Quantitative Easing

SPY: Big caps are on thinning ice (NYSEARCA: SPY)

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Every week we do technical analysis of the major markets for Margin of Safety Investing subscribers. We use a combination of quantitative and technical metrics with Elliott Wave and Harmonics overlays. Here’s an annotated version that might be helpful when navigating market volatility.

In short, we believe that US large caps are on thin ice. Small caps, represented by the iShares Russell 2000 (NYSEARCA: IWM) under pressure for a year now. In past bear markets, large caps have been the last to “fade”.

The wild card was quantitative easing. It’s going away imminently. The Fed will also move towards real interest rates that are not negative this year. Whether they succeed or not is another story. Either way, there will be pressure on equities, especially capital-intensive companies, which will be under pressure in the months ahead.

Large Cap Technical Analysis

Here is our technical view of the markets. Scott Henderson uses proprietary technical analysis including Elliot Wave and Harmonics. I use more quantitative factors based on volume-weighted trades. We include our longer term views, i.e. the weekly and monthly charts.

S&P 500 (SPY)

The shooter says Risk closed! I clearly have several bearish accounts from $420 to $380. I don’t know if I believe it’s that deep here because I’ve been deceived so many times now. But technically, it’s staring me straight in the eye.

TO SPY

TO SPY (Safety Investment Margin)

SPY chart

TO SPY (Safety Investment Margin)

SPY data sheet

TO SPY (Safety Investment Margin)

TO SPY

TO SPY (Safety Investment Margin)

My S&P 500 target remains a little lower for the end of this year depending on where the institutional buying support resides (retirements, hedge funds, family offices, etc.). I would be slightly surprised if the S&P 500 does not reach January 2020 price levels or slightly lower. Jeremy Grantham recently gave another interview to Bloomberg in which he suggested that around 250 on SPY was a target price to burst the QE-driven stock market bubble. He also mentioned real estate as being in a dangerous place.

S&P500

TO SPY (Kirk Spano)

Although I don’t own SPY, I would recommend anyone who owns it to sell it now. If you want to maintain equity exposure, add better ETFs, a basket of stocks, or both. Sell ​​SPY though, it may be in the riskiest place in history.

S&P 500: Historical overvaluation is Tinder under the stock market

Nasdaq 100 (QQQ)

The shooter says Risk closed! Measures at $316. I’m more inclined to believe that matters than SPY with the way the Nasdaq acted. We need a flush for buyers to feel comfortable stepping in.

QQQ

QQQ (Safety Investment Margin)

QQQ

QQQ (Safety Investment Margin)

QQQ

QQQ (Safety Investment Margin)

QQQ

QQQ (Safety Investment Margin)

QQQ

QQQ (Safety Investment Margin)

I still overwhelmingly prefer QQQ to SPY for the rest of this decade. Over time, 100-200 zombie companies on SPY will be replaced and that might be another story. There is significant support for QQQ around $300, however, much stronger support is developing below $250. We will need to monitor the downside momentum in real time when it comes to knowing what level of support is holding.

I’d be surprised if we see the Zombie Apocalypse of Armageddon, but you never know. If fear causes “passive” indexers to panic, then we might see it. If we do, this will be the buying opportunity of a lifetime in the huge millennial-led bull market of the next 10-15 years.

QQQ

QQQ (Kirk Spano)

Small Caps (IWM)

The shooter says Chop! Use branch or split lines on the 90 Min. This should be the second to recover after the Dow Jones. It held up much better than the S&P and the Nasdaq.

IWM

IWM (Safety Investment Margin)

IWM

IWM (Safety Investment Margin)

IWM

IWM (Safety Investment Margin)

IWM

IWM (Safety Investment Margin)

IWM

IWM (Safety Investment Margin)

I don’t buy small cap indices, as I prefer to use specialty ETFs and choose my own potential small cap 10 bagger stocks. However, the charts above tell us that the small cap industries and stocks we like can be bought on dips.

20-year US Treasury (TLT)

The shooter says Mixed! In the short term, we could rebound. I tend to agree with RSI. But hopefully it will be so I can reload the shorts again.

TLT

TLT (Safety Investment Margin)

TLT

TLT (Safety Investment Margin)

TLT

TLT (Safety Investment Margin)

TLT

TLT (Safety Investment Margin)

TLT

TLT (Safety Investment Margin)

TLT

TLT (Safety Investment Margin)

My view of 20-year Treasuries is shaped by two things.

The first is the “forever slow growth of the global economy:

Understanding the “Slow Growth Forever” Global Economy

Investing in the ‘slow growth forever’ global economy

Second, inflation is transitory and will drop dramatically over the next 3-5 quarters.

My Futile Predictions for 2022: Dollar, Stocks, REITs, Crypto, Inflation

Interest rates will definitely rise faster when the Fed raises rates. However, long rates are linked to long-term growth and inflation expectations. There’s not a lot of smart money expecting very high growth or inflation over the next 20 years, at least not globally.

The conundrum is how much growth Millennials actually generate over the next 10-15 years as they go through spikes in spending and spikes in income. I think there will be a “big gap” between winners and losers like we’ve never seen before. That’s why I don’t like SPY. Too many zombies.

I think at least in the medium term, until we see what growth Millennials are generating, there is a ceiling somewhere around 3% on the 20-year UST. So with long rates going up a bit, I don’t want to be exposed to TLT. And the uncertainty prevents me from bypassing it. When that cap hits, TLT becomes attractive to me because I think the economy is slowing down a bit in the first quarter of next year without a good Building back better program.

Kirk’s comment

As I said, large caps are the most vulnerable right now. You see this with the “risk free” odds for SPY and QQQ. I will want QQQ this year, but not until at least one more leg and probably two. I’m going to move as usual, but I’ll save some powder until I see what happens around Q3.

Small caps have been correcting for a year now, hence the wait for the chop. We are in a “buy the dips” period for the rest of this year on small caps.

Also, keep this in mind, the Fed is going to hike rates 4 or 5 times this year. This will put pressure on the Repo market which they have a trillion dollar “emergency fund” waiting to support. Maybe just having the fund there avoids Repo issues, we’ll see. But, if there are problems and that money ends up in pensions, it will also trickle down to stock markets at some point, just like in the fall of 2019.

Here is a very good article on Bankrate’s Repo market:

The repo market, explained – and why the Fed pumped billions into it

So whenever the bear market ends in large caps, we want to become very aggressive buyers across the board. I think that will happen by the end of the year.

A terrible wildcard is a deadlier Covid wave in the fall. The way the virus works is to alternate between being easier to spread and deadlier. There’s a more deadly wave to come, we can only hope it doesn’t spread well.

Given that a third of Americans are reluctant to get vaccinated and generally don’t wear a mask unless necessary, I’m not optimistic that Covid will go away this year. I think we have at least another year and probably 2 or 3 waves of Covid of varying transmissibility and mortality. It means a really difficult year. I hope I’m wrong.