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2/27/2022
STOCKS – INTC, INTU, TSM
MACRO – SPX, SKEW,
- RTM Tactical Update: Don’t Fight The Fed
- RTM: Short Covering Continues For Now
- RTM: Tech Jumps As Real Yields Crater
- Thursday Morning Madness
- RTM: Critical Levels Of Support Approach
- RTM Exclusive: Intel – From Bad To Worse
- RTM: Stocks Sink As Conditions Tighten
- RTM Video: S&P 500 Heading May Be Heading, Sub 4k
This week’s free YouTube Video: Don’t Fight The Fed
It will be another busy week for the market, with plenty of headline risk given developments in the Russia-Ukraine conflict over the weekend. The news already has the weekend, Dow trading down over 1%, but of course, we won’t get a better sense until the futures open at 6 PM ET. However, the futures haven’t exactly been a great source of information the last several weeks.
Russia Impact
The Russian Ruble Devaluation and Russian Default event in 1998 may serve as a proxy for what to expect if the sanctions placed on Russia affect global markets. Forgive me if my memory is off as I was only 19 to 20 years of age and still in college, but interning and a very active investor. During that August 1998 event, the S&P 500 did drop around 15% from August 28 until September 1. It is essential to remember that the Fed ended up cutting rates in 1998 as an insurance policy because of the effects of the global turmoil that started in 1997 with the currency crisis in Asia. Then by 1998, Long Term Capital management nearly blew up the financial markets due to its exposure to Russian debt and leverage.
The Fed
There is no evidence to suggest the functioning of markets is threatened, and that is the only way the Fed steps back from its current policy path, which goes back to what I have been saying for months. The only way the Fed doesn’t start raising rates by March is if the market gives the Fed a way out, which means the market does all the heavy lifting for the Fed by tightening financial conditions and asset prices falling dramatically from here and well below 4,000 on the S&P. Outside of that, the conflict is not likely to deter the Fed as inflation is the Fed’s mandate, and inflation is showing no sign of cooling.
This week there will also be a lot of economic data here in the US, such as the ISM manufacturing and services readings and the BLS Job report. We will see Jay Powell give testimony in front of Congress on Wednesday and Thursday. With mid-term elections coming the heat will be on Powell to contain inflation and bring it down. Unfortunately, the Fed is on a path to raising rates, no matter what geopolitical events, unless global markets put the economy at risk. Even with the events in Ukraine all week, the Fed’s path to this point is unchanged and is likely to remain unchanged. Fed’s Chris Waller noted that he would like a 100 bps hike by the middle of the year and the balance sheet reduction to start. Meanwhile, the Fed’s Loretta Mester also indicated that she didn’t think the current conflict changes the need to remove accommodation, with the comments made after Russia moved into Ukraine.
Powell is like to have a similar tone this week, especially with the political pressure coming down on him to get inflation under control as we prepare for the mid-term election here in the US. It means the Senate and the House are likely to turn up the heat.
Fed Rate Hikes
Fed Futures for December 2022 have been essentially unchanged since the middle of February, which suggests the market sees no change in the policy path to this point.
S&P 500 (SPY)
The S&P 500 managed to post another intense day on Friday, rising by 2.25%. It was a strange day as put selling did not dominate trading on Friday. In fact, on Friday, there was a lot of put buying and call selling, as noted by the very negative delta’s on the day for the SPY and QQQ ETF and SPX index. What is interesting and maybe starting to give us some clues as to the longer-term outlook is how the S&P 500 stopped at 4,385. That marks the 38.2% retracement of the entire move lower. So if we should gap down on Monday as currently indicated, then the rally’s sudden stop would make a lot of sense.
I ultimately think that this past week’s lows will eventually be broken and continue towards 3,800 on the S&P 500. Sure the index could move slightly higher and head toward resistance at 4,450. But ultimately, fighting the Fed will be too overwhelming for the market to see those all-time highs anytime in the near future.
We know liquidity is thinning in the market, and the spreads between the bid and ask have widened dramatically.
SKEW
We also know that volatility selling is pretty much dead at this point. The SKEW index has not moved in weeks now, a sign that traders are not looking for out-of-the-money protection. It’s probably because traders have nothing to hedge against since they aren’t selling near-money volatility.
Reserve Balances
This shift may be happening because reserve balances held at the Fed by depository institutions have been steadily declining. It is likely why we are now seeing margin levels fall along with liquidity in the markets. Should this trend continue, which is likely given the Fed’s plan to reduce the balance sheet size, stocks will continue to struggle.
Taiwan Semi (TSM)
This week, Taiwan Semi needs to be on the radar as the stock is very close to breaking significant support. Once it does, it will probably send a very negative signal for the sector and global growth in general. If the stock falls below $109 again this week, it is perhaps on its way to $93.
Intel (INTC)
Intel rallied sharply on Friday, but there has been some decent bearish options activity in the name that I noted during the week for members of RTM. I think this stock is not cheap and probably trades below $40 in the future. The gap at $47.85 is now filled, and I think it is likely to head lower toward $38 in the weeks to come. (First, 2-weeks are FREE to try – RTM Exclusive: Intel – From Bad To Worse)
Intuit (INTU)
Intuit fell this week below some critical support and a trend line at $500. It is probably a terrible indication and setting up a potential drop to around $420.
Have a safe week
Mike
Mott Capital Management, LLC is a registered investment adviser in the State of New York. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Please remember that past performance may not be indicative of future results.
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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.
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