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)

Recommended Readings:

• Where the Market is Headed Next
• Nvidia Q1 Earnings: Est 100% Growth for Data Center in Q2 is Bonkers
• Q2 Earnings Kickoff: Webinar Replay
• Broad Market Webinar Replay – June 02, 2023
• 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.

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.

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)

Recommended Reading:

Broad Market Webinar Replay – May 4, 2023
Positions Report – 5/2/23
Broad Market Webinar Replay – April 27th, 2023
Positions Report – 4/18/23
Positions Report – 4/10/23

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

Long Term Broad Market

From a long time horizon, our outlook remains the same. We will likely continue to see the market trade within a range for the next several weeks/months until the inevitable credit cycle causes risk assets to crash.

In the above weekly S&P 500 chart, the weekly RSI continues to trade within a bear market range. If we can see a breakout above the upper trendline, followed by a retest and hold, it will likely coincide with a new bull market building. Until then, this market continues to exhibit the characteristics of a prolonged bear market.

Another feature of the current market that is not supporting the bull thesis is how weak breadth is. Usually, in bull markets, we see expansive buying amongst all sectors and markets. This is simply not the case right now.

The above chart shows that as money continues to move into Big Tech, specifically Apple and Microsoft, it is leaving the more economically sensitive and higher-risk markets. This isn’t a case of leaders leading. It is a continuation of the downtrend in many stocks and sectors while being masked by a handful of names moving higher. Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher.

What we are seeing is a handful of big tech names, which hold a growing weighting in the S&P 500, are propping up the markets, while aggressive selling is taking place underneath. This is not the characteristic of a burgeoning bull market; instead, it is the type of behavior we see towards tops.

Intermediate Term Broad Market

My perspective on the long-term path of the broad market remains a high probability from my analysis. However, where we go over the short to intermediate term is quite variable. Here are the two general paths I’m tracking over the following months:

Blue – This remains my primary count. The only reason that I am maintaining it as my primary count is because of the major cycle cluster I’ve been talking about for months. We tend to see big inflection points around these clusters, and rarely do we see them not result in even a minor inflection point. However, this count is relying on a double top that fails below 4195 SPX. Above this region, and this count is off the board.

Red– This count has us breaking above 4195 and moving to the 4280 – 4360 regions. Based on excessive short positioning, earnings coming in slightly better than expected, and the high-frequency economic data not giving into an imminent recession, markets simply do not have a reason a crash right now. If we keep seeing more and more banks fail, we will likely see a pull forward of this thesis, which would show up with a break below 4050. This alternative count is pretty close to a coin toss compared to the blue.

• Above 4195 will put 4300 back on the table.
• Below 4050 will shift the odds towards the red count.
• Below 3808 and we will be entering the heart of the crash.

Supporting Markets

We are seeing mixed results from various markets. Many of the stocks and sectors that I track do look incomplete. This suggests some variation of the red count would play out. However, other sectors have clearly topped or simply cannot catch a bid while on critical support.

Energy (XLE)XLE)

XLE appears to be in a fourth wave and needs one more move higher to complete the 5th wave top. This lines up with the red count on SPX. If for some reason, we see a breakdown below $69 first, this would also line up with SPX giving us a double top below 4195 SPX.

The Dow Jones (DJI)DJI)

I’ve been talking about this index a lot since the October lows. Considering the ongoing destruction we are seeing in high beta risk assets, it makes sense that any push higher would be with safer value names along with Big Tech (minus financials)

Note below that we now have what looks like a 5-wave move higher. We now need a 3-wave retrace (2nd wave) that holds the March low, followed by a breakout higher. If this happens, the Dow is going to new highs while the rest of the market rallies.

If the coming minor correction we are expecting in the Dow breaks below 31985 DJI, then this setup will fail, and it will support the double top scenario where SPX fails below 4195 and continues lower.

The Russell 2000 (RUT)

Small caps have been very weak, which is not a normal characteristic of newly developing bull markets. The regional banks reside here, as well as companies that cannot diversify their revenue globally. So, this index is very much an economically sensitive one.

The below chart looks to be tracing a triangle pattern. This has us making one more push higher, which lines up SPX above 4195, as well as XLE and DJI making another push higher. RUT has the room to make one more low and still hold this setup; however, if it breaks below that yellow band on the chart, it will coincide with the SPX double top scenario.

Financials (XLF)XLF)

Financials, for the most part, have likely topped, just like many high-beta risk assets. This choppy move higher is doing so on less volume and less momentum, which is characteristic of 2nd wave bounces. We are also only in the lower band of the most probable range that this 2nd wave would top. No matter how much higher we move, in the coming weeks/months, financials continue to signal a warning for those claiming a new bull market is developing.

In Conclusion, markets have been frustrating both bulls and bears since November of 2022. We have gone nowhere, as the market continues to trade within the 3800 – 4200 range. This directionless action has been especially pronounced in 2023, as markets violently thrash within a range.

I expect similar price action to unfold, as any continuation up from here will likely be given back, with a floor under any further drops until the imminent credit cycle is unavoidable. In an environment like this, patience, and adherence to a long-term plan is crucial. The market is both squeezing shorts, then forcing bulls to the sidelines, which lines up with the macro forces in play right now. Less is more until a sustainable bullish trend unfolds, or a breakdown below our pivots happens. We believe, ultimately, the market will give way to the damage caused by the FED's rate hikes. This being said, surviving until the next bull market is our game plan. We want to hold plenty of cash to buy beaten-down shares, as well as adhere to our hedge for protection.

Macro

Our thesis remains that we are in the interim part of a prolonged bear market with one more crash low to complete the cycle. A 40-year high Inflation pulse forced the FOMC to aggressively raise rates in an attempt to quell demand in the economy, and thus halt inflation. Rates went up higher and faster than at any point since the 70s, and we are just now starting to see the effects of higher rates in the economy. We think it is cavalier to assume that this rate campaign will not cause a recession, especially with the level of debt in the system, as well as how inverted the yield curve currently is.

We are now seeing evidence of the credit cycle starting to manifest. For one, deposits in all commercial banks are declining at a historic pace.

FRED

This is especially true with regional banks, which is becoming apparent in this earning season. First Republic was the most recent bank to fail, following an earnings report that showed a loss of $102 Billion in customer deposits in 3 months. This is a 40% decline in deposits. Today, we are seeing a similar trend with PacWest and Western Alliance. PacWest has lost 17% of its deposits, while Western Alliance has lost 11%. Both stocks are down more than 30% on this news, as the regional banking sector makes a fresh low.

Federal Reserve

Considering the nature of fractional banking, if too many deposits leave a bank their loan-to-deposit ratios becomes too fragile. It is causing regional banks to reduce the amount of new loans, which is having an effect on the economy. In fact, the unanticipated changes in banks tightening their loan requirements have moved much higher in Q1 of 2023.

BofA Global Research

According to the Wall Street Journal, “in most US districts, small and average banks account for 90% of loans to small businesses.” Most small business loans, auto loans, and personal loans come from this struggling sector. So, with regional banks under duress, expect needed loans to continue to become harder to come by. This is exactly what we are seeing from the companies that would typically get business loans from regional banks.

