Growling Bears

While the bears growl, buy-the-dippers refuse to bite, at least so far. With another interest rate event scheduled after Wednesday's FOMC meeting, along with Jerome Powell's comments, markets could be setting up for another "buy the rumor sell the news" episode with equities oversold according to some technical indicators.

S&P 500 Index (SPX) 4397.94 plunged 264.91 points or -5.68%  last week with the greatest percent decline occurring Friday on an increased combined volume of  3.2 billion shares. It's now below the upward sloping trendlines from both the March 23, and October 30, 2020 lows as well as both the 50-day and 200-day Moving Averages after activating either a Head & Shoulders or Double Top technical pattern as it approaches the lows made last October.

Invesco QQQ Trust (QQQ351.69 tumbled 28.32 points or -7.45% last week ending well below the 200-day Moving Average at 364.85 and near October 4, 2020 low of 349.87. Similar to the SPX, after activating a Double Top technical pattern it's now near the downside measuring objective.

iShares Russell 2000 ETF (IWM) 196.99 plummeted 17.32 points or -8.08% last week, dropping faster in percentage than both the SPX and QQQ. After making a quick breakout advance up to 234.72 on November 8, 2021, it pullback into a range that began on March 5, 2021, at 205.26, but that ended last week when it broke down and closed below the range, an ominous indicator for both small-capitalization stocks and the entire equity market.

CBOE Volatility Index® (VIX) gained 9.66 points or +50.34% last week ending at 28.85. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, gained 8.17 points or +51.25% to end at 24.11% vs.15.94% on January 14. The chart below shows implied volatility exceeding the spike up in late November. As well as negative market sentiment, January monthly options expiration on Friday boosted volume.


VIX Futures Premium

VIX futures premium ended Friday at -5.56%, in red bear territory, vs. 8.57%, on January 14, with February new front-month contracts loaded with time premium and ending higher than March contracts.


Typically negative spikes quickly reverse next week, but occasionally they remain negative longer like the two weeks of November 26 and December 3. The glaring eight-week exception occurred in 2020 between the February 28 low at -37.88, and April 24, 2020, when it turned positive again as shown above.

The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts. Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications. On January 14, before the market holiday on January 17, it reached 65.59 closing above the 50-day Moving Average and appeared headed higher. Then last Tuesday the picture suddenly changed, it was as if the world suddenly recognized excess liquidity would soon begin evaporating. For the week, this reliable indicator dropped 234.81 points to close at -169.22, well below the 50-day Moving Average now at -2.54.



Now the markets apparently accept rising interest rates as the primary concern, but when and by how much remain open questions. Perhaps market prices already reflect small increases. In addition, this week's FOMC meeting should include the rate of balance sheet changes explained by Powell on Wednesday afternoon.

In anticipation, markets could be setting up another "buy the rumor sell the news" event going into Wednesday's announcement. If so, it may mark the end of this leg of the decline. The narrative could be "that's not too bad."

Consider these contrarian buy signals. Both the SPX and QQQ closed below their 200-day Moving Averages, negative VIX futures premium, total Cboe put volume 5.84 million contracts, slightly higher than 5.63 million on February 28, 2020, at the start of the big Covid decline. Equity only put/call ratio at .82, vs. 1.28 on March 12, 2020 with ratios above .60 considered high. Friday's chart:


Some of Friday's unusual volume can be attributed to January monthly options expiration, but the extremes suggest a repositioning rush and oversold market conditions.

In Elliott wave terms, it could be wave 1 of a 5-wave Elliott sequence just getting underway. If so, the rebound to create wave 2 represents an opportunity to sell or hedge longs especially ones with high price-to-earnings (P/E) multiples and those without earnings valued on price-to-sales.


The bears came alive last week and let everyone know they are in charge for now. Both the S&P 500 Index (SPX) and the Invesco QQQ Trust (QQQ) declined every day last week and now look oversold as options and futures indicators confirm. Contrarian traders could anticipate a "buy the rumor sell the news" opportunity around Jerome Powell's Wednesday announcement. However, both indices activated either Head & Shoulder or Double Tops implying more downside ahead.

Disclaimer: is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

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