Positions Report – 5/9/23

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.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

Big Picture

I’m maintaining the count that I have been tracking for many months. In short, we are close to completing the last bear market rally before the final leg lower. It is very rare to see a complex correction play out on such a large scale. However, the pattern and character of this bear market fits the pattern quite well. In these complex corrections, one of the hallmarks is that the final legs are stretched out and take longer to complete in relation to the first few legs.

From a technical perspective, there is not much within the weekly chart of the S&P 500 that signals a linear bull market is underway. The structure off the October low, for one, is an overlapping mess. The closer you look at it, the more you see 3 wave patterns up, then down. This pattern is being repeated even to this day.

As stated, many times before, we needed to see a 5-wave pattern develop off the October low. We did not get this. So, there is only one path a new bull market can take, considering the messy overlapping 3 wave structure, which is a low-quality and less common ending diagonal pattern. I went over this scenario in great detail on the first section of this report here.)

Furthermore, as we move closer to the key 4195, volume is diminishing, as is breadth. I added a simple indicator below that measures the % of stocks in the S$P 500 that are above their 200-day moving average. Note how it is trending down as price is trying to move up. This is not the type of breadth that corresponds with a healthy uptrend.

The weekly Relative Strength Index (RSI) is the biggest tell, for me. It remains in its bear market pattern. We need to see this indicator break above the resistance above, retest and hold. This will signal that a renewed level of momentum is entering the market and would justify higher prices.

Move off the October Low

If we zoom in on the uptrend from the October low, you can see the overlapping patterns quite clearly. Trends do not just develop; they build into repeatable patterns. What I find concerning is that not a single one of the up swings could morph into a 5 wave pattern. They are all low quality diagonal, or just 3 wave moves. Even the current swing has collapsed into a diagonal, which limits the upside if we see a breakout above 4195.

The two general counts I am tracking:

Blue: we’ve topped and in a deep 2nd wave. Once we go below 4040 SPX, the red count gets taken off the board. Below 3808 and we will be entering the heart of a crash.

Red: If we breakout above 4195, the blue count will come off the board as we move towards the final targets around 4280 – 4360.

If this is the start of a new bull market, as stated, the pattern this bull market will have to take is an ending diagonal pattern, considering all the 3 wave moves. If this is in play, it will require a deep pullback once the red count completes. The current structure simply does not suggest that we will breakout in a large 3rd wave power move. So, patience and caution is our motto until the market starts providing a clearer message.

Timing Analysis

One of the primary tools I use is cycle analysis to better time entries/exits. Markets move in cycles, as strange as it may seem. Regardless of why, for those that have been following the time factors I provide, you can see how accurate they have been at signaling local tops/bottoms, to even major ones.

The most important part of this type of analysis from a broad market perspective is when these cycles cluster together. Below is a chart of the S&P 500 that shows each time we see a cycle cluster (blue arrows). Note how they tend to show up at major inflection points. The market recently topped just underneath one of these clusters, which is why I’m very cautious.

No technique is perfect, so if we see the market ignore this cluster and instead move above 4195, the next big cycle clusters are in August and October (really big one here).

Supporting Markets

Financials

Regional banks look horrible. The chart below shows some of the bigger ones in the S&P 600 as well as the Regional Banks ETF (KRE). If a bank breaks below the panic low following the Silicon Valley default, it’s a bad sign. In the banks I track, one as broken down and another is testing this key support. No bids can be found, which is also concerning.

However, it’s not just regional banks. The big banks are in a very concerning posture as well. Take a look at Bank of America. It’s testing a crucial trendline after completing a clean 5-wave pattern from the 2022 top. It needs to break above $30.15 and stay above here to negate this downside development.

The big insurance companies look really bad, as well. I’ve talked about Metlife and Allstate, which still look unhealthy. Now, look at Liberty. This stock has retraced over 50% of its bull market off the 2009 low. This is a very unhealthy chart, all while money is piling into big tech.

