Are the Markets a Ticking Time Bomb?

How do we make heads or tails out of this market? We discuss that and more in this week’s trading newsletter!

The Pause the Refreshes
Way back when, Coca-Cola had a slogan that sold a lot of soda – “The pause that refreshes.”

The idea was that you can always find time to take a break from your hectic life to enjoy a brown sugary beverage!

This is what has been going on with the markets lately… the secular bear turn that began at the start of the year has taken a breather recently.

We anticipated this bear market rally two weeks ago. Noting elevated fear levels across the board, we wrote:

Bottom line: when everyone is yelling “sell!” – it’s probably too late to profit on the short side. Watch for the bear market rally to begin soon – if not this week – and then be ready for the next big step down…which will come when it’s least expected.

So now, as the bulls are starting to sharpen their horns and the shorts are getting squeezed relentlessly, it’s a good time to take another look at the big picture.

In our view, there are strong several reasons to expect that the direction of the market over the long run is down…

…and a few good ones to think that in the near-term the markets may grind higher.

Here are the macro factors to consider when evaluating overall market health:

  1. Interest rates are moving higher. President Biden has made it clear that trying to check inflation is a priority (since he doesn’t want to lose the midterm elections… good luck with that!). Biden is leaning on Fed Chair Jerome Powell, who – like the entire Federal Reserve Bank leadership – is a complete tool of the political system. Powell has already signaled his intention to keep raising rates to bring inflation down (although it’s far too little and too late.) But what this means is that the Fed does not have the stock market’s back… they are willing to let equities prices fall to reign in the inflation beast.
  1. Liquidity is declining as economic growth is slowing. Less capital to invest means less equities buying, and as companies struggle to expand or even maintain their operations, a further economic slowdown seems inevitable. The tide has turned on money flow into stocks, and as households tighten their budgets, retail investing is likely to drop, perhaps precipitously.
  2. Unpriced wild cards still threaten the global equilibrium. Last week we talked about how China’s internal problems and the stagflation problem pose added uncertainty for the markets. These aren’t the only potential danger zones, however. War in Ukraine, global food shortages and commodity price spikes, and supply-demand disequilibrium all pose serious dangers to your long-term investments and wealth preservation plan.

However, for now it may be the case that most of this bad news is already priced in at current levels. Interest rate increases? Check. Economic slowdown? Check. Supply chain worries? Check.

In that quote from a couple weeks ago, we remarked that the next leg down will begin when it’s least expected. For now, too many people are still bearish for that to happen… at least until the next Black Swan event.

Regular Market Slice readers already know that FFR Trading is a good partner to have when it’s time to make sense of the markets. If you haven’t already done so, Call (800) 883-0524 to discuss ideas for positioning your portfolio for today’s turbulent market conditions. 

Goodbye Don’t Mean I’m Gone
It would be a mistake to think that just because the market is in a bear phase you can automatically make money on the short side.

The problem with “sell the rally” arguments is the fact most shorts get destroyed during the vicious bounces. SPX has soared around 9.5% from the lows of 10 days ago. Trying to sell this rally – which was obviously due, as we pointed out on May 13 – would have been a costly error.

For short-term traders, then, the question is where do we go from here.

This 3-month chart of the June S&P e-mini contract shows that strong bounce over the past 7 trading sessions (as of COD on Tuesday 5/31). We can see that the index is testing critical resistance at 4,150, and is comfortably between the 13-day moving average (grey line) and the 55-day MA (purple line).

 

The market is in overbought territory, but as we see looking back to March, it can remain there for weeks.

None of this information gives us much to go on prior to Wednesday’s opening. Typically, we might take a wait-and-see attitude, and look for our next trade after we determine which way the market goes with Wednesday’s open.

(More advanced traders might use overnight or pre-market data to get a better sense of what’s coming… there’s nothing wrong with that approach, provided you know how to use the information intelligently.)

Our macro analytic approach, however, found one other interesting piece of data. Here’s a screenshot of our Watchlist at Tuesday’s close:

What’s interesting here is that even as the S&P declined on the day, the VIX not only failed to advance, but fell back by 1.3%.

Admittedly, this is a relatively small move in the often-volatile VIX, where 10% moves in a day are not uncommon. Nonetheless, it’s a divergence that could be telling us something.

Normally when the S&P goes down, VIX goes up, and vice versa.  In this case, what the market seems to be indicating is that there is not a lot of concern over today’s decline… if traders were worried that prices will continue downward chances are the VIX would have risen.

With this information, it could make sense to bring a long bias into tomorrow’s trading. Reading the sedate VIX print might lead us to put a buy order slightly above the open, with the expectation that an updraft is significantly more likely than another down day.

Of course as you read this on Thursday, you’ll know what happened. This may or may not be a winning trade idea… rather, it’s an example of how to use market information to identify asymmetrical risk-reward situations, even within short timeframes.

If you’re unhappy with the results of your self-directed trading, it could be time to make a change! FFR Trading has a team of top trading professionals, all with 20 years or more in the markets, who can guide you to greater trading success, whether you prefer a “done for you” or a “done with you” approach. When “do it yourself” no longer works, it’s time to call In the pros! FFR Trading’s Strategy Team will help you figure out what all this means for your trading. Call (800) 883-0524  for a no-risk portfolio evaluation, or simply go here to set a time for your appointment.

If You Think You Can…

Henry Ford is widely credited with the famous aphorism, “Whether you believe you can do a thing or not, you’re right.”

This saying holds a great deal of truth for traders, who often allow self-defeating beliefs and attitudes to corrupt their thinking, cloud their judgment, and thwart their financial goals.

Interestingly, the first time this quote was attributed to Ford was shortly after his death in 1947, when it appeared in a Reader’s Digest article. No attribution was attached, so no one is quite sure when or under what circumstances the curmudgeonly automaker uttered these words of wisdom.

There is ample evidence, though, of similar thoughts being expressed by others before Mr. Ford, going all the way back to the Roman poet Virgil. For a fascinating study of the history of this phrase, go here.

For our purposes, though, it doesn’t matter too much who said it first, or how the words have been jiggled around, or even claimed by others. The point is that your mindset – your determination to make it as a trader, despite all obstacles that may arise – is the single most important factor in your success.

That’s why FFR Trading focuses on more than just trading strategies. When you work with our team, you also get the support and positive reinforcement you need to persevere in your journey.

Trading can be a solitary business, and there’s a lot of value to having a coach to help you through the rough patches – and celebrate your wins with you! – as you grow in your trading business.

Give us a call today at (800) 883-0524. We’ll help you figure out what’s going right in your trading, and where you can improve. Then we’ll set you on a path to greater success.  You can also visit our Instagram, Facebook, and Twitter for frequent updates on the markets, trading tidbits, and investment inspiration! 

It’s what we’ve been doing since 2005… no reason to stop now!

To your trading success,

Michael McGinnis

President, FFR Trading

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