SPY Analysis (Mid-to-Late October)

9 ต.ค. 2022

Below is an analysis of the S&P 500 ETF ( SPY ) for the period of mid-to-late October 2022.


Weekly Expected Move

There is a 68% chance that SPY will close the week within this price range.

High price: 375.64
Low price: 349.95

There is a 95% chance that SPY will close the week within this price range.

High price: 388.48
Low price: 337.10

For those who do not already know, the weekly expected move is the amount that an asset is predicted to increase or decrease from its current price within the current week. It is calculated using the implied volatility from the asset's options chain after the close of the prior week but before the market opens for the current week. For more information on how to calculate these values, please see the link at the bottom of this post.


Volatility & Seasonality

From a seasonality perspective, October usually opens relatively strong and can continue to be strong until about the middle of the month, then prices typically decline toward the end of the month. See the chart below.



There may be increased volatility if the CPI report that comes out before the market opens on Thursday, October 13th surprises again to the upside. My inflation predictors show that inflation moderated in September (year-over-year) and that the inflation figure will be less than the August figure.

However, there are early signs that inflation (particularly commodity price inflation) may not decline at the level needed for central banks to pivot away from tightening for some time to come. Until commodity prices stop accelerating higher, there cannot reasonably be a Fed Pivot. If the Fed were to pivot while commodities price inflation was accelerating it could lead to a hyperinflationary outcome.

The recent volatility spike put the VIX term structure into partial backwardation. VIX term structure backwardation simply means that the market is pricing in decreasing volatility in the future. The VIX term structure usually goes into complete backwardation at major stock market bottoms, as this structure reflects the type of capitulation that all major stock market bottoms typically exhibit.

In late September, the VIX broke the downward-sloping trendline. It's quite possible that there will be a capitulation event in mid- or late-October that causes the VIX to rise back above this downward-sloping trendline and which causes the VIX term structure to go into complete backwardation.



If such a capitulation event occurs then it will likely mark the bottom for 2022.

Fibonacci Levels

Price continues to cluster around the 3rd Fibonacci spiral that I discussed in my prior posts (see links to related ideas below).



It is my prediction that a capitulation event will form a lower wick below this line on the yearly candle but that prices will tend to revert back around this level by the year's end such that the yearly candle appears to sit on this line. See below for an illustration.



If there is a major capitulation event whereby volatility breaks out and prices break down, I would expect major buyers to come in around the 0.5 level (shown below). The 0.618 level is another support level to watch.




Regression Channel

Regression simply refers to the idea that price tends to revert back (or regress) to its mean for a given timeframe. Regression channels can help us identify which trend is governing price action. These channels can give insight into trend reversals.

Since mid-August, the regression channel on the 1-hour chart has been governing price action (as inferred by such a high Pearson score). Please see below.



You can see below that on Friday (October 7th), the price bounced off the mean (red line).



Unless we get a highly favorable CPI report this week, I would expect that this channel could continue to govern price action all the way until the start of November.

Here's a general sense of what that could look like. Please see below.




Weekly Chart

In my last SPY Analysis, I noted that my indicators on the weekly chart were suggesting that we could drop back below 388. That definitely happened in the midst of the end-of-September volatility.

This time I am seeing something interesting on the 2-week chart...

I noticed that the Madrid Ribbon has turned completely red twice.

This is very rare in S&P 500 history. To put into perspective how rare this is, there have been recessions where not even this occurs. Therefore, in this regard, the extent and duration of stock market declines that we have already seen have been worse than some past recessions. Unfortunately, though, when this signal presents itself, there is usually more pain ahead. We are in a precarious circumstance with price now below the entire ribbon.



Another chart that has me concerned about a potential capitulation event is the 2-day chart for the tech short derivative chart (SQQQ). As many of you well know, when tech stocks fall in price, the price of SQQQ goes up.



As the chart above shows, the moving averages on the 2-day chart are nearing a complete crossover.

