SPY stock chart
This is a “hot garbage” kind of market!
Any inflationary signs are met with selling in equities as capital managers attempt to get in front of the Fed.
We’ve also got the most telegraphed conflict in the history of Western Civilization kicking off in Ukraine. And tech earnings keep bleeding out any risk appetite in growth stocks.
In terms of narratives, I do think we’re approaching a fever pitch…
Although I’ve been saying that for two weeks now. It’s not about the bad news…
It’s the uncertainty around the outcomes.
If the Fed came out and did an intermeeting 25 bps rate hike, I believe we’d see a monster rally in equities.
Why?
Because it shuts the door on near-term policy changes, leading to less volatile decisions by capital allocators.
In terms of market movement, the best plan here is to consider path dependency based on where we are relative to the January lows.
For example, we could just selloff, retest the lows to the penny, and then go on a massive rally — but that’s a very low-odds bet because it’s simply too clean.
We could also see a truncated double bottom, where we base it off the daily wicks put in on the last week of January.
Or we overshoot, but not by much, and we go and test that swing Anchored Volume Weighted Average Price (AVWAP) from the October 2020 lows.
Or we could see a continued sloppy grind lower, with another risk-off event that takes us to the volume shelf at 403-405 and the swing AVWAP from the March 2020 lows.
That would also be the measured move, highlighted in pink.
So right now, we have to be in reactive mode. The market has some areas that offer amazing upside risk/reward, but others are still toxic sludge.
Make sure you have a plan going into each trade and consider downsizing as overall volatility continues to increase.
QQQ stock image
The Nasdaq is on the brink of heading lower to find some fresh levels. Tech has sucked overall, thanks to the Fed’s policy changes, making investors unwilling to blindly pay for growth.
ROKU is a good example. Earnings were NOT good, and the stock went down over 20% in a single day…
This is after a 12% selloff the day prior.
We have two major levels under the ones we’ve been focusing on.
The first is a key Low Volume Node (LVN) and internal pivot at 327-328.
Under that, we have a huge swing level at 315-318. I’d be very surprised if we got to that level without a larger countertrend bounce first.
IWM stock image
The Russell 2000 continues to look much worse than the others. This surprises me a bit, as there are sectors that perform much better in rising rate environments.
That said, risk continues to get sold off. While it is much higher relative to the Jan lows compared to the Nasdaq, it’s still seen persistent inter-week selling that’s put some nasty selling wicks on the weekly chart.
Like I said a few weeks ago, it’s tough to identify lower levels unless we fully round trip the Fall 2020 rally.
The most surprising thing for this market would be not just a rally…
But a rally past the “obvious” level at 210-212. Not a guarantee — just consider how you would trade this market if the counter-rally really does kick off, and we see much higher prices than most people are expecting.
VIX stock image
In the volatility world, the market tends to bounce after a VIX spike. The primary concern is if high implied volatility starts to get “sticky,” meaning we don’t see a hard selloff after a big bounce.
I am still in the camp that this market is overhedged, which starts to put a floor in the market.
Yet, if enough time goes by, these hedges start to burn off. Then, people get VERY weird as they are left with no protection after paying serious cash for those premiums.
Do you re-hedge or stay with full exposure?
Right now, the VIX — both spot and futures — are acting weird. Some of this makes sense because the market is dealing with two major risk events.
Any short-term resolution of those can lead to upside in the market, and any drop in the VIX can add fuel to the fire.
Thanks for reading this week’s Market Primer! One more thing:
