Bloodletting

April was an ugly month for investors — and advisors. You’re seeing headlines like ‘worst performance of the S&P 500 since WW2’ in the headlines.

Armchair quarterbacking is pretty useless. Suffice it to say, many investors are playing the “I knew I should have” game right now. All the signs were there, right? Inflation; the percentage of stocks falling inside the indexes was rising; 10-year treasury yield rising; inverted yield curve; commodity prices; Fed rate hikes; a war in Ukraine; Chinese lockdowns. IT’S SO OBVIOUS.

The reality is, in hindsight, everyone can be a genius. The question is, how’s your foresight? Because that’s what it’s going to take now. Markets have fallen into correction territory.

The BigFoot Market Macro officially kicked out at the end of the month. Historically this has been a risk-off indicator. However, both the economic macro and the credit macro remain in. So what does one make of it? Risk on or risk off?

Taking a position on the markets is easy. Getting it right is the tricky part. How does one predict the future?

The short answer – you don’t. It’s just statistical analysis and theories. Even the best analysts don’t bat 1000. So bury the idea you’ll get this perfect, and switch to the idea you’re just trying to get more right than wrong.

Looking forward, it’s tricky. There’s still a lot of ugly in the numbers. But a lot is also priced in at this point. Most all of the FANG stocks are now in correction or bear territory. Stocks are down. Rates are rising. Foreclosures are rising. In short: uncertainty is high.

The good news is valuations are a lot better than they were a few months ago. So, relatively speaking, stocks are not nearly as expensive as they were.

This is not to suggest it’s time to catch a falling knife. It is to suggest stock prices bottom when investor sentiment is negative. And certainly sentiment is negative at this point.

Looking at the technical stuff, the negative tends are both obvious and strong. However, there has already been a sharp downturn. And if there’s one thing this market has taught us in the past few years of Covid, it’s that trends can whipsaw pretty hard pretty fast.

At this point the VIX is expensive. And recently, the SPX has been inversely correlated with high VIX prices. Translation: when the VIX gets really high the SPX has rallied as the VIX falls. We’ll see if this trend continues. The price to watch is about VIX 34.

Looking past the VIX, the support level for the week appears to be 4050 for the SPX. It’s entirely possible this thing reverses this week before getting that low though. Futures are down, but not convincingly. All it would take is a bid in big tech to turn things around fast. And both AMZN and GOOGL should see share splits soon. So keep your eyes open.

For this week, look for continued downward pressure early, but it’s possible we see capitulation in the indexes soon. Sentiment is quite negative. If the Fed maintains its current language without increasing hawkishness, it’s possible the market has a small relief rally and moves back toward the broad trading range we’ve been in for most of 2022.

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