This has never happened before in SQQQ's 12-year history.



While only a possibility, this could set the stage for a capitulation event whereby Nasdaq 100 ( QQQ) stocks nosedive back down to their pre-pandemic highs.



Without getting too deep into the analysis, this could also mean that as a ratio to the money supply, the Nasdaq 100 goes all the way back to the March 2020 bottom.



In future posts, I'll discuss more about the money supply and why it can be used in this manner.


Monthly Chart

In terms of the monthly chart, as noted above, I do not see the S&P 500 realistically getting much below the 0.5 level in the chart below without some kind of a major price recovery.



While anything can happen, if the Fed pivots before the Fed Funds rate has risen above the rate at which commodity prices are inflating, I do believe we can end up in a difficult situation with high inflation again in the future.


Yearly Chart

When put into the perspective of the entire history of the stock market (going back in 1871), look how high the stock market is currently valued relative to its mean and past price action.



In terms of the post-Great Recession bull run, we are hanging on by our fingertips. See below.



Below is a closer view.



At the close of 2021, the stock market was so overbought (in terms of the Shiller PE ratio) that despite nearly 10 months of selling, stock valuation is still nearly as high as the peak before the Great Depression.

The stock market is extremely overvalued because of monetary easing. Monetary easing is a central bank experiment that began in recent decades and was normalized in the years following the Great Recession. The monetary easing experiment has created tremendous reliance on its continuity.

Only time will tell how the experiment ends...






Please leave a comment if you find an error in my analysis above or if you'd otherwise like to share your constructive thoughts. Thank you.

If you'd like to plot the weekly and daily expected moves for SPY on your chart, try the indicator "SPY Expected Move by VIX", which is calculated from the VIX rather than from the implied volatility of the options chain. The expected moves that I've posted above were manually calculated by me using SPY options chain data. If you'd like to learn how to calculate the weekly expected move yourself, this video can help: youtube.com/watch?v=Lhv3wiPv6Ok

15 ต.ค. 2022

บันทึก

Here's an update on where things currently stand.

In short, the market remains substantially bearish and a capitulation event remains likely as we enter the latter part of October. From a seasonality perspective, final capitulation often occurs in late October.

When the CPI report came out last week it showed that inflation continues to remain high. Markets initially gapped down. However, due to extremely oversold conditions, price bounced all the way back up to the upper channel of the hourly regression channel (see below). This likely occurred because of a relatively modest short squeeze that was extremely likely to be short-lived.



The downward hourly regression channel not only remains intact, but its Pearson score (which indicates the strength of correlation) is even higher. This suggests that we will likely see this downward channel continue until about the start of November. Just remember that this is not a price channel. So price can overthrow or underthrow the channel lines while the channel remains completely valid. This channel merely gives probabilities.

The oscillators on the weekly chart of the VIX and SPX are flattening out. This suggests that the market may be overextended to the downside. However, the biggest drops (capitulations) often occur when oscillators flatten out and are overextended.




The VVIX (volatility of volatility) remains in an uptrend, which means that price can continue to swing widely as we saw on Thursday and Friday of this past week (see below chart).

Wide price swings will present a higher likelihood that both longs and shorts will lose money, as we again saw this week when price moved higher rapidly causing a short squeeze and then collapsed back down trapping longs. So long as the central bank continues to destroy the money supply, everyone is likely to lose money. Reflective of this tendency for everyone to lose money, the VVIX may remain elevated for the long term (possibly even for years) creating trap after trap after trap on both sides. These traps will continue to fatigue more and more market participants, who will increasingly decide to hold cash or place their cash into interest-bearing savings accounts, CDs, or series I Treasury bonds with a guaranteed rate of return.

Since none of these alternatives will fully protect against the erosive effects of inflation, everyone is bound to lose wealth during this unprecedented period of monetary tightening.

