AM Brew, May 19th 2022

In yesterday's mid-day update to subscribers, we noted that there was a significant chance of the S&P500 re-testing the May 12th lows around 3850. In morning London trading, we are re-testing those levels, but there are no fundamental reasons for a bounce here. For some reason, investors ignored WalMart's terrible release and sharply bid up stocks, but when Target reiterated all the same things, investors wisened up and realized that recession is upon us.

Not all the news yesterday was bad: TJX reported very strong earnings, but that is to be expected from a discount shop in this environment. Along the same line, Analog Devices had a strong report, which is not a surprise in this chip environment. Energy is also strong with Exxon & Pioneer Natural Resources hitting 52 week highs. That said, good news was tough to find. Yesterday Coinbase had unusual options activity in the $40 puts. We suspect that COIN could be in for years of trouble as their obscene pricing model is now decimated. We warned our subscribers to sell COIN at $344 due to impending margin pressures as competitors were offering much better deals for the same service.

The VIX, in the high 20s recently has crept up to 32, indicating significant fear:

VIX spikes generally don't last long. Currently it appears that investors have moved past the recession-denial phase into the acceptance phase - repricing to a new recession-equilibrium won't take long. Everything is happening faster now, so price levels are not likely to last long. The best bull arguments are likely to be technical from the charts, as the fundamental data is not good:

The RSI reading of 36.34 in the bottom of the S&P500 chart above shows that we are slightly oversold. Countertrend traders can likely find even more compelling technical evidence to buy now. The best trades are when the fundamentals, technicals and market tone all align. Market tone is not healthy right now: (A) Walmart released a brutal report and the market had a huge up-day then, the next day, Target released a highly similar (but worse) report and the market went down 4%. (B) Powell spoke a few times and the equity markets were strong then the next day were down big as the market digested the news. Thus we have multiple data points that the market tone is not healthy.

Right now, the fundamentals for everything but energy are miserable or decelerating. The interest rate hikes & inflation are very strong headwinds. The simple technicals are also bad. The market is going down, the chart doesn't look so great. Of course, you can develop more nuanced & sophisticated technical analysis to buy - maybe today is a double bottom etc. For those using advanced technical indicators to buy long, those long positions can be excellent trades but don't ride trades for too long - take profits & move on. Trades are trades: time horizons should be shorter in this volatile flip-flop environment.

Yesterday, our bits and pieces chartbook had some interesting analysis. Today's news is a bit interesting in that Gabe Plotkin's Melvin Capital is shutting down. This won't be the first hedge fund shutdown, and typically hedge fund shutdowns happen near market bottoms. Our best guess is that there will be 4 or 5 more high profile fund shutdowns, but Cathie has escaped withdrawals to date.

The crude oil chart is very interesting here. If crude were to go back to $90, then a lot of the world's problems would be alleviated and the Fed could be less aggressive. Nothing on the oil chart is bearish, but oil has been range-bound and is coiled for an eventual move. Investors should be pre-planning gameplans for moves above and below the current range:

The morning looks a bit weak, with equity futures down -70 bps across the board. The possible re-test of the May 12th lows will be an important consideration emanating from todays action.