So, the only market that I really care about is the major financial sector. If you are a bull, then you believe that Big Tech is leading and financials are following. I believe the opposite is playing out and it’s just a matter of time before the rest of the market follows along. The chart below tracks not the regional banks, but the largest financial institutions in the US (XLF).

So far, XLF has given us a clean 5 waves down, followed by a 3-wave bounce, which is likely over. For those that are new to this analysis, note the triangle pattern. This is the second leg of a correction, which we call a B wave. The final leg of the correction is a C wave and it is always in the form of a 5-wave pattern. The fact that we are seeing this clear 5-wave pattern unfold is concerning. If XLF goes below $30.40, then this market could get really nasty.

On the other hand, if XLF can break above $36, then I will likely pivot into the bull camp, deploy our cash reserves and enjoy a safe bull market uptrend. Short of this, I remain cautious.

One last point on XLF, the weekly Gann chart is quite telling. Notice how the current price drop is riding the 1×1 line (45 degrees) from the COVID low. If this level breaks, it will be a big signal for more downside to come. Also, the square of 19 is coming up around May 26 for XLF. This cycle started on the 2016 low, and will complete one full rotation with the square of 19 date. It is the biggest time factor in Gann’s world. I would expect a 3rd wave breakdown, or some type of big bottom.

On the other hand, if XLF can break above $36, then I will likely pivot into the bull camp, deploy our cash reserves and enjoy a safe bull market uptrend. Short of this, I remain cautious.

Equal Weight S&P 500 vs. the S&P 500

For those that are unfamiliar, the S&P 500 is weighted according to market capitalization (market cap), and it is simply price x float. Since the number of shares outstanding stay mostly static, price is the determining factor in the weighting of the S&P 500. So, it’s really a momentum index that gives a large amount of weighting towards the mega caps in the index that are performing well. This is why MSFT and AAPL currently account for a whopping 14% of the entire portfolio, while Home Depot, Chevron and Coke account for less than 1% each.

The Equal Weighted S&P 500 rebalances the portfolio frequently and provides an equal weighting to all 500 stocks. So, AAPL has the same weighting as Home Depot, Chevron and Coke. In a healthy market, we tend to see mid-caps outperform large caps, as well as most sectors and stocks participating. For this reason, comparing the two indexes can help determine the health of the market/economy.

When we divide the equal weighted S&P 500 by the market cap weighted S&P 500, here is what we have.

When the price in the chart above is going up, it means that the equal weighted index is outperforming. It’s also a sign of a broad and healthy expansion in the markets, which coincides with an expanding economy.

This pattern was moving in the right direction, until February of 2023. Note the breakdown in a clear 5-wave pattern. If the coming bounce is weak, it will be another warning for the bulls. No bull market is carried by a handful of stocks, while the economically sensitive ones keep trending down. This needs to reverse if we are starting a new bull market.

Macro

The yield curve is the most inverted since the early 1980s. What followed was a double dip recession, coupled with frustrating price action until the late 1980s. The bond market is screaming recession on the horizon, which even the FED is acknowledging a “mild recession.”

However, this recession is not here today, and this is why the market is not crashing. Take a look at the 3 month annualized impulse of some key economic metrics.

Nothing about the chart says a recession is here. The consumer is stronger than most expect, and even housing is rebounding. The resilience of the US economy is remarkable and emboldens the bulls into positioning for a soft landing, or even no landing at all.

What these investors fail to recognize is that with strong growth comes strong inflation. Below is the same 3 month annualized impulse of key inflation metrics. Note how far away core metrics are from the FED’s 2% targets.

The conclusion here is that short of a systemic banking crisis, this FOMC will continue to raise rates. Inflation is far from their targets, and they know this. I said last month the FED will raise their terminal rate and talk more hawkish than the market is pricing in. This is exactly what happened. Now, I’m saying that as long the banks hold up, this FED will keep raising rates into year-end.