Be aware that something much bigger is unfolding. Central banks are reducing wealth disparity. In so much as those who hold no assets will stand to lose the least during this period of unprecedented monetary tightening, and those who hold the most assets will stand to lose the most, wealth disparities are being reduced. The rich will become relatively less rich and the poor will become less poor relative to the rich whose perceived wealth is being destroyed by the central bank's restrictive monetary policies. In this regard, we are undergoing a socioeconomic reset. However, everyone’s perceived wealth is destroyed to some degree, and this creates social and political instability. Central banks will need scapegoats to blame for their destruction of perceived wealth; war and a polarized political landscape offer plenty such scapegoats.

Monetary tightening will also force early retirees back into the labor force which is needed both because of labor shortages, and also because the social welfare system cannot support such a large base of retirees who consume but not produce. Aging populations continue to strain social welfare systems globally.

Keep a close eye on commodity prices and be cautious about assuming that these prices will come down because demand is being destroyed by central banks. Commodity prices remain worrying elevated and although demand can be destroyed as unemployment goes up, commodities may remain high as war, deglobalization, pandemic disruptions, and climate change continue to weigh heavily on supplies. Commodity hyperinflation is already occurring in some parts of the world, which is destabilizing. Commodity hyperinflation cannot be solved except with some kind of a crisis. Indeed, certain countries are actively weaponizing commodities to incite inflation and induce instability globally. It is unlikely that commodity prices will ever return to their extremely undervalued state that allowed for negative real interest rates. This is a death knell for companies with negative cash flow and no pathway to profitability (i.e. “Zombie companies”).

It is my opinion that a capitulation event is coming soon (in October). Once it occurs, the stock market will attempt to recover its losses in November into December and possibly into January 2023. However, the 2023 picture remains quite bearish for stocks, which are still historically overvalued. All of the interest rate hikes that are currently underway take multiple quarters to fully percolate through the economy. It is possible that the stock market may move sideways or decline for years to come as a result of stagflation. One can only speculate how the Fed will be able to respond if both commodity prices remain high and unemployment goes up dramatically.

If this plays out, the biggest winners in the long term will be physical gold (once the dollar index peaks), other commodities (e.g. energy, food, precious metals other than gold), emerging markets that maintain geopolitical neutrality (e.g. Indian stock market), certain clean energy companies (despite monetary tightening, cash will flow into these companies because of surging energy costs), and Bitcoin (after its final leg down) as well as a very small group of other cryptocurrencies.

Bitcoin is a perpetually scarce digital commodity. In a distant era when human transactions, and more generally, human interactions, occur almost exclusively by virtual means, Bitcoin will likely develop the same monetary importance that physical gold has today. I can say with a high degree of mathematical certainty that anyone who disregards Bitcoin as being an immense speculative bubble will greatly regret this stance in the future…

29 ต.ค. 2022

บันทึก

Here are some updates as we move into the close of October:

First, it's important to point out that a recession warning that has never failed in the past was triggered this week. That recession warning was the yield curve inversion (10-year US treasury bond vs. the 3-month US treasury bond).



For a more in-depth discussion about why this inversion creates a virtual mathematical certainty that a recession will occur, you can read my post on the money supply, linked below:

From a seasonality perspective, November and December typically see bullish movement in the stock market. I believe that since signals of a Fed pivot are occurring during a typically bullish time of the year, this could lead the market somewhat higher into the close of 2022. Indeed, the stock market has historically gone up after a yield curve inversion occurs. Any collapse in the stock market due to the impending recession that the yield curve inversion predicts usually occurs at least a couple of quarters in the future. This is simply the roller-coaster nature of the stock market. Therefore, I will not be surprised if the market becomes bullish for the intermediate term before declining yet again in the future.

I remain concerned about tech. Look at the below weekly chart of SQQQ, the Nasdaq 100 short ETF. Right now the moving averages are clustering together below the price of SQQQ. If SQQQ fully oscillates down on the stochastic RSI and remains above these EMAs, then this could set the stage for a capitulation event for the Nasdaq 100. Thus, in order for the bulls to prevail, SQQQ's price must collapse below these moving averages and force a short squeeze. Otherwise, the bears will remain in control of tech.



