Sylvester Stallone is off the cliff.
The markets were on fire Friday.
The S&P 500 popped off the 4,000 resistance level and screamed into the close.
What a difference a day makes.
Yesterday, the S&P 500 was dangerously close to a dramatic break under the 200-day moving average. And then a magical messenger arrived to save the bulls from the depths of trading hell.
Meanwhile, the Bears were torn apart.
In a stunning development during the Thursday trading session, momentum miraculously turned green. And the heavens parted…
Thank You, St. Raphael
The S&P 500 was flirting with disaster yesterday. The critical 200-day moving average took us down to about 3,940. A break under that line in the last year has fueled dramatic selloffs.
Then, at around 1:30pm ET, Atlanta Federal Reserve Bank President Raphael Bostic said that the Fed could “pause” on its rate hikes by late summer.
Bostic also said that he’d like to see rates increase by 25 basis points during the Fed’s meeting in two weeks.
Now, here’s the thing…
Bostic isn’t a voting member of the committee. To be honest, who cares?
But it didn’t matter. The algorithms caught that headline and engaged in a massive feeding frenzy. Suddenly, we weren’t talking about a breakdown in the financial markets.
We were talking about a move back to 4,050 level as soon as Friday.
It didn’t take too much volume to get to that level.
It just required a lot of short-covering mixed with low-volume bids. Even junk stocks like ChargePoint Holdings (CHPT), which missed earnings and revenue expectations BADLY, squeezed higher on Friday.
The stock’s $10.50 call expiring on March 3, 2022 traded for $0.12 (that’s 12 cents) at 9:45 am. An hour later, that contract was up more than 650%.
The stock was down as much as 10% at the open and nearly finished even.
This is what happens when momentum turns positive. Capital flushed into the market in a dramatic fashion. It creates incredible short-term rallies that can take up to new heights quickly. How high will it go?
Well, I think there’s a specific level to watch.
4,100 And Then?
Federal Reserve Chairman Jerome Powell will speak on Tuesday.
And to me, this feels VERY reminiscent of the April, August, and December selloffs. We had negative conditions for a few days…
Then, we pushed higher on just a small amount of “good news…”
And then – straight down.
Nothing has shifted in the economic data that would suggest this market is healthy, and not overstretched. We’re at 22x earnings. That’s not where bear markets bottom out. Historically, it is much lower.
More important, consider the fact that our economic data is running hot on the back of expanded economic conditions. The problem is that we have hot jobs data, hot manufacturing data, and hot inflation numbers.
People want to say it’s because “the economy is strong…” but the reality is that it’s largely based on an expansion of credit and leverage over the last few months. In October, economic conditions bottomed out.
In November, credit conditions expanded, the dollar weakened, and consumption resumed. There’s usually a two-month lag on this economic effort. The problem is that it can’t last forever.
This economy is going to hit a wall at some point – and liquidity will start to dry up once again. At that point, look for the market to face the consequences.
For now, enjoy the short-term rally. My target is 4,100 which has been a major resistance level over the last year and source of selling.
That said, the higher we go… the more pain there will be in the end.
Be very cautious – and use any short-term rallies to take gains.
To your wealth,
Market Momentum is Green
We lifted our hedge position with the Proshares S&P 500 Short ETF (SPY) after momentum turned Green for the Tactical Wealth Investor. And while the “loss” on the hedge was a meager 1%, we cheered as our top-performer Mosaic (MOS) eclipsed a 24% return to start 2023. Right now, we’re very worried about the possibility of much higher rates. That’s why we packed our money into one of the best business development corporations (BDCs) in the world. Now’s the time to buy after bond yields declined on Friday. You’ll be happy you owned this stock before March 15.