Weekly Preview / September 06
Notable Events on our Weekly Watchlist:
Monday: N/A
Earnings: N/A
Tuesday: ISM Non-Manufacturing PMI
Earnings: COUP, PATH
Wednesday: Fed Brainard Speech
Earnings: GIII, NIO, GME
Thursday: Fed Powell’s Speech
Earnings: DOCU, LOVE, RH, ZS
Friday: China Inflation Rate (August)
Earnings: KR
ETFs to watch: SPY, ARKK
Correction or Bear Market? The question persists.
With relatively few meaningful economic events or impactful earnings releasees on our radar, this holiday shortened week will feature trading that is more technical in nature. It will be systematic strategies and various algos that run the show, not discretionary traders. We have summed up different perspectives on the levels that matter for the broad market as follows:
-3953 (SPX) Long / Short pivot (Global Technical Analysis)
-3905 (SPX) Gamma Flip Level (Viking Analytics)
-389.17 (SPY) S3 - Lower Bound (Signal Sigma)
What strikes us about these levels is the fact that different models, that rely on different ways to compute key pivot points, have converged on a very narrow range. This tells us that probably many other technical systems are programmed the same way, and will act in concert once downside is established. If that would come to pass, then a bear market would all but be insured.
But, for now, 2 out of 3 such levels are holding. Let’s put last week’s price action into perspective:
SPY Analysis
SPY has not managed to clear resistance at the 50-day Moving Average, despite a “goldilocks” Non-Farm Payrolls print. Prices reverted mid-day on Russia’s gas cut to Europe, and finished the week on a low note. Short-Term technical indicators point to weakness, with the MACD pushing extremes and the Williams Oscillator close to maximum Oversold.
Bull’s hope can hang on to our Medium-Term indicators that point to positive momentum and conditions that are not indicative of an impending crash. When we couple this setup with our key levels, it seems like the market is on the precipice of an important support level. A bounce from short-term oversold conditions would not be at all surprising, and we would need to see where that rally ends in order to draw any conclusions. We have 3 scenarios in mind:
A) The market fails at 389 support, and establishes lower lows (40% odds);
B) The market attempts a rally, fails at 413-416, then support is breached on a second test (30% odds);
C) The market manages a sustainable rally, clears the 50-day Moving average and returns to the regular technical channel (30% odds);
For now, sentiment and positioning points to better odds for the rally short term. In the intermediate term, liquidity poses an important headwind, as the Fed’s $95BN / month balance sheet normalization is in full effect. While the average stock is doing better than the benchmark index on a Z-Score scale (SPY at -1.47 / Market at -0.79), there is little solace to be had in this measure of breadth. Eventually, it will all come down to Q3 earnings as the next major catalyst.
Market Internals / Z-Score Comparison
With Q3 Earnings in mind, it seems as if we just hit a decade all-time low in terms of inventory turnover. Companies are simply not able to push merchandise, and stockpiles are mounting. These will require significant discounts and clearance sales, which will put an immense pressure on margins. This is one of the reasons we are staying clear of consumer facing businesses. There are numerous signs that point to an increasingly fragile and spendthrift consumer, that will count every penny before making a purchase decision.
Market Fundamentals / Inventory Shift
Takeaway:
For now, short-term oversold conditions could give the overall market a boost. We are keeping positive equity exposure in the Sigma Portfolio, as key support levels are holding. More importantly, the composition of our equity exposure is heavily leaning towards the Basic Materials and Energy sectors, which are thriving in the current environment. Sectors to avoid include anything directly related to consumer strength, and long-duration, unprofitable Tech.
In order to diversify our portfolio holdings, we have added two positions in the Technology Sector, with the caveat that both run business to business models and are currently profitable (PRGS and ACLS).
Andrei Sota