The reason this matter is simple – without the FED’s participation, there can be no new liquidity cycle to lift equities. The FED is still raising rates and plans to hold rates this elevated into 2024, which is also a kind of tightening. Assuming that the banks do not force them to drop rates sooner, we would need equities to push higher without the support of an FOMC liquidity cycle.

The current macro, from this perspective, should at the very least, explain why the bulls, as well as the bears, cannot take control of this market.

Regarding the looming credit cycle, the Q2 Senior Loan Officer Survey was released yesterday. Though it was not as bad as expected, it was not good, especially as it relates to the soft-landing thesis:

Commercial and industrial loans and leases (23% of total) – we saw banks modestly increase lending standards while meaningfully increasing the cost of capital. They also saw demand for loans show a sizable decrease from large to small businesses.
Consumer Loans (15%) – banks meaningfully reduced a willingness for consumer instalment loans, while seeing a modest increase in demand for consumer loans.
Commercial Real Estate (24%) – banks reported a meaningful tightening for construction and land development loans, office financing, and apartment financing. Banks reported a moderate decline in the demand for these loans at the same time.
Residential Real Estate (21%) – Banks held their lending standards here, while seeing a large increase in demand for various real estate loans.

This is a continuation of the trend where banks are slowly shutting the credit window. We still hold that the looming credit cycle is unavoidable, considering how aggressive this rate campaign continues to be. The consensus states that there is a 9-12 month lag between a rate hike and experiencing its effects in the economy. This means that we are just now about to experience the 1st of four 75 bp hikes starting in late July of 2022. With inflation preventing the FOMC from starting a new liquidity cycle, as well as the full brunt of the rate hike campaign yet to be felt, we continue to act cautiously.

I/O Portfolio

Cash remains our biggest position. We have a target list of current positions we want to build, and some new ones within the AI space once we get the prices we are looking for. Our portfolio remains concentrated in AI and crypto, for now.

Hedge Signal

Our signal remains in sell mode. We are currently in line with it and maintaining a 100% hedged position. We remain in bear market mode, so expect whipsaws.

Nvidia (NVDA)NVDA)

No change in NVDA’s state. We are in a wait and see mode until the next large pullback gets underway. If it is a 3 wave pullback, it will build the case for red below. If it is 5 waves down, it will build the case for blue.

Netflix (NFLX)NFLX)

Both counts have the low in for NFLX. If blue plays out, we’ll sell into that. If it’s red, we’ll look to build our position at the general targets listed.

Advanced Micro Devices (AMD)AMD)

The path to a new bull market will be a break above $103.50, followed by a 3 wave pullback that holds the low. Like NVDA (and most stocks), if the next large pullback is a 5 wave move, prepare for fire sale prices.

Bitcoin (BTCUSD)

We are looking to add ~2% between $26K – $24K. This setup remains intact, which I discussed on the last webinar.

Microsoft (MSFT)MSFT)

I know it is not popular, but I still see this as a large B wave with new lows on the horizon.

Ethereum (ETHUSD)

This is the big picture for ETHUSD. The bullish setup is in place, and we’re looking to buy the next dip.

Aehr Test Systems (AEHR)AEHR)

AEHR has provided us a clean 5 wave drop from the recent high. This bounce is running on fumes and a clear 3 wave move higher. If AEHR can get above $34, that supports blue. If we break that trendline around $23, then red is in control.

Enphase (ENPH)ENPH)

ENPH is getting pretty comfortable at the recent low. We love the company and are targeting lower prices.

Tesla (TSLA)TSLA)

TSLA is setting up for another push lower soon. I still maintain it has a target of $92 before the bigger correction completes. I just can’t see a 3rd wave break out on that last ER.

Chainlink (LINKUSD)

Just horrible price action. If we break down towards $3.5, we’ll buy heavily.

Taiwan Semiconductor (TSM)TSM)