Coiled Spring Capital Macro Report Aug 14th, 2022

The last week in the market is starting to feel a bit euphoric. Whereas very few people wanted to buy the market in Mid-Jun, they all now think SPX 4300 is a good buy. You honestly can't make this stuff up. We were pretty vocal in our newsletter and publicly on Twitter, why we thought a Mid-Jun set up for a big counter trend rally was a high probability. Back then, we got some colorful disrespectful commentary for posting our views. Similarly, now that the market has had a decent 2 months, we are seemingly the bad guys again spewing out negative rhetoric. We are unbiased in our opinion, but we are also not chart monkeys and don't only look at price. While being a CMT is mainly about price, we also come from a fundamental background and weave those thoughts into our research. This is why we are different and if you don't like our work, I invite you to turn us off.

We originally thought that our long call in Mid-Jun would top out in the 4150 range. After our internal work last weekend, we believed it would be possible for an overthrow to 4250. Our predictive work revolves around DeMark signals. Sometimes those signals do not print as we expect them to. This can change our view in the short term.

Here is what we wrote last weekend:

We failed on Thursday @ 4257 but managed to break above to close on the highs on Friday. We also wrote in our mid-week report that if we cannot break lower, than a 200 day test is likely. Currently the 200 day is @ 4328. This zone has quite a bit of confluence with the 4308 pivot and the 61.8% FIB retracement level @ 4368. This all occurring w/ RSI above 70.

Full disclosure, we did sell all residual trading longs on Thursday and started putting out short exposure. We are still long some Gold, which hit our near term price target. Here is the excerpt from last week's report:

GLD held it's 50 day last week and looks geared for a move higher. $168 pivot is the level to clear.

One of the groups we hit out of the park was Biotech (IBB +14%/$XBI +24%). We argued back @ $76 for XBI and $118 for IBB that this group was leading and should be bought. We noticed the relative strength and argued it could test the 200 day which coincided with a trading pivot. We have now sold most of our position but kept a little with a tight stop.

There is little doubt the market is ignoring the macro data and looking past it. We have maintained for some time that the market began discounting a recession back in Feb of 2021. Most high growth stocks peaked back then and have not come close to regaining their former glory. Here is a chart of the Goldman Most short Tech basket.

Is it possible that the market is now discounting the recovery much sooner vs historically? We know the macro data is going to get worse, but if the Fed is right about a soft landing, than its possible the recovery starts sometime next year. This would explain the strength in the market.

We are not overly bearish on the stock market in the NT, in fact, we have been bullish since Jun as the internals suggested it. We are very bearish on the macro. And hence we are bearish in the intermediate term for the market. We do think the Jun rally has run its course but might see some more upside before rolling over. We admit the momentum and breadth readings are strong enough to consider that maybe our intermediate term bearish posture needs to be adjusted. There has been plenty written about breaking the 50% Fib retracement level and not breaking the low. We also wrote about this last week.

But does that mean it's all clear sailing from here? We'd venture to say no. We wrote extensively last week that the effects of the rate increases have not fully been felt by consumers or by corporations. We think that will happen as we move into the 2H of the year. We also think the mkt will likely need to at least test lower levels first before moving higher.

A few more macro considerations when comparing this period to the 70's, which is the last time we had similarly high inflation.

Inflation did not peak until 1980 but the stock market bottomed in 1974. So there is precedence for a stock market bottom. That said, the market declined -48% vs -24% today, peak to trough, but clearly the political climate was much different back then so tough to compare apples to apples. After bottoming in 1974 the mkt was trapped in a range for 2 years and didn't make a new high until 1980. We have maintained this is the most similar time period to compare to today as inflation is raging and the Fed is raising rates to combat it. This implies that maybe the market has bottomed, but also that the market could be trapped in a range for quite some time.

Tactically we are neutral to bearish and added shorts last week for the first time as we mentioned above. Intermediate term we remain bearish until evidence of a sustainable turn is evident. The constructive action in the market is clear in the breadth readings, and should not be ignored, but that doesn't mean the market isn't ahead of itself.

In 1974 after breaching the 50% retracement level from the 1973 peak, the market failed near the 200 day and never reached the important 61.8% retracement level until 1976. The market then retraced -14%, starting in July, before bouncing to retake the 61.8% level in 1976. RSI was also above 70 during that time frame.

Fast forward to today, and as described above, we are approaching a similar zone under the 200 day and the 61.8% Fib level, with RSI above 70.

Choose your own adventure. We have.

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