SPY Analysis (Mid-August)

2022년 8월 9일

This post is in response to requests for me to give a shorter-term analysis of where SPY might go. Right now the outlook is generally neutral or muted with both bullish and bearish biases battling it out. I will present both bullish and bearish cases for you to weigh.

Bull Case

• Daily chart: On the daily chart, SPY is clearly in an uptrend. It has broken the downtrend line that was in place throughout the first half of 2022, and it has pierced the Ichimoku Cloud, which indicates a trend reversal. One could argue that SPY's muted movement on the daily chart in August is consolidation before a move higher. Some may argue the daily chart is an ascending triangle, which is bullish.
  
• Advance-Decline Line: The ADL has broken out on the daily chart, which strongly suggests "the bottom" is already in.
  
• Volatility: The daily VIX chart suggests the uptrend in volatility that existed in the first half of 2022 may have broken down.
  
• Quantitative Tightening: Many analysts believe that the Fed will not tighten as much as it has projected and that it will pivot to less tightening, which is good for stocks.
  
• Bull Run: Log-linear regression supports the conclusion that the bull run since the Great Recession has not broken.
  
• Unemployment: The unemployment rate is at a historic low, this will support consumer spending.
  
• Historical analysis: Using historical analysis that takes into account the entire history of its price action, it's statistically probable that SPY will close the year higher than the close of June.
  
• Oscillators: The monthly Stochastic RSI is trending back up which will likely carry SPY higher into the close of 2022.
  
• Inflation: With inflation subsiding in the short term, this may create a tailwind for the stock market.
  
• Accumulation: The daily chart of SPY appears to show Wyckoff accumulation in my opinion. This means that smart money has been buying.
  

Bear Case

• Weekly Chart: As you can see in the chart above, the weekly chart of SPY is still largely in a downtrend with overhead resistance/supply. The Stochastic RSI is ready to oscillate back down which may bring prices lower.
  
• Advance-Decline Line: The ADL is moving back down on the daily chart and still remains suppressed on the higher time frames.
  
• Volatility: The weekly VIX chart is near support and its weekly Stochastics RSI is ready to oscillate up. August through October generally sees higher volatility. Further, the VVIX or volatility of volatility is extremely compressed.
  
• Seasonality: August through late-October typically see muted stock market returns, if not actual declines.
  
• Yield Curve Inversion: The 10Y/2Y yield has reached an extreme level of inversion indicating a significant recession is likely in the coming year(s). The 10Y/3M is also nearing inversion. Although these are leading indicators, and markets usually go up after these are triggered, immediately after they're triggered some investors get jittery and stay on the sidelines.
  
• Quantitative Tightening: The era of limitless quantitative easing is definitively over and we're now in a period of unprecedented quantitative tightening. It's highly unlikely that the FED will act in ways that are favorable to a sustained strong bull rally. Stock market returns are likely to be muted, if not outright decline, for years to come.
  
• Bull Run: Log-linear regression shows that the post-Great Recession bull run is nearing the end of its lifetime. Multi-timeframe regression analysis shows that there is a 97.5% chance that the bull run that existed since the Great Recession will end within the next 6 years. The rapidity with which the yield curve has inverted leads me to believe that the bull run will end in 2023.
  
• Unemployment: Although the employment rate is historically low, this is a lagging indicator. The leading indicator is the weekly initial unemployment claims, which is rising rapidly and at a rate that far outpaces what we saw at the start of the Great Recession. Many people who are losing their jobs now are filling the many vacancies left opened from an overheated economy, which may be why the unemployment rate dropped despite rapidly rising initial claims. Unless the weekly initial claims cool down, this could become a major problem in the months, if not years ahead.
  
• Oscillators: The yearly Stochastic RSI looks dangerously close to beginning a years-long process of oscillating down. If this occurs, SPY will at minimum mean revert on its quarterly chart (~340), and at worst fall below the 2nd standard deviation on its quarterly chart (~200).
  
• Accumulation: Although the daily chart of SPY appears to show Wyckoff accumulation (in my opinion), smart money loves to flush out longs and trap shorts by forcing prices back down. It's very possible that a price drop that is meant to flush out the longs may happen between now and late October.
  
• Geopolitics: The global geopolitical landscape looks very poor right now. Even if the US and China avoid any kind of military engagement, the effects that the situation is having on the economy are already significant. These tensions are accelerating de-globalization which will continue putting inflationary pressures on the supply side, even as the Fed tries to cool demand through tightening.
  

How I am playing the market from mid-August to Late-October:

• I will play cautiously and defensively as there are bullish and bearish forces battling.
  
• The long positions I entered into in June are on trailing stop losses. Many have already been triggered.
  
• I am long the VIX until October or the weekly oscillator moves up and appears ready to come back down.
  
• I am cautiously adding a very few long positions using regression channels (and other indicators) as there are several beaten-down stocks out there that are quite cheap and unlikely to go down much more. (e.g. I've been saying it for a while but VFC will not get much cheaper than low to mid-40s).
  
• I will be long TLT and bonds after they correct on the weekly or if the 10Y rate moves back up close to the terminal rate, and if the Eurodollar Futures are stable.
  
• I am avoiding new long positions in crypto until the end of September because August and September are typically the worst performing months for crypto. (I still hold positions I bought in June which are profitable but will sell if crypto drops below my stop loss triggers).
  

Not financial advice, these are just my thoughts. Trade at your own risk.