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Interesting day in the markets, with the S&P 500 falling by more than 1% and the NASDAQ 100 down about 1.8%. I noted last night that if the high in the bear flag was in, we would need to start dropping quickly—and I’d say that started almost right on time today. More importantly, the index fell below the 200-day moving average.
The NASDAQ 100 is showing more of a rising megaphone pattern, but ultimately, these patterns represent the same thing: continuation patterns of the previous trend. The NASDAQ 100 also failed to break through its 200-day moving average.
If today’s declines are real, they should not only continue tomorrow but accelerate to the downside, breaking the lower trend lines and undercutting the mid-March lows before the week is over.
There’s an opportunity for this, as liquidity is expected to tighten over the next few days heading into quarter-end. Today, reverse repo facility usage rose to $240 billion, and it’s likely to continue climbing.
This overnight funding market isn’t exactly filled with transparency. Still, based on my data, the general collateral rate in the overnight funding market rose to 4.45% today—a further sign of liquidity drain. This could be reflected in SOFR moving higher tomorrow, following its rise to 4.33% from 4.31% yesterday. Again, it’s not unusual to see SOFR rise into quarter-end.
Credit spreads widened today, some, as seen in the Markit CDX HY Index, which rose to 341. But more importantly, it almost appears that the spread has a bull flag that has formed. If that is a bull flag, the moves we have seen in this market thus far will be nothing in comparison to this spread breaking out, and what it would represent.
In the meantime, one- and two-year inflation swaps are moving higher as well, and those, too, look like bullish continuation patterns.
We could review more, but I would rather see how tomorrow plays out.
-Mike
Terms By ChatGPT
1. Bear Flag
Definition: A technical analysis pattern that signals a potential continuation of a downtrend after a brief upward or sideways movement. It looks like a small upward channel following a sharp drop (the “flagpole”).
2. Rising Megaphone Pattern
Definition: A chart pattern where price action widens over time, forming a shape like a megaphone pointing upward. It typically indicates increasing volatility and potential for reversal.
3. 200-day Moving Average
Definition: A widely used technical indicator that shows the average closing price of a security over the past 200 trading days. Often viewed as a key support/resistance level.
4. Reverse Repo Facility
Definition: A tool used by the Federal Reserve to manage short-term interest rates and liquidity in the banking system. In a reverse repo, the Fed sells securities to banks with an agreement to repurchase them later, effectively pulling cash out of the system.
5. General Collateral Rate
Definition: The interest rate for secured overnight loans that are backed by high-quality collateral, often used as a benchmark in repo markets.
6. SOFR (Secured Overnight Financing Rate)
Definition: A benchmark interest rate for overnight loans secured by Treasury securities. It has replaced LIBOR as a key reference rate in U.S. financial markets.
7. Credit Spreads
Definition: The difference in yield between two bonds of similar maturity but different credit quality. A widening spread indicates increased perceived credit risk.
8. Markit CDX HY Index
Definition: A credit default swap index representing high-yield (junk) corporate debt. It tracks the cost of insuring against default for a basket of high-yield companies.
9. Bull Flag
Definition: A bullish continuation pattern where a sharp upward move (“flagpole”) is followed by a slight downward or sideways consolidation (the “flag”), usually indicating further gains ahead.
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