Why FOMC can sink the markets.

Weekly Plan 1.28.24

Hey traders-

Quick thoughts for this week on the FOMC, why I think Powell will try to sink the markets and why I think these efforts will be futile.

But first, a quick recap of what worked, and not so last week.

My main expectation this past week was to see us sell down from 4890 into 4811, which I expected will have seen dips bought.

This did not quite work out that way. We traded up about a percentage higher than 4890, and saw sellers retain control of 4930 throughout the week, but never really getting any traction below 4890.

Momentum in the AI stocks, like NVDA, SMCI, AMD etc has been extremely robust and has helped the general market remain bid. Though these stocks are extremely overbought, this has not yet led to any type of sell pressure on the general market.

The other thing that did not work was my short term bullish bias on TSLA. I had expected some relief for TSLA in the short term at 218, however the Q4 earnings were perceived to be extremely negative by the market and we saw about a 12% dip in TSLA to end the week near 185.

My bullish bias on Bitcoin and Bitcoin related stocks like MARA did well. MARA rallied hard from my support levels and Bitcoin rallied about 5000 dollars from my support levels which I shared BEFORE the BTC ETF were launched a little over 2 weeks ago.

This is going to be an extremely active week and you do not want to miss any action this week. Lots of potential set ups are in play which I will share momentarily.

In related markets, there are a few signals which portend to further gains in the general market. Then there are a few signals which are pointing to more downside.

The first of these signals is in the strength in Oil market. Recently I have been bullish on Oil market at $70 (WTI). I have been bullish on XOM at 98.

This week we saw a very strong rally in WTI of almost 800 ticks to close near psychologically important $80 level. Technically, oil appears to head higher. Since Oil is a key ingredient in virtually everything we use, even if you do not drive a gas powered car, it can point to higher inflation pressures across the board.

Higher inflation by itself is not an issue for the tech stocks and the general market, as long as this inflation is allowed to run high without intervention from the Central banks. It only becomes a problem when the CENTRAL banks, like the FED, decide to do something about it.

The Central Banks are limited in what they can from here on to what inflation does. First off, the rates are already quite high at 5.5%. Remember, the market expectation was to see rates down to 2% by this time of 2024. Now the debt payments in form of interest alone are extremely high- both for the average consumer as well as the governments around the world. I do not see a scenario where these rates can head higher from here.

You also then have the banks around the world in a race to bottom when it comes to devaluing their FIAT currencies.

I do see a lot of scenarios where inflation can head higher from here at 3%. Most of inflation gains I think will come from higher energy cost as well as higher services inflation in form of payroll and Human Resources related costs for companies. Without layoffs and higher unemployment, the expectation for higher wages becomes entrenched and can keep inflation higher for longer, in that category.

I think this is necessarily not a bearish scenario for the markets on the equity side, even though the discounted future earnings can take a hit for most of the S&P500 companies, except the Magnificent 7, or 6 if you exclude TSLA.

The related markets which are flashing RED signals are the US dollar, Gold and the largest market of them all, the US Bond market. These appear to signal a more hawkish FED.

Let me put it this way- if Oil was up, and the Dollar was down, I would assume this is a signal that points to gains in the equity indices.

However, Oil is up, so is the Dollar and the Bonds are lower. This combination does not make a lot of sense to me and one of these has to give up. However, if I were to pick an option, I will say this is probably negative for the equity markets in the long run, if this stays this way for next few weeks and months.

If this is the case, this will play out over next several months. However, in the short term, FOMC will be the key driver next week. Below section is what describes my thought process how this may play out.

My levels for this week

It should come as no surprise that 4930 and ~4810 remain my key levels for this week. These levels are for Emini. For SPX, the key levels will be 4910 and 4790 respectively. Emini closed near 4915 for the week on Friday.

Recent Econ data has been supportive for the chip stocks like that of NVDA. I think that is unlikely to change in next few weeks with the exception of what messaging comes out of the FED on the 31st.

I think Powell will be more circumvent around his prior messaging about declaring a clear victory over inflation this time around. He will remain non committal to rate cuts (atleast the timing of them) and will remain firm on his messaging around continued QT. I think March rate cuts are out of the question, but I can see May rate cuts on horizon.

