Market Report 6/14/16

Take a look at the SPX chart I posted last week.

As I’ve been saying for quite a while now, the SPX is trapped between support and resistance. Last week it pushed up into that resistance zone and came within 2 ATR’s of an all-time high. But that area proved to be resistance (for the time being) and it closed last week down a few points from the prior week.

We had two weekly closes at 2099 in a row, then a 2096 close Friday. Talk about treading water…

But this week should bring some real action for a change. On Wednesday the Fed is going to explain why they aren’t raising rates this month, but will infer that a July rate hike is imminent.

How the market reacts to that is the big question. Some are saying the selling Friday and any weakness we see ahead of the Fed announcement are a “trap” for the bears and once it’s over the market is going to rip through those all-time highs.

I cant’ remember the last time I heard the phrase “melt-up” used as frequently as I have the past couple weeks.

But on the other hand it seems like there are a lot of traders that are very wary at this juncture – since it’s clear that the bigger macro picture doesn’t support current valuations. Even the most bullish analysts on Wall Street are talking about a summer “swoon” and all the hedge fund Billionaires are suddenly betting on a big drop – and buying gold.

At least that’s what they’re saying…

It’s a very strange time and this week should provide a lot of fireworks – well ahead of the 4th of July. I would say Wednesday’s Fed meeting could be considered a “binary event”. A certain amount will already be priced-in but there’s always the possibility of a big reaction – either way.

In September of 2015 the conventional wisdom was that they were going to raise and they didn’t – and the market dropped substantially.

Then of course there’s this Brexit thing which they seem to be making a big deal about and don’t forget this Friday is end-of-Quarter options expiration. As if that’s not enough, all this macro stuff like negative interest rates and European banks in trouble, currencies in turmoil etc.

Throw in the fact that US corporate profits have been declining (as I’ve pointed out for a long time now) and I would tend to agree with that one guy that said “the risk is to the downside”. I think it was Gundlach.

But then again we have TINA (there is no alternative – to stocks) given as a reason that everyone will continue to put money into stocks. Even though we have seen weeks of significant outflows from funds.

All in all it might not be a boring summer after all. Remember last August?

August-2015-stock-market-drop

I’m not saying that’s going to happen again – but it’s interesting to note the reasons given for that drop. That’s from CNN but I did a lot of research and those are the standard narratives all over the financial media. I keep that chart to help prevent me from getting too complacent at any given time.

If you looked at the SPX chart I posted last week, you see there’s a TON of support below the current price. It’s been there since mid-March when the SPX broke over the 200-day moving average. It seems like a long way down to that support zone but it’s really only a few percent.

I’m not even going to post the chart this week because there’s not much that’s changed and quite honestly those support and resistance zones are still the levels that the market could bounce between like that old pong game from when I was a kid. Until it decidedly breaks through one of those zones, it’s like a repeat of last year where it traded in a choppy, wide-range with no real trend.

Speaking of which the trend is sideways if you go back a year. The trend is up if you start at the February lows. As I’ve been saying, it’s not out of the question that we get a new all-time high – it could come this week – but the big question will be follow-through.

The financial media will get all whipped up in a frenzy and try to make “getting back to where we were last year” seem exciting. But I’m thinking there’s the possibility it makes a nominal new high and then rolls right back over.

Everything hinges on SPX 2100 – that’s the major over / under level until further notice – until we see 50 points above or below it. Last year 2100 got crossed like 65 times. It was like a magnet and right now its like deja vu.

At this point in time it seems like everything is interconnected, but I’m thinking oil is the top correlation to pay attention to. Oil had been moving higher since the February low at 26 and the market has been following in lockstep. Remember, both bottomed on the exact same day in February.

So oil finally pokes it’s head above 50 last week and the market is within spitting distance of that all-time high and then Friday oil sells off and the market follows with the first real down day we’ve seen in weeks.

If oil is headed lower then I think the market is too. And the funny thing about oil is that no one really knows where it’s going and the predictions have been all over the map and consistently wrong for as long as I can remember. The financial media constantly writes article and brings on analysts that say oil is going to either 20 or 100 over some point in time. The surveys tend to have a recency bias and with oil just moving from 40 to 50 most would suggest it stays in that range.

Last year it rose +50% and for about four months it traded between 55 and 60. It was hard to imagine it had a trip back down to 26 at the time. So the idea here is to expect anything and watch how the market correlates to the price of oil.

After all the Fed interest rate drama is over I think that correlation will still be intact – over the medium-term.

Individual stocks have become quite volatile and on a day to day basis it’s a constant rotation among sectors and hot stocks. The problem is that the cycles are short and can turn on a dime. You see how the oil stocks responded Friday. By the way the VIX shot up to 17 in the blink of an eye.

And everyone’s a gold bug now… That’s quite unusual and perhaps a bit unnerving. Many of you probably don’t remember I’ve been fond of gold since y2k.

Check out this comparison chart of gold vs the S&P500 since the GLD ETF IPO.

GLD_vs_SPX_since_IPO

Over the years with the exception of the 2009-2010 run-up, the conventional narrative on Wall Street has been to avoid gold – it’s a terrible investment. Now we all know that a comparison chart is arbitrary because it always starts with an arbitrary point in time. But using the GLD IPO date made sense to me and it shows how sometimes the conventional wisdom is wrong.

The thing about gold is that the sentiment works a bit different than other things. The more people start to think of gold as a good investment the more the price will likely go up – as opposed to when everyone is on the same side of the sentiment boat in the market.

To wrap things up, this week and next – are going to be particularly volatile and exciting and it won’t surprise me to see wild erratic swings in both directions. Between the Fed language, EOQ opex and Brexit, I’m not sure anyone has a good read on where things land 2 weeks from now. Many have opinions and some have predictions but I’m inclined to watch events unfold and just keep an open mind.

The price action will determine whether we should play defense or whether the proverbial “melt-up” of which they speak is on the horizon. This is a high-risk – anything can happen week. If the market looks like it’s starting to take off, we may see FOMO (fear of missing out) enter the picture and that would be the catalyst for what would feel like a melt-up.

I say we just take it as it comes and try to focus on individual stocks with constructive patterns. I posted a few new ones in the Chart Feed and will be posting more as we go. I may or may not be inclined to open a new swing trade before the Fed meeting Wednesday. But a couple of those charts are very tempting so I’ll be keeping a close eye on them this week.

Join me on the shows and we’ll go over the charts we’ve been watching and I’ll bring some new ones as I find them.