The S&P 500 fell by 1.2% the week ending December 3; it could have been worse if not for a near 80 bps rally off the lows in the final 15 minutes of the day. The rally coincided with a sharp move lower in the VIX, which probably suggests many traders closing out profitable put options and a short-covering rally ahead of the weekend.

Image: Mott Capital Management

S&P 500 (SPY)

From a bullish perspective, the 4,500 level did hold, and as I had noted throughout the day on Friday, that was a critical level, that once broken, will lead to a flush lower to about 4,360. There is a clear downtrend in the market, but a rally back to the trend at 4,600 can’t be ruled out. However, the S&P 500 is very far from even being oversold, and given the developing change in Fed monetary policy, the risk is further downside. As I have stated more recently, it seems highly likely that the highs for the year and potentially the next few months are in.

The change in Fed policy for faster tapering will lead to even tighter financial conditions, making it very difficult for the stock market to advance. I have been telling you for months that the Fed taper would tighten financial conditions and that, coupled with slowing earnings growth, would lead to multiple PE contraction. That is what is now happening. The faster the Fed tapers, the worse this experience will be.

Financial conditions have already tightened by nearly 13 bps over the last 21 weeks. While you will read in other places that financial conditions are still easy, which they are. It isn’t about the actual financial condition; it is about the absolute change in those conditions over time. The chart shows when financial conditions tighten by about 10 to 15 bps, it is accompanied by a market drawdown. The more the conditions tighten, the more significant drawdown.

Conditions based on several factors only tightened further this past week. Given the speed at which the bond and currency markets have re-priced and will re-price further, rallies in the equity market are likely to be sold relatively quickly as markets look to deleverage. All you have to do is look at the TLT/LQD ratio to see why the VIX is rising so sharply and why it may not be so quick to come back.

That means if you are “buying the dip,” you do so at your peril because the VIX is a critical component of why “buying the dip” has been such an easy trade. As I warned in October, the market dynamic for buying the dip has changed. (Should be free: BUYING THE DIP IS DEAD)

NASDAQ (QQQ)

There is a Head And Shoulders pattern in the QQQ, which is a very bearish pattern. It appears the neckline has already broken, and that means $387 should serve as strong resistance as the ETF continues to head lower towards $360.

Amazon (AMZN)

I have been telling you Amazon is dead money since the company reported those horrible quarterly results. That is what it will continue to be until they can provide a better outlook. The stock fell back below an uptrend, and the RSI tells us that all bullish momentum is lost, and the shares are going lower from here, and probably back to $3,000 in the not too distant future.

Square (SQ)

Square is completely oversold at this point and probably has a rebound in it to the $220 to $230 range. Once complete, it should resume its downward move to $130.

Tesla (TSLA)

Tesla had a rough week and finished right on support around $1,000. The gap at $910 is just screaming to be filled, which is probably what happens this week.

Roku (ROKU)

Roku is oversold. It may have one last bounce in itself back to $285 before it ultimately heading to $102.

Bitcoin (BITCOMP)

Bitcoin is melting this weekend, and it looks like it may only get worse, especially as global markets deleverage. It probably rebounds back to the mid-55k range, but ultimately I think it heads back to 30,000 and the July lows by the middle of January.

Have a good one

Mike