Mid-Week Macro

May 4, 2022

FED again...

I long for the days that the FED lived in relative obscurity ( I know, it’s been a while), but unfortunately right now they are taking more after Dr Fauci, seeking the spotlight whenever they can to work their agenda.  It may be the right course (or not), but it is what it is and we have to factor it into our focus right now.  FED meetings don’t matter most of the time, but with the inflation and rate hike narrative so prominent, it has everyone on their toes.  I would say unless they surprise in a big way on the pace of hikes or balance sheet reduction, the meeting should release some pressure from the markets as a whole. Even with a 50 basis point hike, the markets are ready for it.  We started to see sentiment shifts in the markets reaction to news since the start of this week leading up to the decision.  Of course, they could surprise with something that spooks the markets and we are sitting on a ledge, but we also got sufficiently oversold coming into these numbers and have every opportunity to hold these levels for now. We could hold for now even if we go lower later into August seasonality. The reaction is what we are looking for as it far outweighs the news itself.

Triple Play

Daily TP charts are all still in clear downtrends trying to hold onto these ledges they tripped over late last week. Stops were run and now some support is showing up above the 410-412 zone. None are really sporting a successful failed breakdown yet, but they are trying to get back into the bases. The battle has already started for these levels, the FED uncertainty passing might allow one side or the other to bring out the big guns and settle the current skirmish. As mentioned above, I think there is good potential setting up for some relief post FED, but that is not a given.

The first two days of the week markets found some footing after the Friday slide into new daily and weekly closing lows (monthly for 2 of the 3). That footing has so far just pushed us right back up into the MA bands and the RSIs wrestling with the 50 levels.  Not that inspiring, but to be expected until the news passes. More participants will likely get involved one way or the other once the announcement and presser are winding down.

Power Universe

RSI Chart

The Power Universe RSI chart is holding the lows overall, but did make new closing lows last wek with the indexes and have bounced back into the range over the last two days. This set up a favorite pattern on this and the major ETFs above with a long-term divergence followed by a very short-term divergence. Price still needs to confirm, and it’s trying, but when they do they can lead strong short term inflections. Still being in a RSI bear range and below the MA bands leaves plenty of skirmishes ahead before we can say we are back in an uptrend.

Universe Breadth

  • Overall Breadth is still weak but is starting to show short-term measures diverge
  • The NHNL differential remains on a major sell signal and posted negative readings during the last two up days.
  • The percent of stocks above their 50, and 200 day moving averages trying to stay out of the lower quadrants.
  • Breadth Thrust and McClellan both put in divergences at minor extremes.

Percentage Making new Highs and lows gives us 10day, 21day and 63day lows all diverging coming into this week and now dissipating into the meeting. Heavy selling has quieted down a lot since middle of last week, not just the last two days. 

Short-Term Breadth

Over this last two weeks with the new printed lows and the back and forth since we have seen the short term breadth measures go through two cycles of dropping into a washout type reddish pink covering, then back to almost no pink, back to a lot of pink and some red, and now back to very little. This all happened in about a week. That battle is bigger than some are seeing and there are a lot of rotations under the surface over the last four week I think many are missing. We will get to some of that at the bottom in the sector review.

Intermarket View

There is not too much of interest in this section except for the $IWM. While equities are still having a tough run of it and in the bottom of the list rendering it in an unfavorable structure, This looks like a good place to point out that $IWM is now outperforming the $SPY and $QQQ over the last rolling 3 months, after a good while of underperformance.  This might now last a long time, but it does suggest some opportunity to find some early movers while they take are taking out the generals as they say. We will watch to see if this evolves in the breadth of any particular spaces or if it is a broad participation.   We can see the same trend below in the Size & Style list where value still leads growth; but inside each camp, the small and mid cap funds are now outperforming large and mega caps over the last quarter, mainly due to the more recent action.

Sector Review

Definitely some flipping around on the sector rankings list showing some rotation.  Materials are getting back on their horse, even with Precious Metals going from leader to drag. Basic Matrerials and Chemicals have both stepped up in the sector to take up the slack. Big drop in RS of Real Estate and Financials seems to be a fallout from the interest rate narrative while not exactly clear why other than we are in a bear trend overall. There is not that much to gleen from the sector level right here.  When we dig down into the subsector level it is a bit different as we discussed in the Power Sector Review on Sunday evening. You had to get below the sector level to find where money was flowing here.  It is much more precise than it is when we are in a bull trend. However, if we are nearing an inflection point, we can get some great information by following who is outperforming over the most recent price action, especially with the strong selling last week.

In the second list we show all the subsectors that have gained more than 2% over the last 5 days which takes into account a lot of back and forth in the markets as a whole. Remember, over that time the $SPY was up only .07% to give some perspective.  The three subsectors I highlighted over the weekend are happily on the list and right in the middle of the pack.  RS are strengthening on all of them nicely, but there are many more on the list too. It is very notable that while we see strong RS names performing here as we would expect, many on the list are yellow and orange. This is showing some rotation into the beat up spaces under the surface.  Blake asked me yesterday if I would prefer to follow relative strength on a bounce or those that got beat up the most and I said both.  And I mean it. The reasoning is we don’t know if any bounce is just a short term affair or a new leg higher until way later when we look back.  Those two different trade styles (RS vs beat up the most) will likely work differently depending on which type of bounce it is; and actually can provide some of our tells along the way.  By the time we get those tells though, a lot of the gains have been accumulated in one side or the other; therefore, my advice is to have a couple of plays in each side and use them for potential gains and even better, tells on what type of bounce we might be in and where it could go.

Volatility

Finally, the $VIX remains elevated, but hasn’t been able to press to new highs on this down move.  That can change quickly, but is a bit curious with the headline risk right ahead of us.  We mentioned last Thursday in this post that it looked to be coming back in from a close outside the upper BB which can be a good signal, only to have it move right back higher. In that higher thrust though, it didn’t close back above the BB and then the spike on Monday got reversed late day to leave a big tail under the previous highs.  High twenties is still very elevated, but it looks like some air is coming out of the balloon here before the event is even here. It may ben hinting the fear is subsiding some for now.

Wrap Up

This is a downtrend with a high $VIX and lots of headline risk, so all new opportunities are taken in that context.  However, many great moves start in that very same context even if they don’t save the world in the end. It feels like we are either close to that or about to fall off the ledges we tripped over last week and caught with our fingernails.  Whether this is the 80’s action film where the star claws his way back onto the ledge and kicks the bears butt or not is still to be seen. It could be a long battle on the ledge, but the first step is for the markets to get their feet planted back on it versus hanging over it like we currently are.