50-day in Play

Futures markets indicate a continuation of Friday’s sell-off.

Last week the S&P 500 managed to close lower than the prior week. It appears a bit of a trader’s pull-back may be in order. Technical indicators suggest the 50-day moving average will likely be tested early this week. That would be around the 4239, or a drop of roughly two percent.

This would not be particularly disorderly in the current pricing pattern. Nor does it suggest anything catastrophic (at least not yet). It simply suggests pricing things have been over-bought for a couple of weeks and traders want to lock some profits.

The larger issues are still in play. Fed behavior matters. But the conversation is shifting. Does the economy have a handle on inflation or not? Is this really transitory? And does the Fed have enough bullets in the gun to be effective?

These are big questions. The answers likely won’t be known until after the fact. So, for now, follow what the markets are saying. For the week, it looks like slightly risk-off, but in the larger picture, there is still little-to-know return in the risk free space (in fact, it can be argued that inflation makes true risk-free returns negative).

Looking at the numbers, the key area looks to be the 50-day price average for the SPX. Note this level overlaps with the week-of-June-21 low in the 21-MALG line (illustrated below). Essentially, the set up is for an overlap of the prior price wave — a dip crossing below this point, indicating a likely completion of a correction pattern. The question will be, do prices recover and go on to challenge new all-time highs from this point, or do they break lower.

This is a question for more data, but current indications are the prices will pull-back to these levels, find footing there, and move back towards the previous highs to re-test resistance.

For the week, look for a potential test of the 50-day pricing average early, with prices likely dropping below 4260, and a decent chance of price recovery moving back towards the 4350’s by week’s end.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Q3 Earnings Season Begins

Now that Q2 books are… um… in the books, investors and traders will get a look at whether or not the rumors matched reality. Many have speculated that earnings will be strong – especially when compared with comps from a year ago.

Of course, the other key component to pay attention to is guidance. Investors are looking for keys about how well businesses are operating and whether or not there are any external factors (such as supply chain issues) that could affect revenues.

One of the key questions is whether or not news matches expectations. Has the market already priced in news? In which case, a change in the story could lead to a change in the price. So, what’s the story?

Largely, the story is about economic recovery and inflation. Is inflation transitory or not? Will the Fed raise interest rates? Will the worker shortage impact business? Will Washington change policy and blow something up?

When looking at the technicals, the market seems to be asking the question about what data to watch looking forward. Is the Fed going to shift policy? If so, that could really change things.

Also, how are earnings? No, really. How are they? Are they above expectation? Because the beginning of the year had a lot of opinions being thrown around about just how healthy (or unhealthy) the market recovery was. The S&P 500 had projected earnings – and a price multiple. In fact, forward-looking multiple was over 30 for the SPX. Is this still the case? And if so, where does the market go from here?

With the last few weeks of positive returns the SPX has crept into over-bought territory. A technical correction back towards 4260 would not be out-of-line. However, these types of strong upward trends tend to continue until some event sends traders headed in a different direction.

Given the positive nature of the trend, it appears the SPX is playing it by the big numbers until it gets more data. That means resistance at 4400 and support at 4300. When was the last time we got to say something like that?

Sure, there are some more technical support/resistance areas. But, goofy as it sounds, the 4300/4400 range (plus or minus a few points) is real.

For the week, futures show a weak opening with slight downward pressure. If the trend continues, look for weakness early, then buyers to come in the afternoon and push things higher.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Q3

2021 passed the half-way point last week and the SPX managed to finish the week at an all-time high. This sets up a push/pull situation for this week’s holiday-shortened 4-day trading week.

Last week the SPX broke out of its trading range and shot higher. In fact, it’s high enough now that it’s looking pretty over-bought. The question is, given the Fed’s steady course, and the fact it looks like other stimulus efforts may be slowing (think unemployment benefits, eviction moratoriums, etc), is this a recipe to keep interest rates low — which keeps investors in the market.

If this premise remains valid (low rates, TINA market), what we’re likely to see is a pull-back of about two percent or so in the index, then a regrouping for a push even higher. The current high-water market is about 4352 for the index. The next area of resistance is at 4392.