UBS Group

Even large companies are struggling in 2023. In fact, 2023 has been the third worst year for large bankruptcies since 2000 with 70 on record. For reference, 2020 saw 71 bankruptcies while 2009 holds the record at 118.

Bloomberg

So, as I’ve stated before and will say again, a credit cycle tends to feed on itself. The credit window shuts as banks protect their books, causing more bankruptcies, which causes more fear within the banking sector based on loan exposure. This causes unemployment to move higher, which affects discretionary spending in the economy. This puts more strain on companies as well as banks until the cycle runs its course. For those that believe this is a liquidity-driven market, I encourage you to go back in time after an aggressive rate hike campaign and see how long it takes for a liquidity pivot to filter into the market. Once the damage is done, it takes time for both liquidity and the credit cycle to run its course.

One would think that the FED would pause their rate hikes, considering the turmoil. This is simply not the case. Even after more regional banks have come under fire, the FOMC futures have a probability of 87% chance of a 25 bps hike this week.

CME Group

The reason for this is because growth still remains stubbornly strong, as evidenced by housing starts as well as the recent PCE data. What investors need to understand, which makes this cycle so unique, is that with strong economic growth comes strong inflation. Short of a systemic shock to the system, the FED will continue to react to inflation data, raising rates and keeping them elevated until both growth and inflation drop into a recession.

A good example of this can be found in the recent Personal Consumption Expenditures report (PCE). Core PCE (stripped of food and energy), is up 4.6% YoY, and only 1% off its peak. Services are up 5.5% YoY vs 5.1% in June! Super Core, which the FED is closely monitoring, and excludes food, energy and housing, is up 0.2% QoQ and up 4.4% YoY, showing little change. It's remarkable the interest rate risk we are seeing in banks and earnings reports, yet they have had little effect on services.

Keep in mind the FED’s mandate is to get back to the 2% threshold. So, while we have seen peak inflation, we are at least double, and in some instances nearly triple that target in various core segments. So, what this data means is that the FED has more work to do, which is running contrary to what the market is pricing in.

Interestingly, the farther out we go into 2023, the higher we see the odds of a rate cut.

CME Group

This matters because this narrative runs counter to the FED’s stated plan, which is to keep rates at the (growing) terminal rate until 2024. So, for the futures market to be pricing in rate cuts in 2023 means one of two things: 1) that the services segment of the inflation data that refuses to drop will hit the 2% target soon, and stay there. I find this very unlikely, short of a black swan event; 2) the futures market is pricing in that we will be in the bigger credit cycle that we have been warning about for a long time, as the FED drops rates to fight it.

So, the unique equation that we are in…Stubborn Growth = Stubborn Inflation. It appears that the only way to quell an elevated core PCE, which has been the case in all instances throughout history, is through a recession. The FED knows this, and the market is still expecting a pivot long before we are seeing evidence of inflation reaching their mandated target. Do not be surprised if rates keep going up beyond this week, or until a bigger issue in the economy forces their hand. The S&P 500 north of 4100, Bitcoin north of $25,000, and an unemployment rate near record lows does not scream pivot early.

Banks

While regional banks remain in focus, many of the larger banks, as well as insurance companies, remain unhealthy under the hood. We have been warning our readers about this, and it remains true today. Here are a few charts with incomplete corrections.

Metlife

Allstate

Capital One

Bank of America

What these charts are picking up on is unclear. What is clear is that this issue is not isolated to regional banks, even though this is where all the focus is right now.

I/O Fund Portfolio

Cash remains our biggest position as we are now holding north of 30% in cash. Our thesis on ENPH fell apart after their report, so we pulled it back in our portfolio. We also closed our META short. Though we think that call will be correct, our timing was off, which is crucial when attempting to short a stock. Our primary themes remain AI, and crypto.

Hedge Signal

Our signal has, once again, picked up on volatility close to the top of the recent swing. We do not believe that the hedge will be such of a major focus once we get into a bull market; however, while we remain in bear market mode, it will trigger more frequently, which we will continue to lean into.

Nvidia (NVDA)NVDA)

NVDA topped right into a very important time factor that has been in play with the stock since 2018. Any break below $261 will trigger the much needed pullback. Expect heavy buying from the I/O Fund on the way down.

Netflix (NFLX)NFLX)

It’s do-or-die time for NFLX. We will see in the fundamentals if their pivot is working in the US very soon. Regarding price, we can’t go too much lower and still hold the blue count.

Advanced Micro Devices (AMD)AMD)

This is another one we will buy heavily on the way down. If AMD can get us one more high before the bigger breakdown, then we will have a potential first wave in the form of a leading diagonal in place. Short of this, we only have 3 waves up.

Bitcoin (BTCUSD)

Bitcoin is up again on banking concerns. We will maintain this thesis for as long as the structure remains in a bullish posture. For now, that will be above $22,325 and/or as long as the WealthUmbrella signal remains in the green.

Microsoft (MSFT)MSFT)

MSFT is propping up the markets, along with Big Tech. It blew through my prior targets, which means that my original analysis was off. I’ve updated the current targets in the chart below, and expect one of them to mark a top. Expect us to buy a lot of MSFT on the way down.

Ethereum (ETHUSD)

ETHUSD was unable to break through the resistance zone we identified. Like Bitcoin, we remain in a bullish posture; however, we must hold $1630.

Aehr Test Systems (AEHR)AEHR)

We had a good run with AEHR, and we expect to have an even better one in the next cycle. For now, AEHR’s Gann analysis was not encouraging. The cycle cluster on the chart included some strong cycles. The inflection point we got was a breakdown below the 1×1 line that has held up the uptrend since the major low in June of 2022. This is a big deal, which would not be known outside of Gann. For this reason, we are stepping back, hedging the rest of our position and looking lower for better entries.

Enphase (ENPH)ENPH)

This remains a great company, with some of the best management in tech. Their catalyst is intact; however, the thesis that they would remain correlated with energy was put into doubt by that last report. They proved to be too correlated to a weak consumer, much like many tech names. For this reason, they have continued lower, in what appears to be a leading stock for the rest of the tech market. We expect to get shares around $100, if not lower.

Regarding Energy futures, the gasoline chart says it all. We have broken the pattern and will look to a lower level for a larger 4th wave low. The same is true with oil. These charts suggest a fresh inflation pulse, but it is unlikely to happen soon.

Tesla (TSLA)TSLA)

That report was really bad. Management acted in a questionable way, shifting the conversation from margins to automated driving. They then hid the very metric they were touting on prior calls. We believe TSLA is destined to make new highs; however, first, it likely has more downside than most are expecting.

Chainlink (LINKUSD)

It’s been a while since I got trapped in a false breakout. We are sitting on a loss with the most recent attempt at a breakout. Below $6.20 and we will likely stop out of a lot of our LINKUSD. There will be a day when we accumulate a lot of this coin, but not now.

Taiwan Semiconductor (TSM)TSM)

I’m not a fan of this breakdown move. We will look lower for better entries.

