Did you fall for the market’s latest “bull trap” on Tuesday? Last week, I explained that institutions have been selling into short-term rallies. They’re trying to ditch positions in overpriced tech stocks and communications companies – without tanking their positions. This morning, the markets appeared to cheer that the Consumer Price Index (CPI) wasn’t as bad as some had expected.
Really? Yep. Market pundits said that investors were okay with the 1.2% month-over-month figure. They said that is why the market rallied in the first 30 minutes of the day. They said that the markets were happy that the number wasn’t worse.
I don’t know what these people put in their morning coffee – but it’s not rational. The 1.2% projection wasn’t even on my radar until last Friday. Kalshi – a prediction market that allows investors and traders to bet binary options on outcomes had just a 46% probability that the month-over-month increase of OVER 1.1% would happen.
So – that’s just not accurate. And it once again highlights a lot of the comical rhetoric that comes from our financial media AND their inability to understand momentum in the market. Let me show you the market’s next move.
It’s All About Channels
Once again, I highlight momentum in the market and channels in an index. Over the last few months, there has been a lot of chop and uncertainty linked to the 15 different geopolitical and economic risks that impact this market (yes, 15).
When market momentum is positive, it creates a stair-step pattern upward. It typically shows a short-term rally, profit-taking, and another leg higher.
When momentum is negative – confirmed in the afternoon of April 5 – it starts to make a stair-step pattern down. This selloff consists of short bursts of selling, some short covering, and then aggressive selling once again as institutions capture higher prices.
Meanwhile, a downward channel begins to form – and exhibits one-directional movement over a weekly to a bi-monthly pattern.
We see lower highs and lower lows as the markets continue to drop. We want to see stocks break out of this pattern before they can make their next leg higher. To break this pattern, we need to know a lot of capital comes off the sidelines, and volumes pick up.
The last time we saw this pattern snap happened after the Fed’s March meeting. We heard Fed Chair Jerome Powell confirm the central bank’s plans on interest rates and suggest that we would not see a recession shortly. Capital came right in after that statement.
It also transpired at the end of January when we saw significant executive insider buying. Then, after what appears to have been the strongest level of insider buying since April 2020, investors came pouring off the sidelines in early February.
There appears to be just one catalyst right now that can break the pattern: Earnings. And we’re starting coverage tomorrow morning when the most important bank in the United States – JPMorgan Chase (JPM), kicks off earnings season.
What to Watch
This is going to be a very important earnings season. Everyone says that it will be the most important “insert whatever you’d like” ever.
However, with so many negative factors in the market, it will be essential to hear what else Jamie Dimon has to say about the various threats to this market. We have:
- Recessionary concerns
- A Fed that isn’t providing stimulus anymore
- Nine interest rate hikes are coming in 2022
- 40-year highs in inflation – stagflation
- Significant supply chain problems
- The tapering of the Fed’s $9 trillion balance sheet.
- Oil prices back above $100, with a possible upside of $140
- Natural gas prices are at 14-year highs,
- A massive shortage in agricultural inputs,
- An emerging market crisis and sovereign debt problems in places like Sri Lanka
- Potential war crimes in Ukraine and a war that likely won’t end soon
- An inverted yield curve
- Europe’s ongoing energy crisis
- Weakness in China’s economic growth
- The 10-year bond approaching 3% with cores of stocks STILL trading at nosebleed valuations,
- AND MORE!
As I say, cash is your friend right now. When momentum turns positive again, I’ll report back.