The larger question is whether or not inflation is transitory or more significant.

Given history, this is a really tough question. The Fed probably has better tools at its disposal than at any point in history to monitor this kind of stuff. But the markets are also more complex and faster-moving than at any point in history. The key seems to be Washington, DC.

Some are suggesting the stimulus efforts initially used to fight Covid are now being used to force wage increases — sort of a phantom minimum wage play — since larger political efforts to formally do so have met a lot of opposition. Others suggest this is simply an unintended consequence of committing to so much money printing and direct stimulus.

Regardless of who is right or wrong on the interpretation, the challenge remains: will we see inflation stick around?

If housing, energy, and wages are any indication — well, that may be our answer right there. Things are getting more expensive. Employers are struggling to find workers. It’s an interesting time.

If this is transitory, the larger concern would be a cooling of the housing market and the knock-on effects that could create.

So far, the Fed has been relatively cautious about how it speaks to inflation. It suggests it’s transitory and has forecasted a rate increase in a year or so. But they’ve also done more subtle things to subtly reduce the money supply (like the reverse repo stuff we discussed in the last forum call).

This is the push/pull discussion. Inflation, money supply, and rates are all tugging at this market. The technical set-up seems to be over-bought, but also in a break-out to new all-time highs.

There aren’t really hard-and-fast rules for how to handle this. But there are suggestions. And one of them is to keep following the trend until it changes. If this age-old wisdom plays out, this trend looks like there is more upside. (And, of course, if this age-old wisdom is wrong, and the markets go down, the compliance reminds us past performance is no guarantee of future results.)

For the week, there is potential for the SPX to move lower to test support at 4280/4257. However, futures markets are pretty flat right now. If a down-trend doesn’t materialize, resistance is about 40 points higher at the 4390 level. Odds of a pull-back look to be about 50/50 right now (swag technical guess, tough to put real numbers to these odds).

At this point, the SPX has already out-achieved the January projections and we’re only half way through 2021. The question is, do things continue to climb higher from here? So far, the trend suggests we may.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

End of Q2

Last week provided a technical surprise as the SPX reversed course and broke out to all-time highs.

This breakout should negate the sideways pattern that had presented the prior week. The next wave higher appears to be a move toward 4307/4350.

We’re at the end of the quarter, so some volatility is not unexpected. We’re also approaching a holiday weekend with Monday off. This could lead to a volatile end of the week as traders look to extend the vacation weekend and shift trading activity towards M/W/Tues while cramming end-of-June and end-of-quarter trading activity in.

If the vacation theory is correct, trading volume could fall on Thursday and Friday, leading to more significant market moves.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Sideway Pattern Emerging

Based on last week’s move it looks like a sideways pattern is likely to emerge. The SPX fell about two percent for the week, dipping below the 50-day moving average.

The area of support for the index now sits at 4135. That’s about 3/4 of a percent cushion for the index. But a close below this level for the week would signal a potential breakdown in trend with a high probability of further downside.

Peering into the numbers the SPX hit its high for the week on Monday. From there it was four consecutive days of declines.

The 4135 area of support was established on May 21st.

The extreme boundary of support is 4061 established on May 19th. However, this was an intra-day price move and would be pretty tenuous.

More likely, the index finds support at the higher 4135 area.

More critically, resistance has now been established at 4257… funny enough, this is the all-time high for the markets. Hence the more likely sideways pattern than price breakdown.

Monday futures indicate a positive open. Look for stocks to likely trade between support and resistance for the week with a low probability of breakout from this sideways trend.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Possible Trader’s Dip This Week

Last week the SPX broke a nearly 5-week streak by finally closing at new all-time highs. The achievement was not exactly a powerful trend higher though. It was a grind. And now market signals are suggesting a small pull-back may be in the cards.

The issue is not that the markets made a new all-time high. That’s typically a good sign. It’s the issue of how many trading days it took and how volatility has declined. In essence, the market is simply ‘due’ for a pull-back toward the middle of the trading range because of the weakness in the trend higher.

