Folks,
Market Observations for the Week: The DJIA made a divergent new high today but the FOMC minutes, with all its new Fed governors, surprised the market with its hawkish tone and the SPX dropped 93 points. Our bias was that this “bifurcated market” would end badly sometime in the first half of January, but is this the time? How the SPX trades on Thursday will give us a clue. The weakness of Bitcoin has been warning stock market bulls that something was wrong behind the scene. Today, Bitcoin broke key support at 45500 on its fourth attempt in four days and is looking weak Wednesday night. Crude oil made new highs at $78.58 before rolling over after the Fed minutes – it may have finished an EW a-b-c rally from 12/1 on the 34-day Fibonacci step out – this is bearish for the SPX. 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 rallied and made a B-Wave test of the Sunday night high at $1833 before rolling over in a C-Wave down that tested $1808. The 21-day Fibonacci step out from 12/15 fell on Fed Wednesday and gave us a short-term high. The 10-yr US rate rallied to 1.71% after the FOMC minutes and the USD rallied back to 96.22.
1/05/22 (Commentary for Wednesday) Led by a rising crude oil market and a strong bank sector, the DJIA made a divergent, all-time high before the FOMC minutes which cratered the stock indices especially the richly-valued Big Tech sector. Today may have marked an important high in the US stock market – how we trade on Thursday will be key. The back-to-back prints of .89 in the Option Premium Ratio last week was a SELL SIGNAL and is still a warning for more downside volatility in the SPX. Our bias that this “bifurcated stock market” would end badly at some point in January may have come home to roost today after the “more hawkish” than expected minutes from the newly assembled FOMC. correction and that is why we are holding 50% cash. 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 broke below its critical support at 45500 and is testing 43000 Wednesday evening – weakness in Bitcoin may have foreshadowed the weakness in stocks. Crude oil tagged $78.58 and may have finished an EW a–b-c rally from 12/2 on the 34-day Fibonacci step out today – this is potentially bearish for the stock market. 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 and Bitcoin trading profits may be hard to come by in 2022. Gold made a B-Wave test of the Sunday evening $1833 high and rolled over in a C-Wave down that tested $1808. 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 the hawkish Fed minutes and reversed early weakness to close at 96.22.
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 DJIA made a divergent all-time high at 36952.65 into mid-day Wednesday and then corrected after the FOMC minutes.
Big Picture on PMs (UPDATED) – After being slammed down on Monday, gold bounced back to make a B-Wave test of the Sunday evening high at $1833 before rolling over in a C-Wave down after the FOMC minutes that tested $1808. Gold needs a close above $1835 to be taken seriously here.
- Stocks – Aided by a strong banking and energy sector, the DJIA made a divergent new high before the stock deluge after the more hawkish than expected FOMC minutes hit the wire. The richly-valued tech sector was pressured again as the 10-yr US rate climbed to 1.71%. The “bifurcated stock market” that we have seen for months may have been shocked into a real market correction today.
- Gold – Gold bounced back to make a B-Wave test of $1833 before rolling over in a C-Wave down after the Fed minutes. Gold needs to close above $1835 to resume its uptrend.
- Silver – Silver may have finished an EW a-b-c-d-e triangle on the hourly chart after the Fed minutes today.
- Bonds – Bonds remained under pressure on Wednesday as the 10-yr US rate spiked to 1.71% after the FOMC minutes.
- Crude Oil – Crude oil tagged $78.58 mid-day Wednesday and may have finished an EW a-b-c rally from 12/2 on its 34-day Fibonacci step out – this is bearish for the SPX.
- Dollar Index – Boosted by the rising US 10-yr rate, the USD overcame early weakness and bounced to 96.22.
TURNING POINT DAY
The turn window for this week is 1/3-1/5.
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