Despite The Negative Futures, The S&P Can Break Above 4100, Here’s Why

This past week was influenced by the week before last

We (the Dual Mind Research community) started the last week having built hedges from the week before. It was clear that after the PPI reveal confirmed a lowering of inflation boosted the market indexes into the Thursday before and then into that Friday. Once again, traders reacted overly exuberant, creating another unsustainably sharp rally. We’ve been exposed to several of what have been characterized as bear market rallies. All I know is that patterns tend to repeat until they abruptly stop. It is an art to know when to shift tactics. Some of the community members follow RSI and Demark to see when a particular rally is overbought. I just follow the price action, and we seem to line up similarly so far. We kept our hedges on going into this past week. When the rally reasserted itself, I sharply reduced my hedges. Happily, most of the members who are active in our chats kept theirs. They were rewarded as later in the week the market came to reason and sold off. That brings us to this week.

Volatility continues, and imperceptibly we are going higher

We seem to be vibrating between 3800 and 4100, it appears to be two steps back and 2.5 steps forward. At the remove of hindsight, the market still has underlying upward momentum. It’s just that “Fedspeak” erupts as the market tries to meaningfully breach the mid-4000s. On the other side of the equation is the narrative that the Fed will “pivot”. The meaning of that “pivot” has evolved from starting to lower the FFR, to merely stopping rate raises, to lowering the increases from the historic 0.75% level to merely 0.50%. Compared to the past decade, 0.50% was considered drastic. No matter, up until recently it was an open question that we were getting another 0.75% for December. Now the “pivot” will be how far out the rate raises will be into ’23. The optimism attached now to the expectation of a small improvement in interest rates underlines the upward potential. Market participants will have to overcome their skepticism when they’re exposed to (hopefully) a continued improvement in the inflation picture. This is not enough to break above 4100 as yet, but that brings us to this week and why there could be an environment to break out above that level.

I am not confident that the futures this morning are leading to a sustainable sell-off. I think later this week we will see another assault on 4100 and it finally breaks through, after the Fed Minutes. The Fed Minutes are released 3 weeks after the FOMC Meeting. Since the meeting was Nov 1-2, add 21 days and you get November 23. So this Wednesday might give the market a little hiccough. I don’t want to overplay the Fed minutes on Wednesday. They will likely talk up the terminal rate to over 5%. The market is not having it right now, it is all in for a declining inflation profile. Over the weekend, Fed President Larry Bostic announced he is in favor to lower the pace of rises from 0.75 to 0.50%. Good news, but at this point, he is following our stock market’s sentiment that already is discounting a 0.50% rise. Still, it is better that he is back to his usual role as one of the more dovish committee members. Jim Bullard is still among the hawks, lately, he has been the harbinger of Jay Powell’s future position. The ranks of the hawks are dwindling, and the market knows it.

Let me make my specific case that we could see some solid and sustainable rallying into December 13

Here’s why: most of the S&P 500 have reported by now, they can execute buy-backs to finish out the year as close to even as they can get, we have a generally quiet week going into December. The “Fedspeak” at this point won’t be as effective because some of the regional presidents are starting to soften their hawkish stance. At the end of November comes the Fed “Quiet Period” leading to the FOMC meeting on December 13 and 14th. The only issue this week is the release of the Fed Minutes. The minutes are released 3 weeks after the FOMC Meeting. Since the meeting was Nov 1-2, add 21 days and you get November 23. So this Wednesday might give the market a little hiccough. We also have a holiday-shortened week into Thanksgiving and Black Friday. I don’t know the specific statistics, but I seem to remember that this week tends to favor the upside.

Beware of the CPE

The rally leading up to the CPE reveals, meeting a complacent market that is overconfident that lower inflation data will once again be revealed. However, if the CPE doesn’t have some disinflation, or more precisely a lowering of the rate rise, we could get another test of the lows. So while we can trade for the upside for about +2 weeks, we should be mindful that before the next FOMC, the CPE comes into play on December 13th. So what, you are thinking, CPE will show a declining rise in prices here too. Well, not so fast. First of all, stock market participants are never satisfied, and unless the progress is readily seen we could have a nasty dive, to even test recent lows. I am only talking about risk here. I am becoming more humble about this conjecture, so I am not calling this a prediction as yet. However, if we are significantly above 4100 going into this number, the more perfect the inflation numbers market participants will want to see. Is there any cause for me to aver that we won’t have benign inflation numbers from the CPE? No, not yet, however, as someone who looks at charts, any natural system doesn’t go up in a straight line. We could see even a slight rise in inflation, and still preserve the downward momentum, or maybe it breaks that as inflation numbers go up and down, even as they go down.

Oil prices falling are boosting bullish exuberance temporarily

Oil is easing back to 2-month lows in the WTI, giving our traders an opportunity to reload on EnP players. Devon Energy (DVN) is getting into my range and if it falls into $67 I will start nibbling on that stock, also Apache (APA), if it comes down to $44 and even close to $45 flat, it will get some of my funds. The retreat is once again being powered by the notion that China is once again likely to lock down. I still hold that oil and nat gas supplies are tight, and continue to tighten as Oil Companies continue to be very conservative in investing in future capacity when the current administration still makes statements calling for the demise of the hydrocarbon industry. Right now the SPR is still being emptied even as OPEC is counteracting that by curtailing production. Something has got to give.

My trades:

I intend on holding Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT). When the market rallied like it did the Thursday before last, I sold shares that were at $103 to $106 and bought a bunch this past week at $92ish to $94ish. I’ve been doing this over time, allowing me to adjust the overall average price of a position. This is not anything new but I have it as part of CMD – Cash Management Discipline. This is a tactic called “trading around a position”. It allows me to stay in names that I want to own over time. Could Amazon go lower? Sure, I will buy it lower, I do know that Amazon will have its moment of rallying again, and at that point, I will sell the expensive shares again. I did this with Intuit (INTU) as well. Adobe (ADBE), GOOGL, Microsoft, and ServiceNow (NOW) didn’t fall enough for me to add back but I did trim them in the last rally. I started buying oil stocks right now – Coterra (CTRA), Vermilion (VET), Earthstone (ESTE), I intend on acquiring APA, and DVN, but there are so many small EnP companies that have the potential to follow oil back up. I also think that now would be a good time to get involved with oil services companies, perhaps to start with the Oil Services ETF (OIH) since it’s a cap-weighted ETF I will get the biggest names in coverage. There has to be a point where no matter what the current administration says, further investment will be required. Commodities tend to move to extremes so perhaps WTI swings even lower, I will expand my holdings accordingly. This is for my trading account. I haven’t touched my long-term oil-and-gas names in my long-term account. I started positions in Live Nation (LYV) and Zillow (ZG) which are trades that I want to hold as the Fed finally stops raising rates. If EXPE and ABNB fall at any appreciable level, I will start a position in them as well. These are names that will improve as interest rates at least stabilize. I also got long calls (buy to open) in Tesla Bull ETF (TSLL) with a Jan expiration and a $12 strike. I bought them as Tesla (TSLA) hit 177.

One last thought

Goldman Sachs strategists are calling for the bear market to last into 2023. If we truly continue to see inflation receding, they will be wrong. In no way should anyone think that I have joined the ranks of the bears. We at Dual Mind Research are actively managing our portfolios, we are trading and investing in the stock market we have and not what we wish it to be.