This week the many eyes will be on the Fed to get a sense of ‘if or how’ their approach to managing this economy may change. As long as the messaging is basically a continuation of the existing very methodical approach to tapering quantitative easing and raising interest rates, things should remain relatively within the pattern we’ve seen for some time.

The technical point the market is digesting isn’t a particularly large issue in the scheme of what’s going on. It’s more an issue for traders. The weakness in the ‘higher high’ of the SPX is that volatility has declined during the grind higher. The higher high in and of itself, is a good sign. But the fact it was barely able to push higher is what causes pause.

The set-up suggests the markets may be in for a small pull-back below the 4200 level. This is based largely on the weakness of the higher high, paired with the pattern of several days near the 2-standard-deviation top of the 21-day trading range.

In short, we’re ‘due’ for a small pull-back because the trading range has sort of stalled at the higher high.

The support levels should be around 4200, and then again lower at about 4165. That is, of course, assuming the Fed makes no material shifts in their guidance.

Assuming nothing is too far out of line with expectation, the markets will likely push to yet again new all-time highs. The question is, does the pattern unfold over a day or two? Or do we spread this out over more than a week?

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

In Between Patterns

Last week failed to close above the 4232.60 level for the S&P 500 setting up an interesting test for this week. Can the SPX push through to new all-time highs this week, or will the index bleed off momentum and shift toward a neutral-to-negative sideways trend?

Based on the scientific-wild-ass-guess (SWAG) technique, the evidence — including meme stocks, social media, the licking of one’s thumb and sticking it into the breeze, and the part where every news station on the planet seems to be talking about commodity inflation — suggests this market will go higher.

Wait… what?

Yes, you read that right. Consider it an irony reading – contrarian if you will. When retail investors are afraid, professional experience (mine, ha ha) suggests markets can keep climbing the wall of worry higher.

As discussed in the past several BigFoot Forum calls, the working theory is that this market is primarily driven by the Fed and the cost of capital. The Fed continues to affirm a low-interest-rate backdrop. This suggests the risk/reward tradeoffs remain largely unchanged at this point. Relative to bond yields, stocks still don’t look too bad.

When this changes… and history tells us it will… expect the markets to shift. The question is when.

Memes about $75 sheets of plywood being traded for vintage cars suggests consumers know some assets have inflated a lot. Look no further than food, energy, and housing to witness inflation in real time.

Wage inflation is real. Unemployment is still real. Supply chain disruption is still real. The thing is, these are pretty visible to the retail marketplace. Assuming the disincentive to work (where unemployment pays better than employment) ultimately shifts, then things can get interesting. Until then, it looks like the Fed must continue to hedge its bets on raising interest rates.

Oh, and if you’re wondering about Washington, D.C. and how fiscal policy will affect the markets… so is everyone else. At this point, the disfunction in the capital can get nothing done quickly. So the best the markets can do is guess about what will actually happen… an infrastructure spending package loaded with pork? Or a smaller infrastructure spending package loaded with pork?

So where does this leave the technical picture?

Well, last week was a 4-day trading week thanks to the Memorial Day holiday. While much of the trading is bots and algo’s these days, 4-day trading weeks (according to my SWAG theories) tend to be more volatile. The good news about last week, at least from a technical vantage point, is it looks like the SPX bounced off of support to challenge the week near the resistance point.

Monday futures suggest resistance will be challenged right out of the gate today. So the 4232.60 figure should still be in play. A close above this level would suggest the markets will extend their trading range higher after breaking above the previous all-time-high mark. The concern would be a intra-day push above this level, but a failure to close above it. This would suggest resistance is higher and a sideways pattern with more volatility would follow.

For the week, look for a close above 4232.60, with the next resistance level to be at about 4265 or so. Soft support is at 4213, with more material support at 4170.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Short (But Important) Week

May is officially in the record books. Now what?

Well, since it’s too late to sell in May and go away (and, besides, that’s just a wive’s tale, right?), I guess it’s time to turn the page to June.

