March 10, 2022 – Wash, Rinse, Repeat

8:00 am

Good Morning!

SPX futures have declined to a low of 4229.80 as I write, giving back nearly half of yesterday’s bounce before the open.  This attests to the grip that the dealers and hedge funds have on the market, as the SPX closed at Max Pain again.  Note that the rally closed in the correction zone, about 89% of the top in January and the 50% Fibonacci retracement was 4287.32.  The vast majority of options buyers are buying short-dated options that can whipsaw investors.  The dealers may soon have their comeuppance.  We will know the time has arrived when they start crying for a bailout.

ZeroHedge reports, “After yesterday’s optimism-inspired, negative-delta triggered melt up in stocks, futures have slid significantly overnight as lack of options market ‘rampage’ collateral (until the cash open) combined with a material lack of progress in the first high-level peace-talks between Russia and Ukraine stole the jam from the market’s donut.

 

 

VIX futures staged a comeback, rising to 34.02 this morning.  Commentators observe that the market may be near peak capitulation and a recovery may be around the corner.  A true capitulation (bear market bottom) would see none of this malarkey.

Zerohedge comments, “If you are short and want to feel really stressed

The move yesterday was brutal. Shorts were carried out on stretchers. It sure looks like we are “past peak” capitulation in terms of hedge fund flows. AND there is a wall of money that will support equities. AND you can make a case that valuations are attractive. AND maybe mega-cap tech is waking up again as proper bull market generals. OR maybe this was just a classic bear market squeeze and we should once again sell the rip very soon.

Closer to the end than the beginning of the discretionary de-risking

JPM loves the smell of capitulation among hedge funds. JPM Position Intelligence team: “Among Equity L/S funds, we’ve seen 7 consecutive days of active de-grossing as longs have been sold and short covered. Looking back over the past few years, the level of active de-grossing is the biggest aside from Mar ’20 (Covid) and Jan ’21 (Retail Squeeze). Furthermore, the duration of the de-grossing is nearing the duration of past big events, which lasted from 8-12 days)”

 

NDX futures dropped to a morning low of 13510.00, brutalizing the longs taking the plunge at the end of the day.

 

TNX is challenging the Cycle Top resistance at 19.75 this morning.  This move may be spent, as there is no indication of strength left in the Cycles Model.  In addition,   the EW structure suggests a pullback.

ZeroHedge reports on yesterday’s auction, “After yesterday’s disappointing 3Y auction, which was rocked by the rollercoaster swing in markets on a day-old AFP report, moments ago the US Treasury just sold $34BN in 10Y paper (in a reopening of Cusip CDY4) which came just as the FT was sending out fake news that the UAE had reached out to OPEC+ to urge a production boost, which sparked a flash crash in oil and unleashed a new volatility shockwave across assets.

And, just like yesterday, today’s auction left a lot to be desired, with the bond stopping at 1.92%, tailing 0.3bps to the 1.917% When Issued, and just above last month’s 1.904% high yield.This was the highest yield on a 10Y auction since July 2019.

The Bid to Cover predictably dipped from 2.68 to 2.47, the lowest since December, and  below the 6-auction average of 2.53.”

 

USD futures made an overnight low of 97.70 and bounced.  It may be due for a (minor) Trading Cycle low in the next couple of days, followed by the final probe to 100.00 during the week of March 21.

 

Crude oil bounced to 114.84 this morning, raising hopes of investors of a resumption of the bull market.   Crude is on day 247 today leaving another 1-2 weeks for a final push higher.  The EW structure appears complete, but the top may be extended in the corrective phase (Wave B).  On the other hand, should WTIC decline beneath the Cycle Top support at 98.48, a significant decline may follow.

ZeroHedge observes, “It was just last June when we asked if “ESG will trigger energy hyperinflation“, explaining that the progressives’ ESG agenda, “is unwinding the shale oil revolution. As recent events at Exxon and Shell have shown, the pressure on oil companies to reduce oil and gas exploration and adapt their business models has increased significantly over the past few months” (incidentally the answer to our rhetorical question was “yes”).

We added that “ESG is a negative supply shock that internalizes the climate cost of the production of goods and services. This negative supply shock will be inflationary until technological progress absorbs these costs. That could take years.  Moreover in Europe, it could garner enough of political support to justify a more aggressive fiscal policy despite the constraints at the German or EU levels.”

Meanwhile, the impact of ESG on oil companies has been to depress Capex spending to the lowest level in decades, leaving the energy sector entirely unprepared for any energy price spike, as it simply did not have the capacity to pump as much oil as may be needed.”

 

Gold futures bounced to 2015.00 as a brief period of strength ends the week.  However, a consolidation may have begun.  Gold may have begun a 6-week correction period before resuming its uptrend.  A correction this long suggests a possible triangle formation that ma frustrate investors.  Support is at the Cycle Top support at 1905.50.

ZeroHedge remarks, “Gold – everybody sucked in?

The “easy” trade in gold is long gone (outlined here on Feb 11). Now comes the “frustrating” part for most that have missed buying at decent levels and/or sell at recent euphoria levels. Gold needs to consolidate before anything meaningful can occur again according to us. If you are running “must be longs” here but think we are due for a consolidation, we see overwriting as interesting set ups. Gold volatility has exploded higher and offers great yield enhancement plays.”

 

 

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