Weekly Plan 5/31 “22
Traders-
In this newsletter I will be sharing my thoughts if I see S&P500 back below 3800 this week or do we continue to see this melt up that started last week at the lows into 4300 and beyond.
The melt up was forecasted by me at the lows around 3850 in this newsletter and this week we came close to that 4200 intermediate time frame target.
Here is the link to previous weekly newsletter.
I will also recap last week's key ideas and how some of my calls like the ZM, COST and NVDA did.
However, I want to start the current action in the market with little bit of longer term context…
The nature of bear markets
Based on my study of similar downturns in the past, an average bear market can last about 18 months or more. Most recent bear market of 2020 was notoriously short and lasted only a few days. This was an acute bear market and the authorities stepped in with unprecedented monetary and fiscal stimulus and they were able to cancel the bear market within days of being born.
You could say this particular bear market of 2022 was even shorter than that of the 2020? We got a 20% shaved in S&P500 and that lasted only for 2-3 hours on that fateful day last week at 3800 and thereby we managed to kill the bear market last week?
I highly doubt it. I think this bear market is only beginning and has room to go. Much more on that later, down the page.
Here is another interesting metric of bear markets.. we can have several, in many cases 6-8 or more rallies of 10-12% or even more in bear markets.
If you are in the camp, like I am, that the bear market has started this year, you could say perhaps two things with confidence in light of the above facts:
This bear market is now about 5 months old and has about a year to go before we really can see the bottom.
This recent 9% plus rally is the 2nd large bear market rally, the first one being seen in the February earlier this year.
If you are in the camp that the bear market is already dead, then none of this should bother you and we should see new highs soon then if your assumption is indeed correct :)
Let me know which camp are you in? More bear market or end of the bear market.
The second thing I want to talk about before diving deeper into the levels and some other ideas for this week is the primary drivers of current market .
There are several explanations about this current downturn. They range from the war in Europe to extremely high inflation.
In my opinion whatever the root cause , the end result is the same - a weaker and stressed consumer. American economy is predominantly a consumer spend economy. So I think it is safe to call this bear market a consumer spending caused bear market.
If you look at all the signs of depressed consumer spend, you may want to ask your self if any of that has been alleviated in last one week when we saw S&P500 rally almost 10%?
A key metric I like to use is how much new credit card debt the consumer is taking on. And that debt is through the roof with 50 billion dollar plus new credit card debt taken in last month alone! With the credit card APR of 17% or more on average, and in most cases around 20-25%, this does not bode well for consumer giants, like AAPL.
Next question I ask is where is this debt going to?
Is this new spend on the latest and greatest from AAPL? I do not believe that is the case. This spend is mostly on meeting necessary items like gas and food. All or most of this money is going to XOM and OXY. These oil companies while what they do have an outsized impact on our day to day life, they are only 2-3% of the S&P500 .
With increased credit card debt, with average rate on this debt now hovering around 17-18% , I think the consumer is getting weaker, not stronger. And the economy dependent on the consumer as a result is getting weaker, not stronger.
So does this mean the current run in S&P500 is over and we can start crashing next week?
Not so fast.
Read my context and levels below to find out what I am thinking, what may play out the holiday shortened week next week. I just wanted to highlight these two aspects, the nature of bear markets and the state of the American consumer before digging deeper into my analysis for next week.
For today, Memorial day only, I am offering a flash discount of 2%. This discount is valid just for today. Click the link below to get it.
The newsletter is not a signal service. This is simply my opinions, thoughts, some levels and just a personal journal :)