The talk of the town continues to be inflation. Apparently it’s real. The question is how real?

The coming weeks will be important, but this first week of June may set the tone for the entire month. The important figure for the SPX appears to be 4232.60. A close above this level this week would signal a high probability for the SPX to make another leg higher in the precarious climb of the wall of worry.

This is a tricky time for investors. Inside the BigFoot algo’s are a few key insights:

  • All three major indexes have wait signals (indicating a spike in recent volatility)
  • The database has climbed above 77% total long positions (an indication the markets are reaching a potentially over-bought position)
  • All three macro indicators are positive

This mixed bag of data is tricky. In the short term, the volatility spike is a warning sign; the total long positions is less of a signal of a problem than an indicator the market has been on the move higher; the macro’s, on the other hand, suggest the economic backdrop is largely okay.

So which is it?

The answer… is probably d, none of the above. Watch the Fed.

This market has largely been fueled by low interest rates and money printing. Both are still happening. So the key is, if the market now expects these behaviors, what could happen that would change them?

A change in the cost of borrowing funds would ripple through the economy in multiple ways. It would affect the ability to access capital for many companies. And it would disrupt the economic pricing models many investors use to rationalize stock prices. Either way, the stock market stands to be impacted.

So inflation really is a big part of the equation. If assets are inflating, it stands to reason stocks will inflate as well (and certainly history suggests this). The real question is, what kind of volatility might we experience along the way?

These are questions we’ll explore in the coming weeks of this blog. But for this week, simply keep an eye on SPX 4232.60. It’s not an all-time high… but it is the all-time highest closing price for the index. If we finish above this level for the week, it’s a technical sign that the higher high will extend the rally for a bit longer.

It’s a shortened trading week and the unofficial start of summer. Typically this would mean more ‘vacation’ behavior for the markets… but Covid has perfected more of the work-remote stuff, so the effects may be negligible now that we’re all trained to work out of the corner of the laundry room.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Investment, Speculation, or Just Plain Guessing?

Markets these days have become an interesting data mix. And here’s a challenge – not all the data agrees with itself. If you ask some, the markets have the wind at their back as the economy reopens and the government is talking stimulus for… darn near everything. Others point to data suggesting we could see hyperinflation.

it’s hard to say whether or not the technical and fundamental pictures are well aligned. The technical picture has clouded significantly in the past couple weeks. Markets went from a series of low-volatility of all-time-highs to a higher volatility whip-saws.

The volatility, in and of itself, isn’t that rare. But the recent sequence of returns had been such low volatility that the average daily trading range had really compressed. Pair that with a bunch of computers watching this stuff, and anything that pushes volatility outside the average ranges has the potential to trigger algo’s to start moving markets.

A look at the pricing moves of the SPX will show a series of bigger swings, lower highs, and lower lows. This would typically be a bad sign if the time horizon were longer. However, this falls within a relatively short period of time following a longer low-volatility move higher. So it may simply be the markets going through a bit of a correction-and-consolidation phase.

It may be worth noting that crypto currencies had a doosie of a last week. A bunch of the oddly-named digital tokens had big drops – many off over 50% from their previous highs. This seems to indicate a change in risk appetite in general (or maybe a change in the cost of margin).

It should also be noted that a new narrative is permeating financial media — inflation. Or, more concerning and headline-grabbing: hyper-inflation.

Inflation is an interesting one because it has such a significant sway in many financial models. If the risk-free rate of return changes, that variable then alters the outcome of all kinds of assumptions in the markets. Basically, investors are going to expect different returns from their investments.

You may here it couched as a ‘repricing of risk’ scenario. But basically it’s everyone insisting, with inflation rising, and the 10-year treasury likely to follow, the market values are wrong. (Or, again, the price of margin may change, so the cost of leverage would also change. The effect would be the same.)

Of course, getting agreement on what the correct value is is why we have a market in the first place. So there’s nothing inherently wrong with the idea that folks think values are changing. The question is, will there be enough folks in agreement that it will really start to move the markets one way or another?

