Folks,
Market Observations for the Week: The SPY and QQQ sold off early but started to rally during Chairman Powell’s confirmation testimony when he backed off on the “Fed balance sheet” runoff idea as a top priority for 2022. The CPI report early Wednesday will set the tone for both the bond and stock markets. Interestingly, as the 10-yr US rate continued to back off today, the SPY and QQQ rallied into the close – this could set up a volatile opening for Wednesday morning after the CPI report. A hot year-over-year CPI number could pressure rates up and the market down again. Traders put on a lot of “put trades” as the Option Premium Ratio went to a 52-week high at 1.21 today and that argues for a volatile open on Wednesday. If rates have peaked in the short term, that could allow another rally back to test the highs for the SPY and QQQ – how the CPI report comes in tomorrow is key. Bitcoin rallied to test R2 resistance at 42840 today but the rally looks more corrective than impulsive at this point and this is a warning for stocks. Crude oil extended its rally today in impressive fashion and tagged $81.69 and the XLE also extended its impressive new year rally. We remain in 50% cash because of the macro factors facing the global economy (Chinese credit contraction, rising global inflation, and rising global rates, new Covid variant, etc.) and now a more hawkish FOMC that wants to rein in inflation and unwind the Fed balance sheet more aggressively than the market anticipated. Gold extended its rally from Monday and tested $1821 and the GDX followed along – gold needs to close above $1835 to resume its uptrend. The 10-yr US rate rallied to test a 52-wk high of 1.808% early Monday and then pulled back to 1.746% on Tuesday. The USD pulled back to 95.56, which is a multi-week low.
1/11/22 (Commentary for Tuesday) The CPI report looms large for Wednesday and will set the short-term market tone for both bonds and stocks. The rally patterns in Bitcoin and the E-mini did not look particularly “impulsive” today and the fact that both the SPX and the NDX ran up into the close makes us a little uneasy for Wednesday’s open. Traders ran the Option Premium Ratio up to a 52-wk high of 1.21 today and that argues for volatility early Wednesday. Did the NDX finish an EW a-b-c correction from 11/22 into Monday? Maybe. The “bull-hammer candlesticks” on the SPY that we got 1/10 and on 12/20 argue for more rally. The IWM may have finished the right shoulder of an inverse- head-and-shoulder pattern on the daily chart on Monday. Also, to add to the bullish case, the VIX fell in an EW 5-wave decline that looks bullish for the SPX. However, the rally in Bitcoin from yesterday looks corrective to us and that is a warning for stocks. After the CPI report, how we trade into Wednesday’s open will enlighten us. Crude oil defied our bearish analysis and rallied to a higher high at $81.69 into Tuesday night and the XLE(oil stocks) had another big day. We still hold 50% cash as we feel that the macro risks of being 100% long are just too great with the global credit contraction led by China still progressing and a now more hawkish FOMC targeting inflation and Fed balance sheet runoff. The US economy is highly-levered to widespread speculation in stocks, stock options and digital currencies and Bitcoin trading profits may be hard to come by in 2022. Gold responded to lower rates and a weakening USD and rallied up to $1822 – the PM metals and stocks rallied into the close and look extended prior to the CPI report at 8:30 AM EDT tomorrow. In the US, the background monetary conditions have been deteriorating for months and the Fed quickened the reduction of financial liquidity from the US stock market at the December Fed meeting despite slowing global growth concerns. The 10-yr US rate made a 52-week high at 1.808% early Monday and pulled back to 1.746% on Tuesday. The USD made a multi-week low at 95.56 – will we see a quick flip back up to tag 96 again tomorrow.
Big Picture on Stocks (UPDATED) – Our bias is changing Monday night. The QQQ may have finished an EW a-b-c correction from the 11/22 high and the “bull-hammer candlesticks” on the SPY on 12/20 and today look bullish for more rally. The Russell 2000 may be forming an inverse head and shoulder pattern on the daily chart. However, a hotter than expected CPI report early Wednesday could trump everything – tomorrow will be interesting.
Big Picture on PMs (UPDATED) – Gold extended its rally to $1822 into Tuesday’s close and the PM stocks followed along. The CPI report will set the short-term tone for bonds, stocks and gold tomorrow. Gold needs a close above $1835 to continue its uptrend.
- Stocks – The SPY and QQQ both rallied into the close on Tuesday – a pullback into the close would have been more to our liking. The CPI report early Wednesday will set the tone for the bond and stock market.
- Gold – Gold continued its rally to $1822 into the close and the gold stocks followed. Gold needs to close above $1835 to resume its uptrend. The market’s reaction to the CPI report is key for gold.
- Silver – Silver tested $22.84 on Tuesday and needs to take out $23.48 to confirm an uptrend.
- Bonds – Bonds rallied in 5-waves from Monday and look primed for a correction – how we react to the CPI report on 1/12 will determine the short-term trend of long US rates.
- Crude Oil – Crude oil rallied to $81.69 into Tuesday night and that gave us a 5th wave higher on the XLE from the 12/20 low.
- Dollar Index – As the 10-yr US rate declined to 1.746% on Tuesday, the USD dropped to a multi-week low at 95.57.
TURNING POINT DAY
The turn window for this week is 1/10-1/12.
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