Recommended Reading:

Broad Market Webinar Replay – April 27th, 2023
Positions Report – 4/18/23
Positions Report – 4/10/23
Positions Report – 4/3/23

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.

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

Broad Market

The evidence still supports, at minimum, heightened risk from a technical perspective. The market appears to be tracing out a complex corrective pattern that started in early 2022, and it suggests one more large drop to new lows in order to complete the pattern. Our target, as of now, is 3050 SPX. The current low and following uptrend we have been in does not have the type of characteristics that tend to coincide with a new bull market developing. Here are a few:

• Breadth has been quite weak in the recent push higher into April. The NYSE+NASDAQ has given us net new 52-week lows five out of the past six weeks, all while price continues higher. This tells me that many stocks are still in a down trend, while a handful of bigger names are holding the indexes up.
• Volume continues to trend below average, as less and less buyers are showing up at current levels.
• The market internals are still in a bear market pattern. Once the weekly RSI can break above that resistance line, it will be an early signal that a meaningful low could be in. Until then, the momentum in the market is quite weak.

What Would a New Bull Market Look Like?What Would a New Bull Market Look Like?

Another problem that we have to address is that we only have a 3 wave pattern off the October 13th low. Why this matters is because if we were going into an obvious new bull market, that pattern would likely be in the form of a 5 wave pattern.

Three waves up, more times than not, is a correction in a larger down trend. This is what the probabilities support, and this is one of several reasons why we decided to be cautious. The good news about having a 3 wave pattern is that if a new bull market is starting, it can ONLY be in the form of an ending diagonal pattern.

An ending diagonal pattern is the final move in a larger pattern. So, in a 5 wave pattern, it would be the 5th wave. This pattern tends to trace a trend channel, consist of 5 waves, where each wave is an overlapping 3 wave pattern. Here is an example in SNAP’s chart. Note the red pattern in the 5th wave.

You can see how it is a messy, overlapping pattern that traces a trend channel and is a series of 3 wave moves in both directions. Now, if this pattern were going to play out on a larger scale in the broad market, it would look something like this in the S&P 500.

This is the very general path that this type of pattern would take, and it is still too early to confirm if this is playing out. What is important to understand about this pattern is that if it is in play, and we did put in a major low in October, we have likely not even completed the 1st wave. And, we will need a confirmed 2nd wave drop in order to fully confirm it is in play.

Many investors get FOMO, and chase trends based on these emotions. This information should embolden investors that if we are wrong, and a new bull market is playing out, we still have the vast majority of this bull market to capture, once we get confirmation.

This market has literally been range bounce for 6 months. Neither the bulls nor bears can take control. And, based on the underlying structure of this uptrend, if the bulls are going to push us into a new bull market, it will have to be after a deep 2nd wave retrace.

The current Time Factor will likely mark a major top or a low/break out that can push us higher for the next couple of months. We are getting mixed messages in the supporting markets, but what seems to be quite universal is how the coming pullback unfolds will be the biggest tell.

If we do see a low and break out, it will result in the final bullish swing of the current larger pattern that started October 13th. Once we top, if we haven’t already, how the market turns down will determine what will play out. If it is a 5 wave pattern, then the bear market will likely resume. If it is a 3 wave pattern, we will establish an alternative buying plan along with targets.

Take Away: markets do not move in random ways. All trends develop into repeatable patterns on all time scales. The fact that we only have a 3 wave bounce off the October 13th low has reduced the possible patterns that a new bull market will take. If the coming top turns down in a 3 wave pattern, it will strongly support that a new bull market is developing, as we will have a much better opportunity to buy stocks at lower levels.

I do not believe this scenario is likely. However, I want to explain to our readers how this type of analysis can reduce risk, and help you get on the right side of a trend early. We have no confirmation of a new bull market, and if we do, you will see us pivot aggressively.

Supporting Markets

Dow Jones (DJI)DJI)

DJI was leading the market higher into early 2023. Since then, it has fallen behind. What is interesting is that the pattern lower is very messy and overlapping. In other words, it fits the characteristics of a B wave, with a C wave to new highs on deck.

If we are in a C wave, remember, C waves are always 5 wave patterns. The bounce in April, so far, looks to be 5 waves pointing up. This would be wave 1 of the large C. If this is playing out, we need to see a 3 wave pullback that holds the 31,987 supports, then a breakout above the December high at 34,750. If this happens, then we should expect, at minimum, another multi-week to multi-month push higher into summer.

At minimum, if we get confirmation of the above, we should expect to see some stocks/markets make new highs, while others make lower highs. As bullish as they may seem, this will be the last swings higher that complete the large degree pattern off the COVID low. Many markets and stocks have already topped.

NASDAQ-100 (NDX)NASDAQ-100 (NDX)NDX)

Like the DOW, NDX appears to be topping out, to some degree. The NASDAQ-100 doesn’t look like it has room for one more swing higher, like the green count in SPX suggests. This is better confirmed with the various FAANGs that I have been discussing.

If we do see a breakout above 13,425, we would likely need to see some pullback first. If this pullback is a 3 wave drop that is relatively shallow, it will support the push into May/June that is suggested in the Dow, and also in SPX.

The levels to monitor for the NASDAQ-100 – NDX needs to hold the bear market trendline, or 11,200 to support this thesis. If we instead see a 5 wave drop, it will be a big warning of new lows on the horizon.

FinancialsFinancials

Financials more than confirm that any push higher will likely be limited. After completing a large bear pennant, XLF has completed a clean 5 wave drop from that breakdown. Keep in mind, XLF is in a C wave down, so that pattern will be in a 5 wave format, which is what we are seeing. So, this is a big warning, until proven otherwise.

From the 5 wave drop, we are now seeing only a 3 wave bounce, which further supports this thesis. This would suggest we are in a 2ndwave of 5 pointing down. The 2nd wave bounce could be shallow, at which point we would see a sharp drop soon, or it can morph into a bigger 2ndwave that could take us higher and into Summer. In order to negate this downside setup, we need to see XLF break above $36.

Furthermore, the more financial charts I view, the more concerned I become. No one is talking about insurance companies, yet. From what I can tell, they will be. My guess based on the combined charting is that we have many 5 wave drops from the Jan-Feb top. We should see a 2ndwave bounce that can take us into late Spring/early Summer, which lines up with Dow and SPX. During this time, I imagine the sentiment will be that all is safe, and it was an isolated instance. The countless charts I’m looking at on a regional, national and international level strongly suggest otherwise.

Small CapsSmall Caps

Most regional banks reside in the small cap universe. For this reason, the Russell 2000 (RUT) is quite weak. Usually, we see high beta/small caps lead us out of bear markets. This is not the case today. Note how, like XLF, we have a full 5 wave pattern drop from the February highs. We are trending up into the current April time factor, so we should see a 3rdwave breakout, or another large drop, confirming that we are heading to new lows. Because of the current setup, I believe RUT will be a big tell on what’s to come.

