Long

Thinking Big Picture on SP500 and Macros

Hello and welcome to a dump of indicators, signals, cross-macro things. If you like to actually read then you might enjoy this. If you really truly just need the shortest TL:DR its-- February is good, March is bad, market continues trajectory until Fed gets real late in the year.

Let's start with Seasonality (on SPY per MarketChameleon.com)--

February has been a good month for SPY. In fact in the last 10 years of observation it has the best median returns by calendar month at 3.4%
March, however, not so good. There's likely some distortion from March of 2020...something happened then, can't remember, but MC.com says over the last 10 years, seasonally speaking, March is the 2nd worst month (after September. September really sucks)
On QQQ, DIA, IWM, we see some similar stuff, though not as extreme-- February is a pretty good month, March is a lower-rung month

Let's talk about some external indicators/signals.

Per Investors Intelligence, we are in a Bull Top (https://www.investorsintelligence.com/x/free_chart.html?r=101l). This is determined by Breadth in the NYSE exchange. The theory here is that if you're a market timer, right now you are playing DEFENSE, not offense. Underweight risky stuff.
CNN's Fear & Greed Index, the market is Greedy and getting more greedy (https://money.cnn.com/data/fear-and-greed/). The thought here would be we are greedy and are going to run higher but approaching levels of high risk.
Ed Yardeni. My favorite guy to follow on things related to financial markets. Per the YRI Forecast for SP500, they have a forecast of about $4300-4400 for this year and about $4600 for next year (https://www.yardeni.com/pub/yriearningsforecast.pdf). I've followed Yardeni for some time and his forecasts are miraculously good. To achieve these prices, it looks like volatility is on the horizon, but its the good kind.
- I think this forecast is largely contingent on INFLATION (big theme here), which has really gotta be the biggest thing for analysts on Wall Street, I'd imagine. Here's what Yardeni said on his blog yesterday-- "In recent months, there has certainly been some comeback-like action in the prices of assets that might benefit from higher inflation. If inflation were to make a big comeback, bond yields would soar. That could cause a credit crunch, a recession, and a bear market. I am inclined to keep walking. " (http://blog.yardeni.com/)
Bulkowski has a great site for teaching beginners but I think he's also quite good with his targets. Lately he and his indicators have been flip-flopping on the indices. It reminds me actually of a bit of a cycle reset. Right now he's back to bull, targeting SPX $3900 by 2/15 (http://thepatternsite.com/Blog.html)

Moving Average Timing, SP500

Moving Average Timing, All Stocks

Reflection on those 2 charts--

This market is greedy AS F*CK. Pardon the language. We are insanely over-bullish, over-valued, reckless, and so on. But there may be merit in this.. or not. We'll explain shortly.

Market-On-Close (Market Chameleon)--

We've had a flood of MOC Sells this week. About $5 billion in MOC Buys vs $7.4 billion in Sells (https://marketchameleon.com/Reports/StockOrderImbalanceReport)
The 20sma on this went negative/to a Sell Imbalance Today. I have an Idea on this (
) which I haven't updated in some time, but this has a good track record of indicating sideways action on the horizon, or if prolonged, a steep drop/continued selling pressure.
When I look at a graph of the MOC Imbalance history (requires subscription from MC.com) it looks most similar to May 6th, 2019

But it also resembles May 2020... May 7th and May 20th to be exact. And price action on SP500 actually resembles that much more closely...
Implied Volatility/VIX on SPY/SPX500--
VIX just had one of the largest spikes on record, having a +62% day last Wednesday. And all for naught, as it was completely demolished and closed below 22.0 today. But what's on the horizon?

The IV30 on SPY has been levitating above the 20sma of Historical Volatility for 2 months now. It does this a lot and results in 2 scenarios-- in 2016 and 2017 it was largely fizzles. Its like everyone was holding its breath, "Big crash is coming!!!" and, nothing happened. We saw this same pattern in January 2018, September 2018, and January 2020.
Here's a crude reproduction-

But its not just the pattern, the DEPTH of the disparity between the realized volatility on SPY and the Implied Volatility is INCREDIBLE!
It LOOKS as if VIX released.. but it really didn't. October and November had far more realized volatility OHLC and C-C[1] wise.

The short of this is.... volatility heads are betting that we haven't seen nothing yet! March gets a nice skew towards volatility thanks to last year, but the average, median, and lows of SPY's Seasonal Implied Volatility (MC.com) say that we are entering the calm before the storm. I am going to start hunting and accumulating cheap VIX calls for March/April.

INFLATION!--
I think this is truly the bigger narrative going on right now. Investors and big money are trying to figure out if we are seeing inflation (seems like it) and more importantly, if Powell and the Fed are going to act.

Look at the direction of TLT, an ETF for 20+ Year Treasuries versus TIP and SPIP. They usually move together but recently Inflation Protected Securities keep going up while the 20+ Years are getting hammered

And looking at some progressions through the Yield Curve (by my admission I am still learning/trying to understand this curve's structures and influence), the market might be moving away from a Bull Steepener into a Bear Steepener--

^^^^ Where we've been...

