For reference to terminology used, please look at technical analysis under our resources section here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.
Elliott Wave count are meant to provide context. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play
S&P 500 Analysis
The market is very close to completing the upward pattern off the October, 2022 low. As pointed out many times, it is an overlapping and corrective pattern, which has us cautious until it resolves to the downside. Either the coming drop will break through 3805 SPX and confirm that we are heading to new lows (the blue count), or it will hold the 3900 – 3805 region and turn back up, confirming a new bull market (green count). The other necessary event I want to see in order to confirm the green count is a rotation from Big Tech and into more economically sensitive sectors/markets – more on this below. We need breadth expansion in a meaningful way if we truly are in a lasting bull market.
We now have mixed signals from our weekly internals. The weekly RSI is breaking out of its bear market momentum pattern. We now need to hold this level on any pullback. If we fail here, it will be likened to a false breakout in price. Also, breadth continues to flash warning signs, as the % of stocks above their 200 day SMA continues to trend lower against price trending higher. It is rare to see both momentum and breadth be so weak in the early stages of a bull market, and warrants further caution until resolved.
If we zoom in on the structure of the pattern off the October low, you can see how overlapping it is. I labeled the wave patterns so that you can see how this structure fits best as a corrective pattern.
Statistically, when you see an overlapping uptrend, it is more than likely a correction in a larger downtrend. This increases the risk substantially, as it now opens the door to a +1000 point drop from current levels. This is a rare potential to have to risk manage around, yet the wave structure suggests this is more than a possibility to respect until invalidated.
If we are in a new bull market, the only pattern it can take to new highs is a diagonal pattern. This is a series of overlapping, corrective moves that ultimately trends upwards to new highs. It is characterized with big swings, and if this is playing out, we are only coming to the end of the 1st wave. We will know more once we see the character of the coming pullback.
So, how far can we climb before we see a pullback? If we zoom in on this final swing, it appears to be playing out as a diagonal on a smaller scale. This tends to limit the upside move, but a blow off sentiment could push us as high as 4414 SPX. In the chart above, you’ll notice this price will be the symmetrical price where the swing up that started in March will be the exact length as the first swing up off the October low. These corrective patterns tend to be quite symmetrical.
We should see a pullback early this week. If it can hold 4200, and then turn back up, we could see a final blow off move into the +4300 region. If 4200 breaks, the final support is 4170. Below this level and the odds will increase greatly that the top we are looking for is in.
Regarding when we could see this inflection point. The time factor is coming up between June 15 – 25.
Supporting Markets
Dow Jones Industrial Average (DJI)DJI)
The DJI may get a run up to the upper trendline, but that would likely be it. I had a count from months ago on my chart where the Dow makes a run to new highs. When you look at the stocks inside the Dow, they do not suggest this is a high probability. Like most of the weak markets I track, it has to hold the trendline being used as support to keep pushing higher.
Russell 2000 (IWM)IWM)
Small caps continue to look weak. We are seeing a push into our original target zone on weakening momentum. We would need to take out the February highs to invalidate the crash setup. This is a lot to ask, but if IWM can break above this level, it will be quite bullish.
Equal Weight S&P 500 (RSP)RSP)
While tech is pushing the market higher, the more value-oriented names above, which are more economically sensitive, continue to trend lower. If RSP breaks that trendline, it’s game over. Like small caps, it needs to get above the February highs to invalidate the crash setup.
NASDAQ-100
NDX is in a world of its own. I’m counting this move as a 3rdwave top, followed by a 4th wave retrace and one more push higher. This will likely result in even more divergences (lower highs in other markets), if it plays out it will be a clear sign to be very cautious. Emotions are high, and money is piling into tech right now. There is nothing healthy about these divergences. If we are in a new bull market, we must see a rotation from big tech and into your more economically sensitive sectors and indexes.
TLT and the Dollar (Risk-Off)
These are two risk-off plays, and they appear to be bottoming and pointing higher, or in the middle of an already defined uptrend. Long-dated bonds appear to be completing a large degree B wave just as equities are approaching a bigger top. The c wave break out will likely coincide with fear returning to the markets. As long as TLT holds $98, I’m expecting this to play out.
Recent Eurozone PMIs are very concerning. With Germany already entering into a recession, most of Europe isn’t far behind. This is contrary to both US economic data remaining resilient, along with inflation. With the EUR/USD pair coming off of extreme overbought conditions, the setup is there for the dollar to keep pushing higher.
We have been anticipating this move for some time in the dollar, and it’s only a matter of time before the markets react. Two necessary ingredients for a macro environment supporting a new bull market are: 1) The FED starting a fresh liquidity cycle soon; 2) the dollar continuing its downtrend. This is not a good sign for equities.