Putting it all together: either we will see some type of top or breakout this week/next week. The NASDAQ-100 suggests that it will be a top, while RUT could go either way. If the drop is a 3 wave pattern, we could be setting up for a bigger push into summer. This will push the Dow to new highs, while many stocks/sectors fail to make new highs. If NDX and DJI turn down in 5 waves, then the top is in and we will raise cash. The financial sector will be the most important to monitor. It is throwing off big warnings on a wide scale.

Macro

This week will be filled with FED interviews. We have a speaker every day, which should be interesting. Due to the fact that the current FED Fund Futures projections for a rate hike in May is now 86%.

Even more interesting, the projections for an additional rate hike into June is above 25%. We can further see this confirmation in the bond market where the 3-month yield has made a fresh high.

However, the 6-month and 2-year yields are seeing a reversal/pivot soon after this hike. Based on the recent inflation data, I believe the 6-month will push to new highs, as the FED announces that they will have to increase the terminal rate soon. This could be the catalyst for the next leg down in stocks that the NASDAQ-100 is picking up on.

For reference, the shorter the duration, the more controlled by FED policy. So, it’s important to monitor the 2-year and 6-month yields in relation to the 3-month yield. The 3-month yield is signaling more rate hikes, while the 2-year yield and 6-month yields not making a new highs, are saying that we are closer to a pivot than most think. Once the 3-month and 6-month yields collapse, you will know that we are close to a FED pivot, regardless of what they are saying. If this happens sooner than most expect, especially with the inflation data we have been getting, investors should be concerned.

The high frequency data that has been coming out has not been encouraging for the immanent FED Pivot narrative. For one, the CPI print was not as dovish as the headline numbers celebrated.

The only reason it came in so favorably was because of reduced energy costs. When you strip out energy/food, core CPI rose 0.4%, led by rent costs. Rent still has a long way to go to catch up to housing prices, so this will likely continue to put upward pressure on inflation numbers. The Super Core, which is the FED’s preferred means of tracking progress with inflation, came in at 0.4%. This metric is up 5.2% on an annualized basis for the first half of 2023, showing no progress.

Regarding the PPI, this told a slightly different story. PPI is more forward-looking as it measures the input costs of producers/manufacturers. This could be foreseeing a push forward of the decline in M2, which for those that are not aware, we have seen the largest M2 decline since 1930. When this does hit the economy, it will not be pleasant. However, energy costs were still a big part of the lower numbers. Though the trend is undoubtedly down, it is still well above the 2% target. Take goods, for example; it was down 0.1%. When you strip out energy, which was down 6.4% (led by gasoline, which was down 11.7%), you actually have an increase of 0.4%.

This was backed up by industrial production coming in better than expected, which was on the heels of two prior upward revisions. This was led by the Utilities segment, which posted the only gain, while manufacturing continued its decline.

Retail Sales logged a decline of 1%; however, retail sales are up 2.9% on a YoY basis. More importantly, it is still trending well above the average on a 3 month, annualized basis.

The more resilient the US economy remains, the stickier inflation becomes, as shown in the services and super core segments of the inflation data. This will likely embolden the FED to not only raise the terminal rate, but increase rates higher, which will further exacerbate whatever damage they have already caused to the economy in their battle to beat inflation. We expect this type of rhetoric to be on full display this week, as the FED continues to address inflationary pressures.

Now, let’s look at retail sales on a YoY basis stiped of inflation. When we look at Real Retail Sales, it is quite alarming. The headline retail sales numbers are including inflation. Without inflation we are trending well into contraction territory from prior cycles.

This concerns me because the FOMC is waiting very deep into this business cycle to lower rates, and they have to because of how stubborn inflation is. We are seeing many data points like the one above, all while inflation remains well elevated above the 2% target. The fact that they have to raise rates into this type of weak economy is concerning because of the lag time it takes for rate hikes, and cuts to filter into the system. This, amongst several other data points, suggests that the “mild recession” the FED is now forecasting will likely not be mild.

One additional point on inflation, core and super core data remains flat, at best. While the headline numbers continue to fall. This means that energy and food is the primary reason for favorable inflation data numbers. However, if we look at energy futures, a concerning picture continues to unfold.

GasolineGasoline

We have been showing this pattern developing for several months. If gasoline can get above $3, then a clear path to new highs will become probable. On the other hand, if we break down below $2.5, then the odds of this scenario playing out falls drastically.

Crude OilCrude Oil

Crude oil is targeting $87 in a very nice and developing 5 wave move off the low. If this pattern gets to $87, then provides a 3 wave retrace, then crude is setting up for a run to new highs. This scenario is not being factored into equity prices, and until it is negated, risk remains elevated.

If we look at food futures, another major contributor to inflation, we can see a similar theme playing out.

Cattle and WheatCattle and Wheat

Cattle prices have just broken out to all-time highs, and holding at these levels. This has been offset by wheat prices cratering. However, after a very stretched corrective pattern, wheat appears to be putting in a bottoming and setting up for potential breakout. If wheat breaks above $731.50, it could be a problem for food prices in future inflation data.

I/O Fund Portfolio

Our largest position remains cash, where we are holding about 18% of cash. We have taken considerable gains in NVDA and AMD, as they appear to be topping out after giving us an incredible run since the October low. We have allocated more money to AEHR due to a sizable increase for futures revenue and EPS estimates. We also have added to ENPH on its recent, and long-time coming, breakout. If we add more cash into the markets, we plan to target TSLA as well as Bitcoin.

HedgeHedge

Our hedge has been on point during this overlapping and messy rally. It has caught every swing higher, and gotten us out close to the top. The more we see it work in real-time, the more confidence we have in it. As of now, it is still in bear market mode, and recently flipped to sell.

Netflix (NFLX)NFLX)

NFLX continues to trace the pattern we laid out many months ago. It appears to be setting up for the final swing in a very large leading diagonal pattern. The $378 region will be very strong resistance, if we get there.

Enphase (ENPH)ENPH)

It’s hard to imagine ENPH pushing higher if we really are in a bear market bounce. Keep in mind, ENPH continued in an uptrend in 2022 while tech cratered. This is because ENPH is tied to inflation, specifically energy futures. If inflation does have a new impulse, driven by energy and food futures, expect tech to fall while ENPH continues higher.

Aehr Test Systems (AEHR)AEHR)

AEHR found support on the Gann 1×1 line (in red). As long as this level holds, we expect higher prices. Note how AEHR is moving into a time factor soon. If this signals a top and break down below the 1×1 line, we will stop out of a lot of our position. If it marks, instead, a breakout, we may add.

Nvidia (NVDA)NVDA)

NVDA continues to exhibit topping patterns after a very large 3 wave bounce. Even if the low is in, a sizable retrace needs to happen before the next leg higher. April 19 – 25 is a big time factor for NVDA.

Bitcoin (BTCUSD)

Bitcoin is at a key spot. We need to see escape velocity soon with minimal pullbacks, in order to confirm the bullish count below. I do find it interesting that Bitcoin looks to be in the middle of a move while Big Tech/Semis look to be at the end of a move. Either one is telling the truth or the correlation broke.

Ethereum (ETHUSD)

If we can power above $2300, the moonshot count below becomes a much higher probability.

