Morning Comment: Have things gotten better...or worse...since late January?


The futures have bounced off their overnight lows on news that Russian Foreign Minister Lavrov supports continue diplomatic efforts with the West on the issue of Ukraine. The futures on the S&P 500…which had traded lower by as much as 40 points in overnight trading…are basically unchanged as we write this morning. This has also led to a decline in crude oil and a bounce in U.S. interest rates (as people move away from the “flight to safety” trade). It has also led to bounces in the European markets…many of which had been down by 3% at their lows.

There is absolutely no question that the tensions in eastern Europe are having a negative impact on the stock market, but it is not the main reason why the stock market has fallen from its record highs (which came on the first day of trading of this year). Instead, it’s the significant change in policy by several global central banks…especially the U.S. Fed. They are going from their most accommodative policy ever (by far)…directly to a tightening policy (without stopping at “neutral” in between…like they usually do). When this takes place in a stock market that is extremely expensive, it creates serious head winds for stock prices…no matter what is going on in the geopolitical arena. Therefore, if the Russia/Ukraine situation is settled in a diplomatic way, we strongly believe that it will only give us a very-short-term reprieve in the stock market.

In other words, we still believe that the bounce we have seen since late January is merely what we always see in the middle of a deep correction or bear market. Nothing has changed on the issues of inflation or the aggressiveness of the Fed’s new tightening policy……Actually, that’s wrong. Things HAVE changed on BOTH fronts. BOTH of them have become MORE dangerous for the stock market! We’ve seen higher-than-expected inflation data…and we’ve heard more hints that the Fed is going to be even more aggressive in their tightening program. Therefore, we are even more confident that we were last week that we’ll lower lows in the stock market in the coming weeks/months…no matter what happens early in the week this week.

St. Louis Fed President Bullard will be interviewed this morning, so he might walk back some of his comments…especially given what is going on in the geopolitical arena. (BTW, to think that the Fed does not coordinate their public comments is absurd.) However, no matter how you slice it, the Fed is going to engage in a tightening policy that will be much more aggressive than most people were thinking…and much more aggressive than the stock market was pricing-in…at the Thanksgiving holiday. With this in mind, we believe that any bounce we get in the stock market (if we get one), will be another good opportunity to raise some cash in increase defensive positions.

We could get some wild swings this week…as the algos will react to every word (and action) coming out of Russia…and every word from the Fed. With this in mind, we thought we repeat what we said in our weekend piece about the support resistance levels on the S&P 500 this morning. Here we go:

For the S&P 500 Index, the 100-DMA worked very well as “new resistance” last week. If you will recall, we had been highlighting the 100-DMA as the key support level as we moved into this year. It had provided excellent support for 15 months coming into 2022. Sure enough, when it finally broke below that level, it fell quite hard…..After the late January bounce, that “old support” level did indeed provide “new resistance” (as it frequently does). The world’s most important stock index rallied up and tested that 100-DMA on February 2nd…and then again on the 9th and 10th. However, it fell hard after that second “test”…and dropped 4% in just two days (on an intraday basis from the Wednesday/Thursday highs). Therefore, the 100-DMA is the first resistance level we should be watching right now. (Actually, we’ll use 4,596. That is very slightly above the 100-DMA…but it was the closing high on Feb 2 & Feb 9.)…..After that, we have the 50-DMA (4608) and then 4,617…which is where the Fibonacci 61.8% retracement of the January sell comes in (on a closing basis).

As for the first support level, the S&P closed below its 200-DMA on Friday. (Remember, that was the “old resistance” level…when it tested that line every single day of trading two weeks ago.) Thus, it became new support…but since the drop below that line on Friday was only a very slight one, we cannot say it has broken this key support level in a meaningful way. So, we’ll still use the 200 DMA as first support…….Below that, the (more important) support level is the closing low from late January of 4,326. THEN we have the intraday lows from late January at 4,222. As we have been saying for two weeks now, THAT is the “line in the sand” level for the S&P 500. Any meaningful break below that level will be very bearish for the stock market on a technical basis.

We’d also note that the January lows is also where the “neck-line” of an “head & shoulders” pattern comes-in for the S&P. Therefore, there are several reasons to think that the January lows are the line-in-the-sand support level for the S&P 500…especially since it has already broken well below its trend-line from the March 2020 pandemic lows. (First two charts below…we did not draw the trend-line from the 2020 lows…but you can see it with the naked eye.)






Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Feb 14, 2022 — 8:02 AM
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