Global Markets
One factor that will likely hold back a push into our upper target zone in the US markets is the state of global markets. Some of the major markets appear to have topped, while others look like they have room for one more minor swing, at most.
Canada
The Canadian TSX looks like it has topped out before most global indexes. If this bounce drops and makes one more low, it will be confirmed. What should follow is one last bounce before the wheels fall off. The TSX historically leads the US, so when they diverge (like now), it’s important to pay attention.
Europe
The French CAC40 looks to have completed its bigger uptrend off the 2022 low. We were expecting one more push, but this drop is too deep to suggest anything more than a b wave retrace on the next swing. This will complete the larger uptrend off the 2009 low.
The German DAX is in agreement with the French CAC40. Note the island top reversal where sellers keep stepping in at the start of the gap. There’s not much gas left in this market before a larger reversal takes hold.
The Swiss Markets are largely overlooked, but they provide some of the cleanest wave patterns in Europe. This is clearly a larger b wave playing out. It looks like we are completing the 4th of C with one more minor swing to finish off the uptrend. There’s not much left here before a bigger reversal manifests.
Japan
The Japanese Nikkei has been leading the NASDAQ for a long time. It looks like one more minor correction, followed by one more push higher and then that’s it.
Conclusion: global markets have either topped, or are within 1 – 2 more swings away of a larger top, at most. The US market has a revived animal spirit driving prices; however, considering the state of global markets, it should limit how high the US markets can push in the coming weeks.
Macro
The macro thesis that supports the concerning price action above can be summed up in a single phrase – stubborn economic growth = stubborn inflation. To prove my point, the below chart compares the 3-month annualized growth in various economic metrics as well as inflation metrics.
Though it is obvious that we are weakening in growth, we are not yet in recessionary readings. This is emboldening the popular narrative that a soft-landing, or no-landing is what’s playing out. The narrative further goes that even if we do see a recession, it will be mild and was likely priced into equities in 2022. What this narrative is not seeing is that inflation is far from under control, meaning the FED is likely not about to drop rates and start a fresh round of QE.
Note the growth in core inflation, once you strip energy and food out. Two points need to be made: 1) we have been stuck in the 4% – 5% range for nearly a year, showing no progress. This is between double to triple the FED’s target goal. 2) These numbers are compounding sequentially. If there is any hope to have the YoY reading hit the FED’s 2% target, these 3-month annualized readings need to start trending down for several months in a row, which is not happening.
Furthermore, history shows that the FED needs to break the economy to get inflation back in line. Going back to the 1950s, there is no example of core inflation going back down meaningfully once the inflation genie is let out of the bottle. Every instance where core inflation went down meaningfully was on the back of a recession. This means that the bull narrative, whether aware of it or not, is claiming that this time is truly different.
This means that the necessary ingredient for a new bull market, which is liquidity, is not likely anytime soon. There is also no example of a meaningful bull market taking shape without an expanding liquidity cycle. The last liquidity cycle was started in March of 2020. It ended when the FED started raising rates and commenced with Quantitative Tightening. Since then, the FED is continuing its rate hike campaign while rolling off securities from their balance sheet to this day.
One could argue that the market is very forward-looking, and anticipating a pivot soon. Based on where inflation is, this is also unlikely. The bigger risk to the economy is not equities taking another hit, but the FED losing control of the bond market.
Imagine what the bond market would do if the FED dropped rates with the S&P 500 at 4300, and core inflation readings staying stubbornly high? The last time the FED started a liquidity cycle too soon was in the late 1960s. They lost control of the bond market for over a decade, as rates remained very high due to ongoing inflationary pressures. Higher rates compound into lower growth. This is a much bigger risk to the economy than equities continuing lower, especially with the level of debt in the system.
To those arguing that the market is pricing in a pivot early, history is very much against this narrative as well. The below chart compares when prior bear markets have bottomed in relation to the FED’s pivot, which is the start of a new liquidity cycle.
What the above chart shows is that when the FED starts a new liquidity cycle, the market tends to bottom within a 1-2 month spread of the actual pivot. There are instances where the FED’s pivot is not enough to offset the credit cycle within the recession, like in 2008, 2001, and 1981, and a bottom isn’t found until the credit cycle ends. However, there is no instance in time where the market bottoms more than 1 month from the FED’s pivot, which starts a new liquidity cycle.
What this means is that for this to be a new bull market, the market would have had to bottom +7 months before a FED pivot. Not only is this an extreme statistical outlier, but it would truly be stating that this time is also different.
The Market is Too Bearish?