Tesla (TSLA)TSLA)

There are many paths TSLA will take, all in line with the way the broader market breaks.

Advanced Micro Devises (AMD)AMD)

Microsoft (MSFT)MSFT)

Taiwan Semiconductor (TSM)TSM)

Chainlink (LINKUSD)

If this is the real thing for LINKUSD, and not a 4thwave fake-out, we need to see a large 5 wave pattern develop. The blue path below is what that would look like. The blue lines overhead are the breakout spots to monitor. If we do break above $11.6 in a 5th wave move, that would be your large 1st wave. You would want to wait for the 2ndwave retrace to get aggressive.

Also, LINK has a big time factor coming up in May 10 – 8.

Recommended Readings:

Q2 EARNINGS KICKOFF: WEBINAR REPLAY
POSITIONS REPORT – 4/10/23
POSITIONS REPORT – 4/3/23
POSITIONS REPORT – 3/28/23POSITIONS REPORT – 4/10/23
POSITIONS REPORT – 4/3/23
POSITIONS REPORT – 3/28/23

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

Broad Market

Nothing has changed from last week. We believe the bounce from the October low is a bear market rally, and that we are at the tail end of this rally. The question remains whether the market has topped or has one more push to new highs before petering out.

I laid out the case for this push to new highs last week, which could take us back towards the 4300 SPX level, and last through May/June. As of now, we do not have confirmation of this scenario playing out.

Note in the above chart the Relative Strength Index (RSI) below the weekly price chart. This is a momentum indicator that produces very important patterns on longer time horizons. You can see how the post-COVID bull market held the black trendline as support. It then broke this support, which has been its resistance in the following bear market. As of now, we are not seeing internal momentum that is suggesting a new bull market is developing. This is a further warning to the bulls, as the technical picture is not as healthy as some may believe.

Potential Paths

My primary count is in blue. This count has the top in and is only waiting for a trigger to push us below the confirmation level of 3838 SPX. Below this level and the risk will be very high.

Last week I, introduced the green count. This is a variation of the bullish red count I’ve been tracking for many weeks. I’m favoring this one as an alternative because it would have the market top into our major cycle cluster from April 11-28.

Regarding the green count, this would have us in wave 3 of 3 of the final C-wave in this bear market rally. As long as price stays above 4044 SPX, and then pushes above last week’s high, this will remain my alternative count.

The red count has been altered because of the strength of the most recent swing higher. It’s not typical that the 5th wave of a leading diagonal is so strong, meaning that it would likely have to be the 3rd wave in a much bigger leading diagonal pattern. For this reason, I’m not considering this as a possibility as long as price stays above 3970 SPX. Below here, and it will become my alternative count again.

April 11-28 Time Factor

We do extensive cycle work to help us know when to expect a market inflection point. As strange as this may sound to many, of all the technical tools I use, it is the most reliable. Since I first introduced these Gann Time Factors, they’ve had a near perfect track record in identifying these inflection points.

Regarding these time factors, they are simply repetitive cycles that a stock/market reacts too. There are two things that I look for that helps me determine if a time factor is likely to be a big inflection point. For one, I’m looking for the same period being shown across many markets/stocks. The second thing is if we have multiple cycles coming together at the same time to make a cluster.

In the S&P 500 chart below, each symbol represents a time factor/cycle that has an effect on the S&P 500. Note how we have a large cluster coming together next week. This, more times than not, tends to mark a big inflection point worth monitoring.

Regarding other markets/key stocks that I track, here is where they are showing a time factor in the coming weeks:

NASDAQ-100: 26th – 1st

Russell 2000: 18th – 24th

ARKK: 12th – 18th

XLF: 20th – 28th

BTCUSD: 18th – 21st

TSLA: 11th – 28th

NFLX: 18th – 26th

AAPL: 11th – 14th

GOOGL – 17th – 21st

AMZN: 13th – 21st

META: 11th – 21st

NVDA: 14th – 21st

FDX: 6th-17th

So, we have a large cycle cluster, coupled with several important markets and key stocks pointing towards this same period. So, we should see a notable inflection point coming up.

Typically, what matters the most with these time factors is how we are trending into these periods. About 75% of the time, we see a reversal of the trend moving into the time factor. The other 25% of the time, we see a 3rd wave breakout. Regardless, I believe a lot more clarity on what count is leading will manifest in the coming weeks.

Supporting Markets

The Russell 2000 (RUT)

Small caps have been exceptionally weak, mostly because this is where most regional banks reside. The structure of RUT appears to be shaping up as a developing 5 wave pattern pointing down. If this is accurate, we should see one more drop into this week/next week, followed by a reversal upwards. This would suggest that this April time factor would be a significant low, supporting the SPX red count, or potentially an extended green count.

However, a breakdown below that yellow region on my RUT chart will signal that the top is in, and support the blue count in SPX.

Dow Jones (DJI)DJI)

The Dow also supports the red/extended green count. The drop from the December high has been very messy and overlapping, which favors a B wave with a C wave to new highs coming. In order to confirm this, we need two things: 1) the developing pattern off of the recent low needs to become a 5 wave pattern. So far, it’s only 4 waves. 2) we must break above the December top.

If we see a 5th wave develop, followed by a 3 wave retrace into our April time factor, then we might start shifting towards the limited bull case – red/green on SPX.

FAANGs

The FAANGs, on the other hand, appear to suggest something else entirely. Microsoft appears to have met our target at $291. It could have a spill over to the $298/$300 region, but that would be it before we see a bigger pullback take hold.

AAPL and GOOGL suggest that they have one more swing high in them worth monitoring. AAPL has hit our first range of targets and turned down. The structure of AAPL’s uptrend suggests that it could be targeting the $169-$170 region. This would likely complete a very full, upward pattern, which would lead to a bigger decline.

GOOGL has broken out to new highs, but looks to have limited upside potential from here. The geometry looks to be targeting $114-$116 region before we see a larger reversal.

META has reached our target at $216, which had us initiate a short position. According to my count, this should be it for META; however, the alternative count would have us targeting ~$243 before the bigger pullback takes hold.

At best, the FAANGs appear to be topping out. So, the question remains – are small caps and financials leading us lower or is big Tech leading us higher? As stated last week, the structure of the coming pullback is what will determine how bearish/bullish we get.

Since the bear counts have to be in the form of a large C wave pointing down, it will be in the form of a 5 wave pattern. if we see 5 wave drops across the board, then we have an early confirmation to get defensive. On the other hand, if these drops come in the form of 3 wave drops into our April Time Factor, no matter how bearish things look, the market will likely be setting up for a larger push higher – SPX red/green count.

Financials

Let’s not forget about the most important sector in the market – financials. Due to the strength in tech, most have shrugged off what’s going on here. If financials didn’t look so bad, I’d be more inclined to shift into the red/green counts for SPX.

XLF has given us the minimum waves to be a 5 wave drop from the February high; however, my count has us in a 4th wave with one more drop to come. This will line up with the green/red count in SPX and a low in the Russell 2000. As XLF pushes higher in a larger 2nd wave, we can see other markets/stocks play catch-up and top out later in the year as we get one more swing high.

