Stimulus < QT (Round Two)

qt market

Momentum is Orange… What’s the color between yellow and red? The S&P 500’s entire chart flipped today, and there looks to be more selling ahead. I am sitting in cash and building my list for potential shorts come Monday or Tuesday. While some short covering may come on Monday, the trend is looking more bearish. Next week will make or break the market in 2022.

I have been screaming against this tape all week long. Some people kept telling me that the dump wasn’t coming. There was buying and more buying from Tuesday to Thursday.  Thursday’s rally felt like the markets took every last penny before the dump. It kept me up for a little while on Thursday night. I moved to cash earlier this week. I aimed shorting this market, accordingly, on the SPY, QQQ, IWM, and Apple… And then, it took a long-awaited dive.

It is very hard to be “short” in this market. Add $1 trillion in global stimulus like we saw from China, and the markets will climb irrationally. But today’s 1,000 drop on the Dow Jones appears to be the start of something I’ve predicted for a month. A return to sobriety in these markets. If Friday was Round Two of stimulus versus the Fed… Jerome Powell just landed a punch to the head of the Bulls… and won the round. 

Higher for Longer

For weeks, the markets have laughed in the face of higher interest rate hikes and sustained levels of Quantitative Tightening. Fed Chair Jerome Powell and company have said they must do more to tackle inflation. Look at the Personal Consumption Index (PCI) inflation level today. Some people cheered because it fell in line with expectations. A sober person who wasn’t trying to sell their book would admit that it was STILL AT A 40-YEAR HIGH.

Powell predicted pain for the market and economy. He explained that the Fed has to get inflation under control because it impacts the working class and poor Americans. How quickly Wall Street forgets this very simple fact. Inflation requires a decisive blow. And it appears that the markets actually believe him after the fourth reminder that it will take considerable time to cool inflation. Today’s selloff was the first step in closing that equity gap. As I wrote yesterday:

According to Bridgewater Associates CIO Greg Jensen, we are currently 25% higher than the traditional relationship between asset prices and cash flows. There would need to either be significant economic growth SOON to narrow that gap… Or a sharp decline in equity prices.

I think the latter is the pathway. Meanwhile, the Fed will likely raise interest rates by 75 basis points in September and could push toward 4% by February 2023. 

According to CME FedWatch, which tracks the probability of rate hikes by Fed meeting, the odds of a move to 4% on the Fed funds rate by that month is above 11%. 

What’s Next For Our Market

I’m anticipating a full switch in momentum in the next two to three days, and with it – a sharp decline that rivals the previous downturns we’ve seen in January, February, April, and June. Now is the time to have a plan. I always start with the iShares Russell 2000 ETF (IWM) as my baseline trade. 

The IWM always gives me a place to start because I like to focus on its resistance points and how far it has traveled south in periods of negative momentum. This chart from NimbusCapital (via TradingView) shows that once the IWM falls under resistance at the $190 level, the clear downside is at about $170. In fact, every time that we’ve seen a clear negative signal on the broad market…

It’s hit at least $170. And here we go, right? The September 12, 2022 $176 put closed Friday at under $1.00. That contract would expire the week of Quad Witching and the release of the August PPI and CPI report. If momentum goes negative, this would be an ideal target, with a possible upside of 500% if the IWM hits $170 on or before that date. It’s aggressive, but so is selling in negative environments. 

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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