I remain highly skeptical of Apple's strength in the long term. I strongly believe that Apple remains in a complex topping pattern on the highest timeframe. I worry that numerous market participants are getting trapped by Apple. Its cash flow is being perceived as a relative safe haven. Nonetheless, it remains highly unlikely, in my opinion, that Apple's stock will generate much wealth for investors in the years to come.

Here's Apple's entire price history as shown in a log-linear regression channel:

You can see that we remain above the +1 standard deviation, which is considered overbought for Apple. It has never sustained a price above the +1 standard deviation for as long as it has now. As a matter of fact, Apple has generally not generated wealth for investors for over 2 years now. This is because the money supply has moved up at nearly the same rate as Apple's price over this time period (see below).



I very strongly believe, based on my charting analysis, that Apple will underperform for years. Its price is being held up relentlessly by passive investors via the numerous ETFs and mutual funds which have large holdings in Apple. A sizeable portion of these passive investments come in the form of retirement contributions. Once unemployment goes up, these passive investments will come to a halt. The current yield curve inversion all but guarantees that unemployment will move up in 2023 as a recession ensues from the Fed's rate hikes. When companies need to cut costs during a recession, the easiest thing to cut is contributions to employees' 401k. Since Apple is the greatest beneficiary of these contributions via mutual funds, other companies' poor health will certainly spill over into Apple's stock price.

The below chart suggests that on the highest timeframes, Apple is getting ready to oscillate down relative to the S&P 500, and yet at the same time, the S&P 500 is getting ready to oscillate down relative to bonds (TLT). Thus, between Apple and bonds (TLT), which do you think will fair better in the coming years?




One chart that virtually no one is talking about, but which is extremely concerning is the chart of corporate bond yields relative to the money supply. This chart suggests that in the quarters and years ahead, corporate debt will likely become a major problem. The only question is to what extent will the Fed be willing and able to rescue corporate debt, in a way that does not exacerbate inflation. This complex interplay between brewing debt crises and brewing commodity inflation will cause a Catch-22 that is likely to result in a significant recession regardless of what the Fed does.

Finally, although I remain bullish on Bitcoin in the long term (decades), I feel confident that Bitcoin has not bottomed yet. No past halving cycle data support the conclusion that the June bottom was the cycle bottom. It's most likely that the cycle bottom has yet to occur. Furthermore, even if the June bottom was the cycle bottom, there are still hundreds of days left before the influence of the halving cycle provides strong bullish tailwinds for Bitcoin and cryptocurrency in general. Therefore, remaining patient with Bitcoin will be rewarded. Remember there are opportunity costs to be lost by throwing money at Bitcoin while it remains generally flat. A recession is brewing, and this recession will likely challenge stablecoins' stability. Cryptocurrency is pretty much the only asset class that the Fed will absolutely not come to the rescue of should things become extremely unstable during the coming recession. It is mostly to the benefit of central banks that cryptocurrency and stable coins fail.

In terms of the global economy, the picture continues to look bleak. Deglobalization and decoupling continue to accelerate as geopolitical tensions weigh. Those who have studied economics know that deglobalization brings productivity away from its frontier curve into a more inefficient state because it reduces nations' ability to produce what they have a comparative advantage in producing. Virtually all countries will be harmed by deglobalization because deglobalization is inflationary and reduces productivity, which in turn reduces living standards. The coming recession is likely to be global in scale, and during this next recession, elevated inflation will likely persist. Since deglobalization is slow and insidious, the resulting economic decline and reduction in productivity are likely to be very long-lasting (years, minimally; decades, possibly). During a prolonged economic decline, geopolitical conflict is more likely. Geopolitical conflict in turn makes the situation worse, especially with regard to inflation.

It's during turbulent times like what lay ahead that great fortunes can be lost, and that great fortunes can also be made.