However, it’s worth being on alert. We do have a 5 wave pattern down and a very small 3 wave retrace, which could be a very small 2nd wave. If we see a gap down on heavy volume in financials, it will confirm that the blue count is farther along than originally thought.

I continue to believe XLF is one of the most important markets to watch. This is not a collection of regional banks, but the largest financial institutions in the world. If we do get another drop, the 5 wave pattern will be very filled out, and dropping from what appears to be a bear pennant B wave. If this happens, any uptrend that follows will be on borrowed time.

Bank of America (BAK), being one of the larger banks in America, has one of the more concerning charts. It looks like waves 1 and 2 are in, and we are on the verge of a 3rd wave break down. As long as BAC stays below $31, this setup is in place. If we break that trendline that has held up BAC since 2012, expect the markets to follow.

Macro

The Fed Funds Futures now has odds of a 25 bps rate hike around 71% during the next FOMC meeting in May. This has risen from around 50% just prior to the recent jobs report last Friday.

The jobs report was perceived as strong, but under the hood, the results were actually mixed. What was strong was that private sector labor income came in at 9.1% on a 3 month annualized basis. This is the highest increase since April of 2022. Furthermore, civilian employment jobs increase by 577,000, with a 480,000 increase in the labor force. This pushed up the participation rate in the economy to just north of 62%, which was the highest we’ve seen since March of 2020, just after the pandemic started.

However, as we’ve stated time and time again, the most important metric is not the increase in jobs, but the number of hours worked. With all the increase in jobs, the number of hours worked actually went down on a MoM basis of 0.1%. This tells us that businesses were hiring, but they have less work that needs to be done, which is not good.

Employment is the last metric to go in a recession, and we are seeing the metrics that matter continue to trend lower. Regardless, the FED’s aggressive rate hikes have yet to address a rather resilient labor market, meaning that they will continue to press rates, further intensifying the interest rate risk we are seeing with banks.

What is the bond market telling us about the recent data? The 3-month yield just pushed to new highs, while the 6-month yield is very close to making a new high. In other words, the bond market is confirming the FED will push rates higher in May.

However, look at the 2-year yield (red below). It’s still suggesting a top in rates, and continues to suggest a reversal/pivot quickly after the FED raises in May.

The shorter the duration, the more of an effect the yield has on FED policy. Once we see the 6-month and 3-month start to crater like the 2-year, a FED pivot, and likely reversal will be close.

I do not see a pivot as a positive occurrence, though most will. In fact, we could see the equity market rally hard on this news, confirming our red count in SPX. We’ve been trained over the last 14 years to only focus on liquidity. With inflation low, the FED has been able to support equities with multiple liquidity cycles, leading to short, but sometimes deep corrections.

With inflation at a 40-year high, they embarked on the most aggressive rate hike campaign since the 1970s. This was accompanied with global central banks following along.

What investors are forgetting about is the effect rate hikes have on the economy, and the lag time it takes for hikes to be felt in the economy. Some estimates claim that it can take up to a year before the full effect of a hike is felt; however, the consensus is that it’s anywhere between 6-9 months. This would imply that we are just starting to feel the effects of the current rate hiking cycle.

Historically, the FED pivots around market tops, starting a new liquidity cycle. However, the combined effects of the multi-month to multi-year rate hike campaign triggers an unavoidable credit cycle, which appears to be unavoidable in the coming months.

In the chart below, I compare the Fed Funds Rate (BLUE) to the S&P 500. The below gray bars show the lending standards for banks. As banks get more concerned about the economy, the less loans they provide, causing a cascade of defaults.

Note how the FED starts a new liquidity cycle usually around the top in equity markets. They start lowering rates, knowing that it will also take time for these lower rates to filter into the economy. However, once rates go up too high, the damage is done, and the economy as well as the markets must go through a credit cycle before a new expansion period can start. What’s concerning in the current cycle is that the FED is still hiking rates and engaging in QT, meaning that this credit cycle could take longer to cycle through than most think.

In conclusion, price action, liquidity cycle and credit cycle do not support a renewed bull market developing. If we start seeing evidence to the contrary, we will happily pivot. We will continue to lean into our hedge signal, while holding heightened levels of cash until more clarity is presented in the market’s direction.

I/O Fund Positions

We have positioned some of our portfolio for the potential of the SPX green/red counts playing out. We currently hold just north of 20% cash, with a ~4% short position in META.

Hedge

Our hedge has provided us three intra-day sell signals over the last couple of weeks. However, we need to close the day on a sell signal for us to act. This means that buyers have stepped in towards the afternoon session on weak trading days. We are close to triggering a sell signal, and another down day that closes on the low will likely do it.

Netflix (NFLX)NFLX)

Netflix, by default, has become our largest position. The structure looks like it needs one more push into the $379-$410 region to complete the 1-year long, leading diagonal pattern. If this happens, we will cut our position significantly. In fact, we may front run this move if we push a little higher.

Nvidia (NVDA)NVDA)

There are simply no significant sellers in NVDA, as it is now +158% from our October 13th tranche at $108. We still only have 3 waves up off the low, and expect some event to trigger a sell off. If we see 5 waves down on this drop, it’s a big warning, while 3 waves down will set up the next great buying opportunity, sooner rather than later.

Advanced Micro Devices (AMD)AMD)

AMD is also topping out. The same analysis that applies to NVDA (and many stocks), applies here – 5 waves down is not good; 3 waves down will set up a great buying opportunity.

Enphase (ENPH)ENPH)

We don’t want to see the $187-$180 region broken. Below there and the bullish setup in ENPH could be in jeopardy.

It continues to act like energy commodities, and like the below energy commodities I track, it appears to be bottoming/setting up for a breakout.

Crude Oil

Crude continues to consolidate at the recent high in what looks like a 4th wave. Any push above $81.90 will confirm a 5th wave, as well as a major low being put in.

Gasoline

Gas is close to breaking out above $2.8. The final test will be $2.95. If it clears these hurdles, I’ll be looking for new highs in gasoline, as strange as that may sound, considering the macro environment.

Bitcoin (BTCUSD)

Bitcoin is moving in an inverse correlation to the banks, which is very interesting. We will continue to follow the WealthUmbrella signal to help us navigate this move. Technically, as long as BTCUSD stays above $19,550 on any weakness, we are still looking up.

Ethereum (ETHUSD)

ETHUSD has a more bullish posture than Bitcoin. However, the $2100-$2300 level will be an important pivot for ETHUSD to clear. We could see a pop into that region, followed by a failure. If we can clear this region, the upwards target on ETHUSD is worth buying into.

Microsoft (MSFT)MSFT)

Please refer to the Supporting Markets analysis above.

Tesla (TSLA)TSLA)

TSLA appears to be bottoming out, which favors the red count. If we get a full 5 waves up off the low, regardless of what unfolds in the broader market, a strong case can be made for a major low being put in.

Aehr Test Systems (AEHR)AEHR)

I believe the Gann chart below is the most telling. Note the buyers stepped in at the double 1×1 line in red below. If this line breaks, we will likely reduce AEHR in our portfolio. Also, note the cycle cluster coming up between April 18th – 25th. If we are trending up into this region, that will also be a signal to reduce our exposure to AEHR.

