Notable Events on our Weekly Watchlist:

Monday: N/A

Earnings: N/A

Tuesday: Consumer Inflation Expectations

Earnings: N/A

Wednesday: PPI, FOMC Minutes

Earnings: PEP

Thursday: Inflation Rate

Earnings: DAL, TSM, WBA

Friday: Retail Sales, Consumer Sentiment

Earnings: JPM

ETFs to watch: SPY, TLT

Bulls unable to break through

Another week brings yet another dismal performance for the equity market, with the main indexes pushing oversold extremes again. The final “nail in the coffin” for last week’s price action came on Friday, with the Non-Farm Payrolls print and the Unemployment Rate.

According to the figures, 263K jobs were added in September, versus expectations of 250K. The unemployment rate was measured at 3.5% versus expectations of 3.7%. Normally, these are not the types of figures to send the markets into a nose dive, yet that is exactly what happened (SPY - 2.79% on the news, and up 0.64% for the week). Due to the sharp drop on Friday and the inability of buyers to push the market up past Monday’s and Tuesday’s levels, the perception is highly negative.

A tight labor market underscores the need for the Fed to restrict monetary policy, and that is the most heavily weighted macro factor right now driving ALL asset class markets. By this thinking, what should normally be considered “good news” (job market strength) will result in a negative stock market reaction, and “bad news” (e.g. people getting fired, recessionary indicators) will be rewarded by a rising stock market that is looking to front run a Fed “pivot”.

This unusual environment results from the repeated interventions that Central Banks have made throughout the last decade and the outsized impact their actions have had on the equity and treasury market. It is not the type of environment that can last forever, but for now we have to trade what “is” not what we want there to be.

The only silver lining comes from markets extremely deviated to the downside and a very expensive US Dollar which is ripe for a pullback.

SPY Analysis

According to our methodology, there are no immediate levels of support for the market that we can bet on. The previous level that we have used as a stop-loss shall now act as resistance, starting from 385 and going up to 400 on SPY. We are still expecting a re-test of this area in October, although it has to be said that time is ticking for this trade (3 more weeks left to achieve it).

There is little downside left on the chart, with support extending from the 2020 October highs at 352 on SPY. We will get the latest inflation reading on Thursday, with expectations set at 8.1%. Current positioning suggests that a figure merely matching expectations will be able to lift asset prices at least in the short term.

All the trading of the week will be a set-up for Thursday, so I would not let that influence my decisions. Q3 Earnings season is also starting in earnest of Friday, when JP Morgan reports results.

Takeaway

No reason to add to short positions or hedges at this juncture. We are still waiting for a support break of the 360 area on SPY, or otherwise a rally that would offer us some better exit prices for single stock positions.

The plan in the medium term is to get the Sigma Portfolio to a market-neutral allocation. Although the portfolio has outperformed nicely, there are numerous signs that point to the need to be at least fully hedged, if not entirely net short. We will cover these for future articles, but for now we are speculating on a short term rally. Speculating is the key word.

Andrei Sota