^^^^ Where we might be going.
(Note the intervals used are reflective of BARS not DAYS, because on average there are 252 bars to 1 calendar year. This indicator is modified from gwaaf's US Treasury Yield Curve so I can see movement over time)

The Copper to Gold ratio is a nice indicator of inflation and where the 10 Year Treasuries are going. The 10Yr has picked up some pace lately but its largely been lagging, as Copper keeps flying higher.

Best I could do to try and line up these 2 symbols in TradingView.. there are better charts out there, like this one:
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iUBBQtpArY9c/v2/pidjEfPlU1QWZop3vfGKsrX.ke8XuWirGYh1PKgEw44kE/-1x-1.png

Then there's also the 10yr breakeven inflation rate, which is what the market expects inflation to be at in 10 years' time-

This is another one of my best attempts to make a chart fit right but the point is that Breakevens are saying expect inflation in the future, while the 10Year seems to be suppressed, though it is starting to get some movement up.

Commodities seem to get it. We're seeing a broad rally in commodities that are breaking out a of a multi-decade resistance line and bear market.
DBC Commodity index

Consider that economies are still in recovery from COVID and we probably aren't seeing peak demand, meanwhile supplies are likely diminished. Oil is looking to follow the rest of commodities in breaking out, and it seems highly likely to see heavy demand once the majority of populations are vaccinated and people return to traveling (car, plane, etc)
Inflation and the Fed--
Jerome Powell has said and reiterated several times "we're not even THINKING about thinking about changing rates". And this has been really nice and soothing to the market, which enjoys a risk-free rate of nearly zero pushing people out of bonds and into equities. But what will start to worry investors is not having an idea of if the Fed will ever start thinking about rates, as the market very clearly sees inflation on the rise.

I love to follow CME's FedWatch tool, which is basically the market pricing and hedging in the likelihood of the Fed changing its Fed Funds rate for each future meeting, and by what amount: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html. On the left navigation side of the tool, look for 'Probabilities' under Target Rate. For the better part of the last year its had 0% for rate change probabilities across all meeting dates. Well now its starting to see future meetings have an actual slight possibility of a hike ("So you're telling me there's a chance" -Lloyd Christmas). Today the market is saying there is an 8.5% chance of a 25-50bps rate hike in September 2021. This fluctuates often, so maybe if you check enough you'll see it go back down to like 0.3%, but it has stayed above 0.0% for about the last month.

I've heard some theories that go- Everyone keeps wondering why and how the market keeps going up on BAD NEWS, well thats because the worse the news the more the Fed is going to baby the financial markets. What happens when we start to only see good news, though? The Fed will get noticeably more Hawkish. There's a pecking order to things that the Fed is concerned about, and its kind of like this--
1. Deflation
2. Deflation
3. Deflation
4. >>> too much inflation <<<
5. Price stability
6. Maximum employment

Powell will have to raise rates or at least subdue concerns about this by talking about it soon. If he doesn't and inflation picks up even more, this stock market will get scared. If he does talk about it and puts it nicely the market will feel some relief but also know that the best is behind us. If his word choices are not perfect, maybe the market will get scared the Fed is going to go to Hawkish too fast.

Putting it all together--
There are a handful of other stuff to talk about but for the sake of just posting this damn thing, lets end it.

Here goes my prediction for the remainder of the year
- We keep going higher in February and reach 400/4000 SPY/SPX500 just before March.
- Everyone holds their breath for the March volatility and we get a little bit but nothing too concerning, another BTFD, then a BIG ONE
- Let's see if we can get below 3500, as low as 3300. Looking at SPY's options Open Interest, the #1 for Puts is 6/18 $340 and a close 2nd is 6/18 $323. Likely this is a couple of MASSIVE hedges to the downside, with someone saying we see a big drop but the lows of November 2020 hold
- V shaped bounce from this correction/crash, onto new ATHs
- Right around September and October, which are volatile months from a seasonality perspective, we start to finally get the Fed talking about, if not at least just thinking about, changing the Fed Funds rate. I like this as a catalyst to really spook the markets
- Eventually I think we return to ATHs but the pace of SP500's expansion is going to slow significantly if we start talking about QE tapering and rate hikes in the future, etc
General thoughts, things I like-
- Buy VVIX/VOLATILITY in the coming weeks when its the cheap
- Buy commodities, either through ETFs, futures, individual companies, etc
- Buy TIP IVOL
- If you could do so, straddle USO or UCO, I dont think USOIL just hangs around $57, I think it either rejects or joins its brothers in breaking out
- The Megacap tech companies are probably a nice safe bet. Russell 2000 stocks are probably going to boost your portfolio gains but erode most of those gains later..these are going to be great to trade not invest in, I think
- Biden administration going to love Healthcare, Green Technology
- Financials going to be whipsawing around
- If you're going to trade GME AMC and all those WSB stonks, be on the right side of Implied Volatility by selling it. You are doing yourself no favors buying a Call or Put when the IV is at otherworldly levels

chrism665

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