December 20, 2022

3:00pm

SPX may be at a crossroads.  Normally we would see a rally back to the 50-day Moving Average at 3863.40 or possibly back to the support line at 3910.00.  However, it is flirting with short gamma beneath 3850.00 which intensifies beneath 3800.00.  A close beneath 3800.00 may cause SPX to tumble even lower overnight.

ZeroHedge remarks, “Despite the much-anticipated ‘dovish soft-CPI’, equity markets sold off last week and continue to do so (ignoring the Santa Claus rally). However, VIX remains notably low although uncertainty feels significantly higher and liquidity into year-end remains dismal as the quarterly roll-over of a massive put-spread collar that the $15 billion JPMorgan Hedged Equity Fund (JHEQX) owns as a protection for its portfolio remains the elephant in the room.

While the position consists of protective puts funded with the sale of bullish calls and even more-bearish puts, it’s the calls part of the trade that has Wall Street’s attention right now, in part because these contracts have a strike price near where the S&P 500 is trading: 3,835.”

 

2:25 pm

BKX tested the neckline of its Head & Shoulders formation at 97.00 yesterday and bounced.  The question is, will the bounce extend to the 50-day Moving Average at 102.62 (resistance), buying more time or simply roll over?  Liquidity is being drained from the economy due to rising rates.  Inflation pressures are causing consumers to drain their savings and rising funding pressures are affecting banks, as well.  It is estimated that some 30 major banks are on life support, but we won’t know who they are until they appear asking for a bailout.  In the meantime, liquidity continues to drain from the banking system until the year-end, as indicated by the Cycles Model.

ZeroHedge warns, “Six months after the Fed’s Quantitative Tightening started, the Fed’s balance sheet has shrunk by just over $400 billion, less than 10% of its massive expansion in the post-covid era when it nearly doubled in just days $4 trillion to $7 trillion, and then grew another $2 trillion over the next year.”

 

8:00 am

Good Morning!

NDX futures challenged the Lip of the Cup with Handle formation at 11000.00 last night by declining to 10942.00.  It is currently hovering at 11000.00 and may go lower, since the rest of the week shows trending (downside) strength.  The next possible support level may be the November 7 low at 10632.40, followed by the Cycle Bottom at 10246.04.

While puts dominate today’s op-ex, short gamma appears at 11000.00 and intensifies beneath 10700.00.  QQQ (closing price 269.75)  shows Max Pain at 280.00.  Long gamma may begin at 282.00 while short gamma starts at 275.00.  This has the potential of a runaway train.

ZeroHedge remarks, “Morgan Stanley’s Wilson continues nailing market moves. He turned bearish not long ago and continues to deliver his bearish thesis. His latest bounce call was just a technical bounce and we should once again focus on his longer term bearish fundamental view which can be summed up in 3 bullets:

1. weaker inflation data is bearish for stocks …”This makes sense as markets contemplate what falling inflation means for growth and the equity risk premium.”

2. earnings outlook is looking bad and deteriorating

3. weekly survey data falling…demand is basically worsening

Chart shows the perfect overshoot above the 200 day…

 

 

SPX futures dipped to a low of 3776.70 in the overnight session before a bounce.  It remains beneath the 50-day Moving Average at 3860.64.  Normally we would see a retracement to the combined 100-day Moving Average and Intermediate-term resistance at 3934.08.  However, the Cycles Model suggests an intensification of the decline for the remainder of the week.

Today’s op-ex shows Max Pain at 3850.00.  While calls dominate above that, long gamma my not be activated until 3900.00.  Puts dominate beneath 3850 with short gamma intensifying beneath 3800.00.

ZeroHedge reports, “After last week’s CPI and FOMC decision, it was supposed to be smooth sailing into the illiquid, year-end waters as trading desks closed down for the year, and where among those few traders left some expected a Santa rally while others kept pressing their shorts. The BOJ – which was badly been lagging all of its central bank peers in tightening financial conditions – however had other plans, and on Tuesday morning Japan’s central bank shocked the world when it announced it would widen the Yield Control Curve band on the 10Y Treasury from 0.25% to 0.50% on either side, a move which had been viewed as a “when not if” – as markets knew the BoJ would eventually have to realign the “kinked” 10Y point with the rest of JGB curve and fundamentals…”

 

 

VIX futures consolidated within yesterday’s trading range.  The Cycles Model indicates a surge of strength may be due today.  There are a few more days left for a potential Master Cycle high.  Otherwise the December 2 low may have ended the Master Cycle a bit early.  In that case, we may see rising volatility through mid-January.  Many analysts see the December 2 low as a break-down, indicating one should be short the VIX.  However, this may also be a wind-up for the strongest rally of the year for the VIX, given the re-entry back into the Triangle formation.

 

TNX gapped higher this morning in time for an increasing trending strength that may last several days.  There may be enough strength to rise above the 50-day Moving Average at 38.38 by the end of the week.

Investing.com observes, “Recent data for the US economy reflect a mixed profile, but several widely followed business-cycle indicators are screaming recession.

A pair of Treasury yield curves are signaling that the odds are high that a period of economic contraction is approaching. The spread for the 2- and 10-year Treasury on Wednesday (Nov. 22) edged deeper into negative terrain, slipping to -0.71 percentage points, a new four-decade low. The 3-month/10-year spread is also negative. History strongly suggests that when these yield curves are inverted, as they are now, a US recession is near.”

 

 

 

USD futures have retested the trendline at 103.50 in the early morning session.  The cluster of Master Cycles in the past month indicate a possible effort to devalue the USD.   Japan’s effort to strengthen its currency may also have led to this event. However, the Cycles Model now indicates a rising USD through mid-January, despite the BOJ’s best intentions.

ZeroHedge remarks, “The BoJ decision to widen the YCC band was a surprise in the sense that’s it been viewed as a “when, not if” matter (while still messaging quite “dovishly” in the press conference, with Kuroda going out of his way to message repeatedly that this was not policy tightening, as they did not raise short-term policy rates nor adjust the monetary base target).”

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