Taiwan SemiConductor (TSM)TSM)

The recent escalation between China and Taiwan is concerning. This will hit TSM especially hard, but it will have effects on most semis, including AAPL. Regardless, this is an amazing company, and we look forward to building our position into strength or weakness.

Chainlink (LINK)LINK)

Meta Platforms (META)META)

Please refer to the Supporting Markets analysis above.

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

Broad Market

Weekly Chart

My perspective remains unchanged – have we topped, or do we have one more rally before a major top gets put in place? What has changed, which I will go into, is the possibility for a multiweek rally that could put my original target ~4400 SPX back on the table.

Please note the weekly RSI above. It is still within a bear market internal range. More times than not, the weekly RSI tips its hat first. We have clear price levels as well as RSI levels to help us determine what count will unfold.

Daily Chart

If we zoom in on the structure from the October low until now, we clearly have 3 waves up off of that low. This greatly supports that a bear market rally, to some degree, is developing.

The two counts I have in play are below:

Blue (Primary): we have topped and are working on a deep 2nd wave pullback. The higher this goes, the less likely that it is playing out. We have blown through the 4067 resistance and are now working on the 4118 region. Above the 4118 region and the odds of blue playing out go down substantially. We need to go above the start of wave 1 to completely invalidate it.

Red (Alternative): We have only completed two of three waves in a large degree bear market rally. This would have us in the early stages of the final push higher. From an Elliot Wave perspective, this final push higher will be a C wave, which always takes the form of a 5 wave structure. Wave 1 of 5 is complete, and April will be a 2nd wave retrace. The problem with this count is that wave 1 is relying on a rare pattern (discussed below) called a leading diagonal. These are not very common, and more times than not, fail, leading to a continuation of the predominant trend, which is down.

15 Minute Chart

If we zoom in closer, we can see the leading diagonal pattern as wave 1 of the final C wave pushing higher.

What is interesting is that the pattern is complete. We have a 5 wave pattern that is very overlapping, and stays within a defined trend channel. In order to fully confirm that the red count is in play, we now need a 3 wave pullback in April that holds 3838, then a 5 wave uptrend that breaks above the 4118 level. We still have a lot to prove, so patience is required.

Price levels to monitor: Above 4118 favors Red. Below 3838 favors blue. Expect April to be bumpy.

Supporting Markets

NASDAQ-100

On a shorter time frame, note the termination wedge for the 5th wave, which is happening on decelerating momentum. This is clearly an end move for the uptrend in place, and it is clearly a 5th wave, which will be followed by a drop. How we drop will be very important, and probably the ultimate theme of this report.

If we see a 5 wave move from this top, it will support my blue count. If instead we see a 3 wave drop that holds the bear market trendline, then the red count, or some variation of the red count will become my primary, and we should have a large push higher into late Spring.

The only count that does not feel forced on NDX is the same complex bear market pattern playing out in SPX. However, I also cannot deny that a potential leading diagonal is in place for a larger 1st wave up. The parameters are in place to help us get on the right side of what follows – 5 waves down and the bear market continues; 3 waves down and we can start putting more cash to work.

Dow Jones Industrial

I have not talked about this index for some time. However, it was the leading index off the October low, and my larger count still suggests one more high is needed to complete the final 5th wave off the COVID low.

Note how messy the correction has been so far. We have not seen a clean 5 wave drop from the February top, which supports the scenario where we see a bigger uptrend over the next several months.

Also, note how the current bounce has only given us 3 waves up. If this morphs into 5 waves up, it will signal that the first wave of the larger C wave is in place. This will be a strong clue that we could be in for a bigger bounce, which supports the Alternative Red Count in the broader market.

Financials

XLF continues to be the most important chart in the market. I believe it is leading the rest of the market. So, any new uptrend will likely only be temporary, which is supported by the macro environment.

XLF looks like it has given us a sharp 5 wave drop after breaking down from a large degree bear pennant.

This would line up with the SPX red count, in that a larger 2nd wave rally would unfold that fails to make a new high. As long as no more issues unfold in the banking sector, we could see this larger rally unfold.

However, it should be very clear that this rally would lead to large divergences, and likely not be the start of a new bull market. As long as XLF stays below the breakdown levels we saw just prior to SIVB collapsing, expectations for a new bull market should be muted.

Conclusion: if the SPX blue count gets invalidated, and we are setting up for a larger push into the 4275-4500 region, expect this rally to be limited in time, price and sectors that fully participate. We could see indices like the Dow make a push to all time highs, while the Russell 2000, S&P 500, and possibly the NASDAQ-100 make lower highs. The divergences will be key, if this plays out.

More Evidence to Support the SPX Red Count

Most readers prefer a strong thesis, and unwavering support for that thesis regardless of what unfolds. This would be similar to buying a stock based on a story and holding it without a stop. Investing is never that easy, and one lesson I learned throughout 2022 is to hold a strong thesis loosely.

As a portfolio manager, I am always asking myself where I am wrong, what will it take to flip, etc.? We are not in the business of being right, but in the business of maximizing profits and reducing risk.

Therefore, what you are seeing in this report is an active thought process that lays out levels, and markets that would determine us flipping to my Alternative Red Count discussed above in the Broad Market section.

I’ve been discussing how bad the banking sector looks through various charts. It is my belief that the banking sector has put in a major top and is coming close to bottoming out in the 1st large degree wave pointing down. This should give way to a rather large rally in the form of a 2nd wave, where we see many lower highs in the sector.

However, what cannot be ignored is that the rest of the market is NOT crashing with the banks. In fact, some sectors and stocks have moved higher while banks continue to crash. This coupled with the extreme bearishness that we discussed last week could be setting us up for a bigger rally into Spring.

Improving Breadth

We’ve seen some bullish signals with improved breadth in the markets. While MSFT and AAPL were holding up the indexes for the last couple of weeks, we are now seeing an expansion of buys throughout the market.

The below chart tracks two of the three breadth indicators that I like to tracks. The one on the bottom is called the McClellan Summation Index. It’s a slow moving index that measures breadth within the broader markets. What is important to note is that it bottomed in an area that has led to many bounces, and it is clearly pointing up. An uptrend in this oscilator from these levels can lead to a bounce that lasts between 4-6 weeks, on average.

The second indicator is a volume oscillator that measures buying/selling volume within the NYSE. I use many techniques to gauge cycles and inflection points, Gann’s Time Factors being my primary. However, one that I pay attention to when it triggers is known as T-Theory.

The basic idea is here that we should see equal periods in time of cash leaving the markets as we do with cash entering the markets. This creates one cycle, and has an eerie accuracy on helping determine periods of strength into the future.

For those interested in the subject, the inventor of the theory, Terry Laundry, has years of his analysis and use of the theory on line here. I’ve also found this blog helpful in understanding more modern applications of the technique.here. I’ve also found this blog helpful in understanding more modern applications of the technique.

