possible we can get a technical recession without the accompanying layoffs and earning collapse but do you want to hold your breath for that? I don't. That's not the norm. 

Is it possible for us to look back at this point one year from now and say "that was the bottom""? Yes it is, but it's also just as possible for us to look back to say that we were at a point where things were about to get really bad, maybe not tomorrow but by the end of summer or early fall.  There's definitely the potential for this when you look at the excesses of housing which right now is hurting.