Momentum is Red. The S&P 500 continues to bounce around that support level of 3,900, and we could see some fireworks during Quad Witching on Friday. But something is interesting about how traders bet on higher interest rates in the second and third quarters of 2023. And we need to discuss why being open-minded to short-term rallies is more important than ever.
As projected, the SPDR S&P 500 ETF (SPY) flirted with disaster again Thursday, breaking under the key support level of 390. Instead, the S&P 500 is dancing around that 3,900 level. If we move lower than those levels… look out below for the bottom.
While some traders celebrated the top-line retail numbers, we have a problem with the economy. The AtlantaFED again slashed its third-quarter GDP estimate to 0.5%. I’ll still take the under… I fully expect that we’ll have three or four negative quarters of economic growth on top of a tolerable job market.
The key thing to remember about the job market is that we still haven’t completely recovered all jobs lost from COVID-19. The jobs market is still seeing way too many Americans holding second jobs. That doesn’t make for a robust economy.
Two Charts and a Forecast to the Bottom
There are two charts that you need to see today. The first is the long-term price chart for Meta Platforms (META). Mark Zuckerberg’s big bet on the Metaverse (at least for the time being) isn’t a huge hit with investors.
We’re now back to testing the December 2018 and March 2020 lows. This is extremely bearish. However, I’m also starting to see a market aggressively pricing in higher interest rate expectations now through late 2023. At some point, META will be a buy. But it takes a lot of guts to start buying up the stock ahead of the Fed’s meeting next week.
After more than a decade of cheap money policies, it’s a reminder that everyone sells at once – but it takes a VERY long time for the price bubble to move. I recommend you start putting together a watchlist of stocks that could experience rebounds when we have three important factors that tell us when the bottom comes.
The bottom will come in this order:
- The Federal Reserve will cut interest rates.
- Executive Insiders will engage in what could be the most aggressive period of buying their stocks since March/April 2020.
- Momentum will turn positive in the market – and we will take off from there.
That rally won’t happen next week… and probably won’t happen in 2023. But it’s important to know that this will be the pattern. I highly recommend cash as a position when momentum is negative. There’s a possibility that we see another big leg down in the technology sector.
Still, this downturn for META will be the subject of many conversations. The stock is now off 60% from its 52-week high. That is severe wealth destruction that could take more than a decade to return to 2021 highs. When we move into oversold territory on META, I may look to see out of the money puts… but not today. Next, take a look at this chart.
SPY Circa 2018
The last time the Federal Reserve aggressively tapered its balance sheet, the markets didn’t like the process. In 2018, the Fed expanded its balance sheet cuts from $30 billion per month to $50 billion per month. The markets freaked out… The bond market sold off aggressively in November 2018.
The S&P 500 ETF (SPY) sold off nearly 19.8% in December 2018. But note the directional moves of the S&P 500 during that time. The market was range bound in October, November, and December of that year before we finally reached a massive selloff. After this massive drop in December, the Federal Reserve gave up. It started buying assets again… and started cutting interest rates.
This “giving up” is what so many traders have bet on in the last three months. But we’ve seen a big shift in rate expectations now for Q3 2023. The odds of a move above 4% by February 2023… and up to 5% in July 2023… are increasing by the day.
Right now, the S&P 500 ETF (SPY) is bouncing at resistance of 390. Its upward range level is 415. I would not be surprised to see this market trade similarly to what we saw in those months of 2018 before the market cratered.
You must pay close attention to short squeezes… and watch the probabilities of rate hikes for the Fed. The odds of a 100-point hike on Wednesday has increased to 22%. If the Fed only goes to 75 points, those higher bets will need to be unwound. So don’t be surprised to see us move higher next week. If you’re shorting this market… you might want to take profits by Monday.