That being said, note how the volume oscillator has moved beyond the prior peak and into positive territory. This implies a period of strength into the May 19th region. As long as the prior low in the oscillator holds, this will remain intact. Below that low, and we tend to see sharp reversals in the price trend. If this happens into the April time factor, we will know what to do.

Dow Cycles

At the beginning of the year, I laid out a general path using an amalgam of various Gann Cycles. They are weighted towards the more important cycles. These roadmaps have a history of providing key dates as well as general paths throughout the year. This is what we posted at the start of the year for the Dow.

I put this roadmap in the background because the rally in January was muted on the cycle. However, it called for weakness in February and a low in late March, which has been shockingly accurate. If this roadmap is playing out, we should see the April Time Factor that I have been discussing as a 3rd wave breakout with a topping pattern into late -May/early-June. Note how the top here lines up with the top in the T-Theory chart above.

SPX Time Factors

Without question, one of two of the biggest time factors for 2022 is April 12-28 (August being the next big one).

You can see the stacked cluster of cycles in the chart above. These stacked cycles tend to mark major inflection points. In short, they tell you when to look for something important. The "what" is always determined by how we are trending into the time factor. So, if we are trending down into that cluster, then we should look for a low, or vice-versa.

There is also a single cycle for SPX in late May that lines up with the period outlined above. I have a hard time imagining the mega cycle cluster in April will not be as important as the lone cycle in May. But, let’s say that we do see a 3rd wave breakout in April, or some kind of a 2nd wave low taking shape into the April time factor. We will then know that, with high odds, the SPX red count is likely taking us into late-May/early June. So, unbiased, we have to be as objective as possible as we move into April. Knowing when to look for a big inflection point is very valuable information to have.

Macro

OPEC announced a surprise cut to the world’s oil production. We have been talking about the bullish setups in Crude as well as Gasoline for many weeks. These bullish setups have been developing in light of very deflationary forces hitting the market, and we may be getting the trigger needed to confirm this thesis.

Crude

Today’s gap should mark wave 3. We need a 4 then a 5 to new highs to fully signal a low is in. If this happens, then my lone thesis that oil is setting up for a push to new highs is likely in its early stages.

Gasoline

This would line up with Gas breaking above the $2.8 barrier.

If these two things happen, expect an inflation impulse to return, and at exactly the worst time for the FED. The market is rallying on a pivot with a terminal rate below 5%.

The FED decided in their last meeting that banks are sound, and inflation is still too high. There was a split tone in a hawkish FOMC statement and a dovish speech by Powell that followed. James Bullard, President of the St. Louis Federal Reserve Bank, and voting member of the FOMC, stated last Friday the need to increase rates along with the terminal rate by year end. If energy does break out, coupled with the Wednesday PMI Services coming in too hot, along with a jobs report on Friday, we could see equities get hit, especially high beta stocks.

Furthermore, of the 14 countries that reported manufacturing PMIs for March, 10 countries slowed, and 7 were in contraction. For those arguing that a China reopening will offset global monetary policy, this data is not encouraging. Eventually, the recession in global manufacturing will spill over into services, which will trigger the recession being told in the bond market.

It’s also worth noting what is happening with the M2 money supply. First off, we are seeing the largest drop in the money supply since 1930. M2 has gone flat and had minor dips, but it has remained relatively consistent in how it has expanded. So, to see any contraction is quite concerning, especially one as large and consistent as the current one.

Milton Friedman taught us that inflation is a monetary phenomenon, and that the M2 layer of the money supply is arguably the most important for tracking inflation, disinflation and deflation.

The FED controls bank reserves, not deposits. In order for bank reserves to become bank deposits, which is one aspect of M2, banks have to loan money out. The COVID rescue plans, were fiscal injections directly into the M2 money supply. We saw M2 increase by 40%, which has never happened in modern market history. This led to a sizable increase in money market funds, bank deposits, as well as brokerage accounts. This is liquid money ready to be used within the economy.

The interesting aspect about M2 is that it is a leading indicator. We tend to see the increase long before we feel it in the economy. Note how M2 began increasing a full year before it showed up in the CPI print above. Also, as we are learning the hard way, it takes a lot of time for this increase to work its way through the economy.

Once the decelerating M2 hits the economy, we should see it affect business fundamentals in a noticeable way. This should lead to unemployment as well as revisions downward. It is not the type of macro factor that has historically led to expansions, and is one more factor among many that has painted the worst macro environment in decades.

I/O Fund Portfolio

Please keep in mind that our largest position is currently cash. Though we have reduced our cash positions from 30% – 22%, we do not plan to be fully allocated if the SPX Red Count plays out. We will stay in an elevated cash position until we see evidence that a new bull market is starting through: 1) favorable price action in global markets; 2) a new Liquidity Cycle is starting (discount window borrowing is NOT QE); 3) an averted Credit Cycle within the banks. As of now, neither of these things are supporting a new bull market.

Hedge Signal

Our hedge signal remains in Bear Market Bounce mode. So, expect more whipsaws than normal, as we lean into it to tell us when to get more cautious. The positions we have purchased over the last month all have stops that will move up with price.

NFLX

Between $379-$420 will be the high risk zone. Do not be shocked to see us cut NFLX in half if we get into that zone.

NVDA

We’ll step back on NVDA. I’m still counting this move as the A wave of a larger 5th wave. The pattern since the 2018 low has been a large degree ending diagonal. So, this move will be a 3 wave uptrend. So far, we only have the A wave in place. We will look to add on the B wave retrace. If the retrace is a 5 wave pattern down, then the red count will become my primary.

One of my favorite cycles is coming up with NVDA – green vertical line below. It tends to create strong swings in this stock, and NVDA has another cycle stacked on the same day – blue. Look for a top/low of sorts in late April for this stock.

AMD

If the coming pullback breaks below $69, we will have an excellent opportunity to buy at new lows. If this does happen, as will be true for all stocks, buying at new lows will be emotionally very difficult.

ENPH

Very clear parameters. We should know very soon the direction ENPH will break.

Bitcoin

Consolidating at the high is rarely a bad thing. We have our levels, as well as the WealthUmbrella signal to guide us on this move.

AEHR

Either we’ve topped or we have one more large push to new highs.

April 18 – 22 will be an important time factor to watch for AEHR. Either we break below that 1×1 line around $26, or we’ll see a blow off top.

TSLA

We’re adding due to fundamental reasons as well as the prospect of the 4th wave being shallower than expected. If we see a 5th wave higher, we may reduce our position.

MSFT

The theme is clear for most stocks – if April’s volatility is a 3 wave drop that holds the downward trendline, it’s very bullish. If it is 5 waves down, we are going to new lows. It’s hard to get super excited over such a messy/overlapping structure. We need to see follow through on the coming drop – i.e., 3 waves that hold the low.

Ethereum

There is an explosive setup in place here. We have 3 degrees of 1st and 2nd waves. A setup like this, if it triggers, tends to result in a big push higher from here. We’ll see if ETH takes the setup or not really soon.

TSM

Chainlink

The consolidation in LINKUSD is approaching 1 year in length. This is a lot of pressure building. Whatever way we break, expect a big move.