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MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN GOOGL
Stocks traded flat on Friday, dropping by only 16 bps. It could have been worse if not for a push higher in the final hour of trading. Stocks initially fell sharply following the stronger-than-expected jobs report and wage growth. There were a lot of mechanical pieces to the equity market being able to hold together, most notably the continued melt of the VIX index.
It is not unusual to see volatility selling on Friday, and this Friday proved to be no different. The VIX finished the day lower by more than 1%, around 21. It is indicative of puts positions being sold.
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Despite the decline in the VIX, the VVIX index, which measures the volatility of the VIX, finished the day higher, closing at 84.13. The VVIX divergence from the VIX is worth paying attention to, as it could be an early sign volatility measures are starting to creep higher.
The VIX to VVIX ratio is coming down after hitting very high levels. It is more indicative of the big move down in the VVIX, and as the VVIX begins to normalize and moves higher, then the ratio should normalize, which should support the VIX and help it to find a bottom.
S&P 500 (SPY)
The S&P 500 still flashes a bearish technical pattern, a rising wedge. The rising wedge is well defined, and if this plays out correctly, I think the index returns to the origin of this pattern, which comes somewhere around 3,750.
A bearish setup for equities should be all that surprising, given how much yields have recently increased. The TIP ETF has fallen notably and no longer supports the recent gains in the NASDAQ QQQ ETF or S&P 500. Given all of the hawkish commentary from Fed governors, last week and FOMC board member Bowman this weekend, the trend in rates should continue higher.
The CPI report will be the deciding factor, and I would expect that CPI will show little to no improvement when this report comes out. Yes, commodity prices may have rolled over some, but the biggest problem with inflation is housing and shelter, which are showing minimal improvement.
I think that rising rates should lead to widening spreads and financial conditions starting to tighten again. Remember, the Fed wants financial conditions to slow the economy down and cool inflation. The more financial conditions ease, the more tightening the Fed will have to do. The Fed needs asset prices to decline if it expects inflation to come down.
Alphabet has stalled out at its prior highs and shown no momentum after posting the better-than-expected results. The RSI remains negative, indicating that bearish momentum is still in control. The bear flag pattern is also still very much alive as well.
KB Homes (KBH)
It may also be noteworthy that KB Home appears to be rolling over from its recent gains. If rates increase again, it will make sense for the home building stocks to start moving lower if rates keep rising. The uptrend broke, and there is a big gap that needs to fill around $26.25.
Netflix has a bearish divergence forming, with the stock trending higher and hitting up against resistance at $227 and the RSI trending lower. To me, this indicates that the stock is at a turning point, and we are likely to see the shares return to the origin of the rally at around $175.
That’s going to be all for this week.
Charts used with the permission of Bloomberg Finance L.P. 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. 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.