Market Briefing For Monday, Jan. 31

Rebounds were on our mind late Thursday, after many consecutive down days that just seemed 'climactic' in nature; even if rally odds are dubious as to sustainability. The late Friday action in this case was more important than usual; because of the technical levels that were being fiddled around during the preceding chaotic sessions.

That was the case for the S&P, as well as NDX and certainly the Russell. So if they had plunged significantly, that would reduce chances for recovery for some time, or in terms of 'price'. Most crucial in Nasdaq, heavily beaten-up and showing both expensive mega-caps and brutally-crucified small-caps, for the most part behaving in symmetry to the downside, which suggested a key washout was underway (algo-driven liquidations) which needed to bounce.

Executive summary:

In sum: whether we have any sort of bottom or not, even before tightening by the Fed, rallies should be viewed as the kind of rebound I speculated coming: essentially a 'B' wave within a bigger-picture 'A-B-C' decline. (Rally being 'B'.)

I think some of the over-owned hedge-fund darlings that got pummeled get the rebounds as well (some traders have layered-in shorts as they broke and now those guys generally come out of them like you saw in Friday's last hour; part of why I called attention to the importance of some firming late in the day).

There are areas that I'm pretty sure will not sustain rebounds after a couple weeks (if the upside lasts that long; I doubt it will last 2-3 months as a couple of analysts suddenly suggested today; although I wish so for the small-caps). However that's for later; for now continue to see a period of overall rebound. If there is concern (for example of a glut in Semiconductor chips after all this); it is concern well before its time; as the rebound isn't yet in its prime; and that will be once supply-chains are restored; hence solely speculation for now.

Bottom line: looked for rebound and got it. Likely more; with pauses to see how much selling initially occurs. Also last time the Fed attempted what is the sort of 'double-tightening' (interest-rate hike and balance sheet reduction) and did it concurrently, was in 2018. Here they are suggesting sequential hikes at least a bit ahead of balance sheet reductions; but similar implications.

The Fed was forced to abandon those when stocks briefing tanked back then; by the way setting-up our great buy of AMD at 17 or so then. During 2019, the Fed cut rates and gradually pivoted-back to quantitative easing. It isn't really a question if the Fed will be able to pull off double-tightening today; because the market already tanked outside of a handful of mega-caps.

So you no longer at this point have an even bigger stock market bubble or economy more levered-up with debt as you did back then, or like last year when we warned rising risk was giving opportunities to build cash on those rallies in big-cap stocks as all the buybacks were ongoing and setting-the-state for huge insider selling. So I disagree with those looking for collapse here; and I similarly disagree with at least some looking for uninterrupted rallying over the next few months.

• Anticipated turnaround on Friday (and if not then Monday) was important; and delivered; with Nasdaq doing a 7% or so round-trip Friday alone;
• The 10-year Note reversed on Friday too; which may be something that I have mentioned; the market talking itself into a 'bear' for months; though not recognized by the majority of analysts until recently;
• We've suggested this may 'hint' at the market doing the Fed's work; even as mega-caps were the last to 'catch-down' with the majority of stocks;
• Probably this also suggests or anticipates inflation will be peaking this Spring; and that would blunt the logic of the Fed being so aggressive;
• This part is speculation; but as we saw in 2018 & 2019; the Fed can shift rather quickly if they recognize an 'error' in policy; in this case their error, in our view, was waiting so long (behind the 'curve') and talked of modest firming for too long; leading them to a decision to get tough;
• If we can moderate the supply-chain issue (depends more on China than on the Fed, and I suspect they realize that); the excessive drum-beating for sequentially higher Funds Rates may quiet down and market's relax;
• However this all remains a process; and even if the first pullback coming in the new week in contained and we work higher; the future is still rocky;
• Needless to say it's important that 'war' is avoided this weekend, which I remain pretty confident will be the case (Putin finds sufficient basis for a period of negotiation from U.S. responses; so even though he's grumbling it sounds like enough to thwart any immediate moves to fight, hopefully);
• The most ominous sign to the contrary was moving 'blood supplies' close to the area; something that isn't usually done merely for an 'exercise' or a 'show of force' to achieve diplomatic concessions; so we shall see.