There has also been a narrative that the market is so bearish, as the masses pile into short positions prematurely. While we do think that it is possible for this run higher to push into the fall, the implication is not as valid as one might think.
The AAII investor sentiment survey shows the current allocation to stocks around 34%. This is nowhere near the level of drop we see in stock allocations during a credit cycle downturn. Even though the reading isn’t suggesting exuberance, it is very disconnected from the reality of a credit cycle downturn.
Source: YCharts
This is further backed up when we look at the exposure of households to equities as a % of financial assets. Though this number is well off its all-time highs, it is notably higher than the 2007 top and just off the 2000 top. The private sector is also not factoring in the possibility of a credit cycle downturn and has a long way to drop once the reality sets in.
Source: FRED
Conclusion: it takes time for rate hikes to filter into the economy. The rate at which the FED raised rates has created an unusual lag between their effects and the market rebound. However, core inflation will not allow the FED to lower prematurely. They need a recession to both correct core inflation and also provide the cover needed to start a fresh liquidity cycle so that the bond market does not start another leg of selling.
The gamble the bulls are making is quite high: 1) Core Inflation will just go down on its own short of a recession for the first time in modern history; 2) the market sniffed out a FED pivot +7 months before an actual shift in policy, which is an extreme statistical outlier and the first of its kind; 3) the ongoing rate hikes will not create a credit cycle downturn, or if there is one, it will be minor and was priced in last year; 4) This overlapping and corrective uptrend off the October low is the start of an ending diagonal, even though probabilities do not favor this scenario.
I/O Fund Portfolio
The move in AI and the I/O Fund’s overweigh this trend is a large reason why we are doing so well this year. It has offset our early and excessive bearish positioning, as well as having to log a few outsized losses on our hedge. We believe that by 2024 the frustration around current hedges dragging on returns as well as our defensive positioning will be worth it.
We continue to hold a large cash position, and though it may not feel like it, we believe this decision will pay off over a long-time horizon. We do believe a credit cycle downturn will start in late 2023/early 2024, and that the equity market is not pricing this in today. Our goal is to have plenty of cash to buy choice tech positions at much better bargains than we are seeing today.
Nvidia (NVDA)NVDA)
Any pullback in the summer needs to hold $347-$333. If this level holds, we will likely begin buying again as NVDA sets up for a push towards $585. Below this level and NVDA will likely go lower than many believe possible.
Advanced Micro Devices (AMD)AMD)
Unlike NVDA, AMD is making a lower high. The weekly candle was a nasty one last week, with some follow-through this week. I think, at best, we get a pullback into the $80s-$70s. We will likely be buying some of our target allocations based on the red count playing out.
Bitcoin (BTCUSD)
Here is the flush we were expecting. So far, it looks like 3 waves down. Below $23K and we will get concerned. Below $19K and we will be stopping out of a portion of our position.
Aehr Test Syst (AEHR)AEHR)
We will continue to target AEHR on the next pullback, now that we know what count is playing out. This move up is likely of the final 5th wave higher. If the coming pullback is a 3 wave move into our support targets, we’ll buy.
Netflix (NFLX)NFLX)
NFLX could push higher, but it is in the upper regions of our target box. We will look to buy more on the next large degree pullback.
Microsoft (MSFT)MSFT)
This bounce still counts best as a large B wave, which lines up with the rest of the broad market. There’s a shot, like AAPL, where it can pullback in the summer and then continue to new highs in the red count. Once we get a pullback, we will reassess. Interestingly, the blue count for MSFT and NVDA lines up really well with the coming AI trend once we get on the other side of the credit cycle downturn.
Enphase (ENPH)ENPH)
Ethereum (ETHUSD)
The big picture in Ethereum is promising. Bitcoin looks similar in that we are working on a very large 5th wave in an incomplete uptrend that began years ago. As with Bitcoin, we will defer to the WealthUmbrella team’s signal to help us position or cut our losses.
Tesla (TSLA)TSLA)
I’m struggling to count TSLA’s price action in a way that makes sense. So, instead, we’ll identify downward targets and the level that must hold to avoid getting there. First off, the bear market downtrend has been building its swings from the $244 Fibonacci confluence zone. You can see the perfect symmetry of swing highs leading to symmetrical swing lows from this price zone. The next swing up in $84.75 based off the January 2022 top. If we break below $153, this will be our target.
Chainlink (LINKUSD)
I’m zooming out on LINK today. The consolidation is just too messy and going nowhere. However, LINK is one of the rare alt coins that has completed a 5 wave pattern off its ICO. There’s still a chance that LINK can push towards $3.5 before bottoming. However, there will likely be a time when LINK is in our top 5 holdings…just not now.
Taiwan Semi (TSM)
