Don't fall for a bear market rally

The US equities have opened today higher and have added to the gains made this last week. The short-term picture is showing what I consider to be a bear market rally which can lead the bulls into a false sense of security as those that have missed out on the massive gains in the last 18-months seek to get back in on a bull trend that just doesn’t exist anymore.


Weekly Index Analysis


The percentage of stocks trading under the daily 200 moving average in the Nasdaq is currently 42.57% which is not enough to sustain a rally higher. For the S&P500 the figure is 53.66% so we could potentially see the benchmark index hovering around these current price levels for a day or two longer.


The fundamentals affecting the indices and especially the US majors are varied and often contradictory. What we should remember is that the market looks forward and tries to anticipate future value and risks.



We have seen a rising consensus that the Fed will go into a rate hike cycle to curb higher and persistent inflation. Now if you believe the monetary stimulus that was added into the economy is the root cause of the current inflation then you will be expecting inflation to come down when the Fed starts to remove assets off their balance sheets. If you believe the cause of today’s inflation is higher energy prices either in conjunction with other factors or solely, the OPEC+ meeting today should offer some light at the end of the tunnel and possibly a peak in energy prices as they agreed to go ahead with the schedules extra 400K BPD in the coming months. Some analysts will be looking at the supply and seeing dropping demand as negative for oil prices and therefore the end to inflation. If you look at the supply chain and the disruptions caused by the pandemic and continuing bottlenecks, the Dry Ships Index should also offer some hope that these problems are coming to an end as goods are shipped across the world at pre-pandemic prices. Yesterday’s ISM PMI data showed prices paid as still elevated so the producers are likely to pass on the costs, which is inflationary but that has a shelf life as consumers will end up refusing to pay ever-higher prices for goods at some point. Especially if the jobs market is not expanding which is where we turn to today’s data from the ADP.



As a result of the spread of the omicron coronavirus variant, businesses in the United States laid off 301K workers in January of 2022, the first job loss since December of 2020. Investors had predicted a 207K job gain. Most jobs were lost in the service sector (-274K), specifically leisure and hospitality (-154K); trade, transportation, and utilities (-62K); education and health (-15K); finance (-9K); and information (-8K). Figures for December were revised lower to show a 776K job gain instead of 807K previously reported. Looking at a graph that compares the ADP figure with the NFP number it is obvious that they don’t move together in lockstep, but they do tend to trend together over time. Today’s ADP number is therefore not good for the traders’ expectations of NFP on Friday or coming months.



Internally the S&P500 and Nasdaq have had some good earnings reports. Yesterday’s Alphabet earnings report was very bullish and the traders in the after-hours session traded the stock up to just above the previous highs on 19th November 2021. Alphabet has decided to do a 20:1 stock split, so any investors holding 1 ordinary share will receive 19 additional shares if the stock split is approved. The main benefit from doing this would be to drop the nominal share price, (market cap stays the same) but there will be an additional amount of shares which improves liquidity and gives smaller investors a lower barrier to entry of ownership.



Technically the S&P500 had run up to 4586 which is also the 61.8% Fibonacci retracement level and previous swing low support level. If this old technical support is breached, I have 4645.86 as the first level of significant resistance and then around the 4700 level as a deep retracement resistance level.



Something else that I monitor is the US Federal Surplus/Deficit. For 99.9% of the time that I have followed the fiscal flows the US has been in a dual deficit. Firstly, they had spent more into the economy than they taxed back, and secondly, they import more than they export and so have a trade deficit. This has generally kept the US dollar weaker along with lower interest rates and accommodative monetary policy. With low-interest rates, debt is cheap, and the monetary expansion makes its way into corporate profits. In March last year, the US Federal government spent $900bln. Last month they spent just over half of that, so spending is down and so will be future corporate earnings. If earnings go lower than the layoffs or lack of new hires will emerge and we go into a negative spiral, just as the Fed looks to raise rates and make credit more expensive. Google announced better than expected earnings and revenue. In fact, year over year revenues increase 41%, and quarter on quarter they were up by 32%. If they are to maintain that sort of projected growth into the future, it will be most interesting where they either gain revenues or cost cut to maintain revenues. The easiest way would be to get a smaller workforce to work harder and more efficiently.



At the time of writing the Nasdaq is showing a rejection of the 50% retracement level, which is the level where longer-term investors see value starting for a long when it’s in an uptrend. Unfortunately, with the break of market structure from December and October, this is currently lower swing highs and lower swing lows. A.K.A. a downtrend. Selling the rips has been the main call for 2022 so far. The bulls will be looking at the daily 200 EMA as a possible raft to hold on to, but if the pressure mounts their fingers will slip as traders look to the future and price big tech and large caps lower.



To participate I would look to the Initial Balance range (IBR), which is the high and low of the 1st hour of regular US trading hours. When we see a bullish rip higher and then a close back inside that range, that could be the first signal to go short. If we get a break lower, waiting for a classic retest of the IBR low to confirm as resistance could be another entry.




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