With this event risk backdrop, below are a few thoughts on the price levels for next week-

Scenario 1: I still think that any dip caused by the FOMC into 4810-4830 level could remain supported for another test of 4900s. This is supported by my theory that the chip and AI stocks probably have more room to run on the upside before a turn lower. More on this later in sections below.

Scenario 2: For the next trend leg up or down, traders need to take out 4930 on the upside, or trade down below 4830 AND remain there.

Truly I think this market believes it is going to get rate cuts, and I think it will get rate cuts soon. The open question then remains for me that when will the FED stop tightening and start printing again. Given this bull market has started out of 0 rate cuts, AND the labor market remains very strong, the FED has 0 reasons to end the Quantitative Tightening any time soon. The retail consumer continues to spend the money that s/he had saved up and for those who do not have savings , they continue to soak up credit card debt.

This however will not last and I think by June-July, this will be apparent to all. This is the time when I think we start seeing first cracks in form of negative GDP growth.

Let us now talk about some other things like TSLA and some earnings plays.

SOFI

SOFI earnings are on the 29th. This stock has taken some heat recently but the insiders have been net buyers of this stock.

Insider trading is an extremely important indicator which should not be ignored especially when it tends to show up on low prices.

SOFI debtors tend to be college educated, with advanced degrees, and on paper that carries lesser risk of default. SOFI also has branched out into other exotic products of late which is aided by perception of FED rate cuts.

This is why I think SOFI stock could be supported on any dips and could target $10 or higher. It is about $7.5 at the moment.

NFLX

With NFLX I had shared last week that the option prices were simply too high for my liking. I had considered 480 PUTS if the stock held 510 after its earnings drift.

Well, it actually gapped up 10% and is now trading 570.

A lot of these companies, Netflix included have a very narrow view of looking at things. The objective is to beat stock price sell off at any price. So they hire extremely book-smart, Ivy league graduates and expensive consultants who then come up with novel ideas like $6.99 ad based subscription services to boost the subscriber count at all cost as Wall Street is also equally short term and is looking at the subscriber growth to buy the stock.

This will work in the short term.

In long term, I think this is not sustainable and will eat away at margins. We will worry about long term later, but in the short term, I think this stock could be headed higher from 570.

For the FEB 2 MOPEX, I like the $580 CALL which is currently bid at $6. Keeping in line with rest of the general market expectation, I think this stock could dip briefly post FOMC but could remain supported for an eventual test of 580-600.

If so far you enjoy this blog, I ask you subscribe, like and share as it goes a long way to support the publication by traders, like your self. As soon as I figure out the new format of content delivery, the prices are going far higher. Not a bad time to lock in low rates forever.

TSLA

With TSLA, 177.5-180 will be key levels for me for this week.

I think if TSLA were to sell down into these levels, they could be supported for a move back into 190.

At time of this blog, TSLA last traded 185.

GRND

Grindr is the most prominent social media network for the LGBQT community. Recently is cleared $8 level and has been consolidating here around 9.

Traditional match making has a lot of competition, however this one section is niche and the stock could benefit from this.

I like this consolidation technically and I think if it holds $8 area, it has much higher to run into 12-13 and beyond.

Real Estate

With Real estate, atleast on the residential side, I think there are 2 unavoidable factors which are bearish in the short term.

One is the seasonality itself. Come March, I expect a flurry of new listings which will drive prices down across major markets.

I also think rate cuts are potentially bearish for the housing market. There is a lot of potential selling energy which is contained right now as potential sellers are waiting for lower rates to sell and move on. Rate cuts in May solve this.

Then in some geographies, like on the West Coast there are set to be a series of new laws and taxes to go into effect which are hostile to the homeowner in my view.

These states have large deficits which need to be filled in order to continue the social spending programs which I think are going to get wider, especially with millions of influx of people who will need some sort of fiscal support from the states for healthcare and housing. I am quite bearish on California housing which I think has to get worse before it gets better.

If I am in the market for a new home, I think I can get better terms as well as better pricing of 10-15% or more in next few months.

SAVE

Can SAVE now be saved?

I had few very good calls on SAVE. First being that I expected SAVE to sell off from 8 to 5. This was correct.

I then expected it to rally from 5 to 8 which again was ok. Last but not the least, I expected it to sell down again into 5 which it did.

At this point it is now around 6.