For a while now, analysts have been rationalizing higher valuations of stocks because, relative to bond yields, stocks look relatively affordable. The markets seem to have doubts about this thesis recently though, as tech (really high PE’s) has struggled. (In fact, most of the growth side of the style box has underperformed the value side of the style box this calendar year, with small growth, as a category, showing meaningful price drops in recent weeks.)

The value side of the style box has been the larger winner year-to-date. This is likely for a lot of reasons, including the fact that growth assets were coming off of a very strong recovery period during the Covid shut-downs of 2020 and the essential/re-open story that drove their prices to all-time highs.

The question is, are investors simply rushing from one side of the style box to the other because of the somewhat inverse relationship between value and growth? Or is there a more significant shift to the underlying fundamentals of this market that signal a regime shift?

Much of this will get unpacked on this Thursday’s forum call. If you are reading this and don’t already subscribe to BigFoot Investments, you’re welcome to join us as a guest this week. Visit the contact us link and drop an email. We’ll get you the login info.

For this week, watching the SPX, look for support at 4138/4095. On the flip side, resistance should be around 4205.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Confidence Shaken

The NASDAQ has been getting whipped around since mid-February, but last week saw major indexes join in declines. And already the major media narratives is beating the drum of inflation.

This is not new news. In fact, had you been in the last forum call, you may recall a warning that inflation and CPI data would look ugly simply because of the way the data would ‘paint the tape’ based on when the samples occurred.

Well, the data arrived (as anticipated). And it was ugly (as anticipated). And the Fed has continued to be patient (as anticipated).

This is not to suggest inflation is not happening (it is). But it is to suggest this has not snuck up on anyone. It’s simply a sellable headline for financial media outlets.

The larger concern is probably which type of inflation. Specifically, wage inflation showed a big jump in April. This may present the biggest problem: Washington (as often) appears to be completely painting the Fed into a corner with generally reckless fiscal policy – namely the continued extension of unemployment benefits in a re-opening economy. By effectively paying some not to work, it is forcing employers to increase wages to attract workers. And this, in turn, is driving the inflation narrative.

Pair the labor supply constriction with the already disrupted supply chains and you start to see the picture the market is digesting: just how do we price this thing going forward? Which areas of inflation are temporary as a result of Covid? Which are unintended consequences of policy decisions?

Clearly the markets have struggled with these question. The NASDAQ has been largely sideways since February of this year, with prices fluctuating over 10% for the index. The S&P 500 and DIJA, while less volatile than the NASDAQ, both experienced losses last week. All three major indexes have seen a spike in volatility.

Interestingly enough, none of this was particularly disorderly when examining the technical backdrop.

Looking at the SPX as the primary indicator, volatility had been on the decline for weeks. In fact, a quick look at the Bolinger Bands (below) shows a period where trading deviation had narrowed significantly in the last week or two. And while this does not mean the market ‘is due’ for a spike in volatility, this type of pattern typically leads to a breakout one direction or another. Toss a negative headline or two in the mix and the market will typically break lower.

Notice (in the chart above) that once the SPX dropped below the shaded area, it found support above the 50-day moving average and recovered back into the middle of the shaded area. This suggests the SPX is presently neither over-bought nor over-sold.

Looking forward, the strong upward bias has been somewhat mitigated. Markets may be entering a bit of a sideways consolidation pattern (which would be somewhat cliché because… sell in May go away… so we’ll see).

It’s possible this consolidation leads to a resumption of the prior up-trend. Candidly, it’s a bit early to call that. There’s still a fairly strong possibility this volatility gets baked into the prices fairly quickly and the up-trend resumes.

For now, look for a period of sideways movement as the markets digest this volatility and Washington decides how much additional money to print (this time in the name of infrastructure).

For the SPX, look for support near the 4100 level, with resistance just over 4200 (actually about 4206, but the market is rarely cooperative enough to give a specific number and have that work out).

Futures indicate a lower open Monday, but the downward pressure does not appear extreme. If the week closes higher than last Friday’s close it will indicate a sideways-to-positive bias still exists.

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