10/30/22

#STOCKS – $AAPL, $PYPL, $IBM $CAT

#MACRO – $SPY, $VIX 

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MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL

The week of October 31 is going to be a tough one. There is a ton of economic data and earnings and an FOMC and BOE meeting. Tuesday is the day the fun begins with JOLTS and the ISM data. The ISM data on Monday will be tricky because it is forecast to come in at 50, which is the level that separates a sector in contraction or expansion. But I always like to look at what it equates to on a real GDP growth basis, which is noted in the actual press release. It is a better indication of the economy. So read the press release!

The ADP job data is Wednesday morning, and the FOMC meeting is in the afternoon. Thursday is the ISM services index, which is expected to come in at 55.1, down from last month’s reading of 56.7.

Then on Friday, we got the BLS Job report, and forecasts call for 190k jobs created in October and an unemployment rate of 3.6%, up from 3.5% last month.

With all this data and a CPI report on November 10, I think the Fed will keep its options open (read more here) and stick to the Jackson Hole and September meeting script. If the Fed says it plans to slow the pace of rate hikes, and the Job report and CPI come in hotter than expected, then they look foolish telling the market they see smaller rate hikes and then having to walk that back. The best bet is to keep the market guessing.

The Bank of England will have its policy meeting on November 3, which is essential too. Many people view what the BOE did back in October as a policy shift when they came in to support the bond market. It wasn’t, they still plan to start selling gilts, and I feel it will be made clear to the market on Thursday that there has been no policy shift.

By the way, the Reserve Bank of Australia was one of the first banks to lower the pace of hikes, and guess what. Inflation came in hotter than expected last week at 7.3% versus estimates of 7.1% and jumped from last month’s reading of 6.9% and a new cycle high. Now what?

Besides, it isn’t entirely clear if inflation in the US has peaked yet. Archer Daniels Midland, ADM’s stock (not AMD) price seems to think food prices may run higher and inflation overall. The stock is on the verge of making a new high, and guess what? It has been tracking CPI over the past five years.

S&P 500 (SPY)

However, I think the party in the stock market can continue for a bit longer. A tremendous amount of liquidity comes into the equities in the first few days of November. This past week saw nearly $24 billion flow into equities, and this coming week, systematic flows will be back, which means the CTA’s will be working their magic to push stocks higher as they did in August, with more than $10 billion to buy.

At this point, the S&P 500 broke free, and with the CTAs in overdrive to cover shorts and such, I could see the S&P 500 running to around 3,950 to 4,000, and hitting the top of the broadening wedge. How far the S&P 500 will get depends on the options market and how much room it gives the S&P 500 to run. On Friday, 3,900 was resistance because that was where the greatest concentration of call gamma was, and that was where options traders started to sell their calls, keeping a lid on the market. So from an options perspective, you will need more call buying to push that call concentration level higher, say, 4,000. If that happens, then there is plenty of room for the market to continue to rally.

 

However, the higher the market goes into the FOMC meeting, the more unlikely it is that Powell will give the equity market what it wants to hear. Rising stock prices work to ease financial conditions, and the one thing Powell doesn’t want is for financial conditions to ease. Additionally, if the market runs higher, the VIX will probably keep melting to around 23 ahead of Powell. Also, with the VVIX trading below 80, it seems the market is not hedged enough for a hawkish Powell.

Besides, at this point, the spread between the VIX spot and VIX generic three-month futures contracts is -2 and still needs to get to around -5 or lower to signal a shift in trend in the equity market. You get a market that rips in the FOMC meeting, and after the FOMC meeting, due to further VIX melting, you could see that spread widen to -5 points by Thursday. It has been a pretty good market top indicator since August 2021. Couple that with a better-than-expected job print, and the rally will be over by Friday.

PayPal (PYPL)

PayPal will report results this week, and at least the chart looks pretty good. The RSI has been steadily rising now for some time, and it almost looks like there is a bull flag that has formed. A positive commentary on results could lead to the shares breaking out and pushing to technical resistance at $109.

Apple (AAPL)

Keep an eye on Apple; the big move higher appears to have been related to implied volatility melting. I have owned the stock for a long time, and their guidance on Thursday may have been the vaguest guidance I have heard them give in a long time. The results weren’t disastrous, though, and that caused a massive drop in implied volatility, which means put selling and short covering.

Caterpillar (CAT)

Caterpillar is one of the reasons why the Dow has outperformed recently. Look at the move in this stock since it reported results. Just look at the RSI and how over-bought it is, but that doesn’t mean it can’t fill that gap at $225 before pulling back.

IBM (IBM)

But even more surprising is how IBM is leading the market higher. Yes, I said IBM. Hate to say it, but IBM also looks like a big short-covering event. Look at the VIX on IBM go from a 44 to 23 in a straight line drop.

Good luck this week; it is going to be fun. Have a safe Halloween!

-Mike

Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.