Folks,
Market Observations for the Week: The NFP jobs report looms large for the SPX early Friday. A hotter than consensus job creation number (422,000) would pressure the market down. However, our Option Premium Ratio indicator jumped from .63 to .97 today as many traders added more put protection and that tends to correlate with a rally day for Friday. Our bias is that the corrective bounce that started today for the SPX will extend into Friday and give the bulls a strong relief rally in the SPX. Today, Bitcoin continued its weak trend and is making an undercut low at 42145. Crude oil climbed above $80 today and that kept the XLE rolling higher – our favorite oil stocks include CVX, XOM and COP. 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 Fed that wants to rein in inflation. Gold continued down in its C-Wave that undercut $1790 – gold has a monthly seasonal to go down into the NFP jobs report. The 10-yr US rate rallied to 1.744% and that held the USD up around 96.22.
1/06/22 (Commentary for Thursday) A rising crude market continued to pull the oil stocks higher and the higher 10-yr US rate supported bank stocks. Overall though, the SPX gave us an EW 5-waves down early Thursday and started a corrective bounce that could extend Friday on a “weaker than feared” NFP jobs report. The Option Premium Ratio jumped from .63 to .97 today as traders loaded up on “put protection” and that often correlates with a big market rally on Friday. Our bias that this “bifurcated stock market” would end badly at some point in January may have come home to roost Wednesday after the “more hawkish” than expected minutes from the newly assembled FOMC, but the market is still due more rally from a corrective bounce that started today. 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 now testing lows for the week at 42145 Thursday night – weakness in Bitcoin foreshadowed the weakness in stocks. Crude oil rallied above $80 and oil stocks (XLE) continue to get bought – this is potentially bullish 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 hawkish 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 continued its C-Wave down below $1790 and could still make another undercut low before the NFP jobs report early Friday. 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 as the US 10-yr rate tests 1.75% which is our near-tern target. A weaker than expected NFP jobs report could give the 10-yr US rate a pullback.
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 – The SPX traced out an EW 5-waves down early Thursday and then started a retracement bounce that could extend higher on Friday if we get a weaker than feared NFP jobs report. The large pop in the Option Premium Ratio argues for a large rally day on Friday.
- Gold – Gold continued to decline in a C-Wave down that undercut $1790 and could make another undercut low early Friday. Gold needs to close above $1835 to resume its uptrend.
- Silver – Silver is also in a C-Wave down and must hold above $21.41 to keep a short-term bullish scenario alive.
- Bonds – Bonds looked extended to the downside as the 10-yr US rate spiked to 1.74% on Thursday.
- Crude Oil – Crude oil topped $80 on Thursday and money flow continued to favor the XLE oil stocks like CVX, XOM and COP.
- Dollar Index –Boosted by the rising US 10-yr rate, the USD continued to hold up around 96.22.
TURNING POINT DAY
The turn window for this week is 1/3-1/5.
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