Overview
After a flash sell-off last week, markets have now recovered quite strongly. Is the bottom in? Or is this simply a “dead cat bounce”?
First off, a quick review of why markets sold off, something we covered in depth last week.
Secondly, a look at the fundamental reasons why you should still be bullish at these levels and why it’s generally a good idea to buy the dip.
Thirdly, a look at the technical outlook for the main indexes, popular stocks and cryptocurrencies.
Lastly, we will review our Swing portfolio, where we are adding 4 new limit orders, and our Macro ETF portfolio.
Expect to learn:
Why markets sold off last week
Why employment isn’t as bad as it seems
Liquidity and the dollar; History repeats?
Key support and resistance levels for SPX, BTC and tech stocks.
How to best take advantage of this dip
Why so bearish?
Let’s put a green candle on that chart.
As is often the case in markets and investing, one day the sky is falling down, and the next everything is back to normal. Sentiment and emotions play a bigger role than we would like them to in investing, which is why it’s always important to have frameworks in place.
A week ago, the BoJ began to tighten, threatening to unwind the “Yen carry trade”, which I covered here.
To put the words into a picture, the BoJ has a terrible habit of “timing the top” when it comes to tightening monetary policy.
These episodes of tightening have affected Japan, but also global equities.
So, when the BoJ laid out its plans to hike rates and cut down on asset purchases, markets panicked, and the Yen began a massive rally.
Since then, things seem to have stabilized in Japan, and a lot of this can be attributed to the words of Governor Uchida.
Uchida came out and essentially told investors it would not rock the boat if the market went through a tantrum.
Well, it seems like that has been enough for now to stem the sell-off in Japanese and US equities, as well as stem the rally in the Yen.
Reasons To Be Bullish
Over the last few weeks, you’ve probably already heard all of the bearish arguments, so let’s cover the reasons we should still be bullish.
Employment
In markets, it’s always hard to establish causality, but at the very least it is true that the sell-off in US equities also coincide with a very weak non-farm payroll.
However, as I already mentioned in the chat, a lot of this could just be noise
Now, the latest employment data also supports this theme. Initial jobless claims continued to decline.
After COVID, a lot was said about employment being structurally tight. However, we have seen unemployment begin to rise. Some, myself included, have talked about how the Sahm Rule is triggering. However, as pointed out in this note below, the “modified” Sahm Rule, which excludes the effects of immigration has not yet been triggered.
Arguably, a lot of the recent slack in the jobs market could be attributed to higher labor supply due to immigration, but not necessarily a weakening economy.
Economy strong
Indeed, the evidence so far does not support a weaker economy here. Business optimism is at new highs.
Retail sales surprised to the upside.
And, to top things off, inflation is coming down, now at 2.9% YoY.
So far goldilocks persist, with the US economy resilient and central banks now getting ready to ease further.
There may indeed be pockets of overvaluation in the market, but there’s no evidence so far that we should be concerned about a recession.
Liquidity and the dollar
And yes, we must talk about liquidity, as always.
It was in fact the BoJ “liquidity scare” that sent markets tumbling. But what can we expect moving forward?
The BoJ has already said it won’t tighten if markets don't’ like it.
The Federal Reserve will begin to cut as early as the next meeting.
And China is also on track to continue to ease. This has been the trend over the last couple of months.
The trend for Global liquidity is up, and there could also be something more at play here. Michael Howell, from Capital Wars, noted in a recent post that he believed something like the Plaza Accord may have been reached.
The Plaza Accord was a joint agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British pound sterling by intervening in currency markets.
Source: Wikipedia
If there is indeed a coordinated effort to devalue the dollar, this should be a boon for liquidity. Michael Howell also shared the following graph on X, showing a comparison between liquidity today and back in 1985, when the accord was signed.
This lines up with his overarching thesis that the liquidity cycle should continue up for the next couple of years.
Let’s look now at how the market reacted before and after the Plaza Accord.
Interesting to see that the SPX actually sold off around 10% ahead of the Accord. Following this, markets rallied over 88% over the next two years.
Not that history will necessarily repeat itself, but a weaker dollar will be good for markets, some more than others, and this also lines up well with my technical view of the dollar index (DXY)
We have convincingly broken down below the 50 and 200 daily MAs, and I expect to make a lower low in a wave C somewhere in the 95 region.
Technical Momentum Is Back
Since the panic sell-off on Monday the 5th, the SPX and NDX have been on a tear. Buyers have shown up, but it seems people aren’t willing to sell the rip.
I’d say we have some pretty bullish signals for the time being.
The SPX is looking good here, bouncing above the 200 EMA and reversing exactly at the 78.6% retracement of its last rally. We can see market breadth has improved, and the MACD has flipped bullish.
Moreover, we’ve actually triggered a buy signal on my TS algorithm.
The algorithm has managed to outperform a buy and hold strategy. It didn't help us catch the bottom, but it did also save us quite a bit of downside.
Ultimately, catching a falling knife is risky and it is better to wait for a confirmed break out, and pull-back.
In this regard, we the RSI entered overbought in the 4h chart, I’d love to see the SPX retrace now back towards 5300, where we have some support from the 200 EMA on the 4h chart.
This would be the ideal place to add in terms of risk/reward.
If you haven’t already I highly recommend you check out TrendSpider. It has a bunch of cool features and a great team behind it. I particularly like the strategy builder and custom indicators you can find.
Sign-up using this link, and I’ll personally send you my custom trading strategy.
Now, a look at the Bitcoin chart
After wicking down all the way to $49K, Bitcoin rallied back above $60K, but has since sold off again.
For now, the green trendline is a key area od support to hold at $52,000. Below that opens the door to $43K, where I think we have very strong support.
However, this could be a reasonably good spot to add.
Portfolio Update (Swing and Macro)
With big sell-offs, come big opportunities, and so it is time to add some new trades to our Swing Portfolio.
Adding to our favourite crypto miner, which showed great earnings
Adding exposure to one of the best performing altcoins
Adding exposure to one of the most undervalued chip stocks out there
Adding one of Michel Burry's favorite stocks
Adding buy orders lower to take advantage of any further sell-off.
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