Folks,
Market Observations for the Week: The SPX and DJIA extended their rallies to make new all-time highs early Tuesday in the New Moon Timing Window but rising rates pressured the Big Tech stocks down. The pullbacks in the DJIA and SPX were corrective and that implies higher highs after the FOMC minutes on Wednesday. Our bias is that this “bifurcated market” will end badly sometime in the first half of January and give us a strong stock market correction but a lot depends on how the markets reacts to the FOMC minutes tomorrow. Holding defensive stock sectors like utilities and PM royalty companies (FNV and WPM make sense here). Bitcoin twice tested key support at 45500 on Sun/Mon in the New Moon Timing Window but today’s early rally failed once again leaving Bitcoin testing support one more time. What is the recent weakness in Bitcoin telling the market? Crude oil made multi-week highs at $77.64 Tuesday and prices are holding up overnight – this is bullish for the SPX and DJIA. 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 aggressive Fed that wants to rein in inflation. Gold bounced back to $1817 on mid-day Tuesday but then began to base sideways into the FOMC minutes Wednesday. The 21-day Fibonacci step out from 12/15 falls on Wednesday’s Fed minutes and may give us an important low. Rising rates gave the USD a 5-wave rally to 96.42 early Tuesday.
1/04/22 (Commentary for Tuesday) Led by a rising crude oil market and a surging bank sector, the SPX and DJIA made new all-time highs early Tuesday as a rising 10-yr US rate pressured the richly-valued Big Tech sector. Recovery stocks like the energies and banks fared well today in another “bifurcated tape” day that ended with weak market breadth. With the corrective pullback in the SPX and DJIA today, we are looking for higher prices after the FOMC minutes. The back-to-back prints of .89 on Wed/Thurs was a SELL SIGNAL and is still a warning for more downside volatility in the SPX. Our bias is that this “bifurcated market” will end badly at some point in January and the market will undergo a serous correction and that is why we are holding 50% cash. We recommend some defensive holdings like utilities and PM royalty companies like FNV and WPM. Historically, when the Fed has drained liquidity from the financial markets via cuts in bond purchases, big moves down have started in the stock market since 2008. Bitcoin is testing critical support at 45500 for the 3rd time in three days and looks precarious – what is Bitcoin telling us about the health of Mr. Market here? Crude oil tested $77.64 early Tuesday and helped boost the SPX and DJIA to new highs – our favorite oil stocks, XOM, CVX and COP, have all given us a pretty good run since the 12/20 low. 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 aggressive Fed targeting inflation. Another scary signal came from the early December news that the down payments of 20% of first home buyers came from Bitcoin profits – the US economy is highly-levered to widespread speculation in stocks, stock options and digital currencies. Gold bounced back to $1817 but could still correct into the 21-day Fibonacci step out on Wednesday. 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 USD got a boost from rising rates today and tested its R1 pivot resistance at 96.48 after an EW 5-wave rally.
Big Picture on Stocks (UPDATED) – We feel strongly that the SPX is in the process of making a broadening top and that the market is living on borrowed time – our bias is for a major SPX high in the first half of January. The Russell 2000 has already given us a bear market signal – an EW 5-waves down on the daily chart into 12/20. The SPX made a new all-time high at 4818.62 early Tuesday and then corrected into the FOMC minutes on Wednesday.
Big Picture on PMs (UPDATED) – After being slammed down on Monday, gold bounced back to $1817 on Tuesday before basing into the Wednesday FOMC minutes. Gold needs a close above $1835 to be taken seriously here.
- Stocks – Aided by a strong banking and energy sector, SPX made a new all-time high early Tuesday at $4818.62 before correcting. The corrective pullback in the DJIA and SPX argue for higher prices after the FOMC minutes. Higher rates pressured the richly-valued tech sector. The “bifurcated market” that we have seen for months will give way to a stiff market correction sometime in the first half of January. Defensive sectors like utilities and PM-based royalty companies like FNV and WPM make sense to us going into 2022.
- Gold – Gold bounced back to $1817 on Tuesday after its drubbing on Monday. Gold needs to close above $1835 to look bu1llish.
- Silver – Silver made a B-Wave test of last week’s high at $23.48 Sunday night and finished its C-Wave down to $22.67 early Tuesday. How we trade after the FOMC minutes will be key.
- Bonds – Bonds remained under pressure on Tuesday and the 10-yr US rate spiked to 1.686%.
- Crude Oil – Crude oil tested $77.64 early Tuesday and helped boost the SPX and DJIA to a new all-time high. Crude oil is holding up well overnight.
- Dollar Index –Boosted by the rising US 10-yr rate, the USD tested its R1 pivot resistance at 96.48 after tracing out 5-waves higher.
TURNING POINT DAY
The turn window for this week is 1/3-1/5.
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