Weekly Plan 1/22/23
Hi folks-
Last week was one of the first weeks that we started seeing the effects of the US FED tightening take a firm hold on the economic conditions.
The data, across the board weakened- whether you look at the retail sales which have been coming down steadily, or the import activity, inventory build up across different industries, major contractions in the service sector ISM, and manufacturing activity here in the US and softening of residential market with contract cancellations hitting records - all these signs post to an upcoming recession, assuming we are not in one right now.
The market focuses a lot on popular metrics like the employment figures - however these tend to be severely lagging and the employment will be the last shoe to drop, months after cracks develop in more leading indicators like retail sales and inventories piling up.
Amidst this some companies, like Tesla have taken proactive steps to reduce inventory by drastically lowering prices.
From my plan last week, the overall bias was bearish below 4060. The market participant consensus view was quite bullish coming into the new week.
Quoting from my weekly plan last week (gray highlighted text). Skip this below if you are aware of the 4060/3950 level context from a continuous auction perspective:
I think unless we see a close or two above 4060 area, this rally may fizzle out.
Scenario 1: Unless we see a Daily close now above 4060, I think we may see a retest of 3950 support zone.
Scenario 2: A Daily or weekly close below 3950 may target 3850.
The edge case scenario may be continuing FOMO on a close above 4060 this week and the next, however, see my notes below on how I see that ultimately resolve.
Slightly longer term, folks who read this post regularly know I was a bull at 3800 all thru December. This support held very well. I have been bullish last two weeks or so as well as I was expecting a test of 4050 or so.
This test is now happening. I think the next major move will require a break of 4060 on the upside.
I do want to share my thoughts briefly on the much anticipated FED pivot
There is renewed optimism for the longer term equity bulls that a FED pivot in now coming soon and that they will begin cutting rates as well this year.
Whether they cut the rates or not, I will not be too rosy about the prospects for the S&P500 any time soon. I think 4200 is a formidable resistance under many scenarios and will be hard to overcome.
Even if the FED stops or even if it reverses course and begins cutting rates aggressively, I think it may not be very beneficial to the stocks, many of which remain aggressively overvalued. See my posts about AAPL, MSFT, NVDA etc
These stocks need a full scale QE 4 or a QE 5 to pop to new highs again - absent that, I think it does not really matter whether the FED cuts or not. Appetite for another QE is not there right now- fiscally or monetary.
This means that below markets in my view are to benefit more from an impending FED pivots than let us say S&P500 or a meme stock like GME:
Bonds (obviously if the yields fall more)
Gold /PM (precious metals) - Dollar decline story
I would say even the banks could benefit if the yields stay relatively high without the economy falling through the floor.
This is why I am not sharing the same enthusiasm that many bulls are as far as the S&P500 goes when we approach 4200. Now if we are near the June/September lows, I may be singing a different tune but I am not there at 4200!This market could read this econ data softness in data in 2 ways:
Economic data is weak now. The FED is only going to raise rates by 25 BPS in February and there will not be any more rate hikes after that.
Economic data is weak now. This means the FED will begin cutting rates as we may already be in recession.
I think this market is running with the first view point right now rather than worry about the latter. I do think the second point is going to be front and center soon.
So, as we sold down from the weekly upper LIS into 3900, I sensed this and I mentioned this in this Substack several times that I am not convinced these lows will hold, despite the sell off - this was a point in latter half of the week when almost every one was quite bearish as we rallied about a 100 points higher from that 3900 area between Thursday and Friday to end the week back near 4000.
Not only did S&P500 action prove good between these 2 OrderFlow levels, we finally saw a break for the TSLA bulls.
I have been a tremendous TSLA bull near 100 level where I called the low in the stock, which is not a surprise given my posts last few weeks - TSLA finally broke out of the rut and traded almost 35% higher near 140s.
A lot of this action is due to the action in Dollar
One of the favorite talking points of this FED last few months has been that “we can very easily cut rates if we need to” and they have been using this sort of justify remaining hawkish in face of this weakening macro.
I was one of the very first to call a Dollar top in this Substack near 112-114 a few months ago and since then the Dollar has declined to 102 area. The FED has posed to be hawkish but the market has not believed them - which we can see in Dollar, in Gold and of-course in S&P500 prices.
Since the market correctly anticipated a top in inflation rates and I think it is correctly predicting no more rate hikes after February, the Dollar weakness can be justified.
The FED has reiterated they can cut easily if they have you - but what is they can not? Even with high rates, inflation is high. Oil remains high. Some of the commodities still remain high. What is the FED cuts and they go even higher?
This inflation cycle is like no other. While you can justify the Dollar weakness assuming there will not be any more rate hikes, but can you justify the weakness given the current rates may have to stay high far longer?
I do not think so.
In the subsequent sections, I will share my views on where I see the S&P500 bottom out and if it already has bottomed out plus a lot more ! If you have not already, consider subscribing to this newsletter for up to 5 posts every week.