Notable Events on our Weekly Watchlist:

Monday: China Industrial Production and Retail Sales

Earnings > VTSI, TTWO, IQ, WIX

Tuesday: EU Q1 GDP Growth, Retail Sales, Powell and Mester speech

Earnings > None of interest

Wednesday: Housing Starts, Building Permits

Earnings > TJX, LOW,

Thursday: Existing Home Sales

Earnings > PANW, AMAT, KSS, GOOS,

Friday:

Earnings > DE, FL

This week will feature relatively few earnings of interest. On the economic front, the start of the week will be more important, with China reporting Industrial Production and Retail Sales on Monday, followed by EU Q1 GDP Growth, US Retail Sales and Fed Chair Powell’s speech on Tuesday. Given this backdrop, we are closely watching the start of the week for volatility and how the market behaves under potential stress. Failure for equities to go lower might signal the short term bottom we are looking for.

SPY Analysis

As long as equities trade below Z-Score -1 level while on a previous uptrend, they are excluded from all of our trading models. Such is the case now, with SPY at -1.5 standard deviations below the regression line. We might attempt a small speculative position in the Sigma Portfolio if we see SPY breaking above resistance in the 405-410 area. Mainly, this trade revolves around the assumption that large blocks of put options were bought pre-FOMC with strike at the 400 level and are now becoming worthless. Any significant push upward would make participants eager to minimize losses in these positions and create a vacuum effect that would bring SPY back up to the 430 area. This is outlined as case 1 on the chart above.

Failure to break above 405-410 would entail a grind lower to technical and fundamental support of 340 - 350 by June - July (case 2 on the chart above). That would align with the typical duration and drawdown of an “average” bear market.

I view these cases as equally probable and would not especially take any view right now, absent new info. The close into Monday and Tuesday will be vital this week, as a lot of economic data will get digested.

TLT Analysis

We are looking to add TLT speculatively to the Sigma Portfolio on a break above key resistance at 119. The purpose would be two-fold - one as a fine risk-reward contrarian play, and second as a “hedge” to our planned equity exposure later in the year.

Market Breadth Analysis

The compression of market breadth is evident since last summer. Ideally, we would like to see Above 200 levels stabilize before getting more aggressive with equity exposure. Right now, all measures of deviations are sitting at “extreme oversold” levels and we need to make historical comparisons to get any sense of context. The average Sigma Score of companies is higher than SPY, however, and this gives us hope for a rally since it is the only bullish indicator.

Takeaway:

Last week we got “taxed” by the negative skew phenomenon apparent in both Enterprise and Nostromo. I explained this phenomenon in the article here. The only asset class that has worked so far this year has been cash, and we have been big fans of it up to a point. Cash is now becoming extremely overbought and we need to find ways to deploy it. Treasuries make the most sense and present the best value. Equities may or may not rally, and we are willing to speculate up to a point using a long ETF position. If you are already long equities, I would suggest taking some risk off the table on any sizable bounce, however. We will see how the week unfolds and tomorrow’s rebalance instructions from our models.

Andrei Sota