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.
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