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- Coiled Spring Capital Macro Report Sept 4, 2022
This newsletter started getting cautious on the stock market in August when the parade of bulls emerged from under their mattresses to claim victory the bear market was over. Clearly that was premature as the market has declined precipitously since our very public comments about selling all residual longs and setting up short. Our downside targets for the SPX have all been achieved (200 - 350 SPX points collected in the process).
Last weekend we suggested that the close below the 38.2% FIB level on the 60 min chart suggested a possible test of 3901.
Thursdays low was 3903. This 61.8% Fib level also coincided with a confluence zone that we wrote about weeks ago in the 3920 region. We highlighted this region as having even more importance in our mid-week update on Tuesday and suggested that it would at least support a bounce trade.
That bounce was good for almost +3% and abruptly turned sour during Friday's intraday trade.
We posted similar levels for the Nasdaq.
The low on Thursday for the Nasdaq was 11546 and bounced +3.46% before rolling over on Friday.
We have been quite cautious on the macro environment all year and over the last 2 weeks we did get some more concerning data.
Home sales are nose diving.
Consumer confidence remains in the dumps.
Dallas Fed Manufacturing activity is firmly negative.
We are also seeing the unfolding of an energy crisis in Europe with the Nord Stream pipeline shut down on Friday. This coupled with an ECB rate hike cycle that has just begun:
And Biden is flaring tensions with China by possibly restricting US investment in China tech companies. There is no shortage of things to worry about and they seem to be getting worse.
Powell and Co are firmly committed to reducing inflation by raising the Fed Funds rate and QT is about to double this month to $95B/month, or double the pace from Jun. To assess what QT could mean for the stock market, we are borrowing some work from the Hedge Eye Macro team:
Taken together, our cautious view on the market set up has not been deterred. But as we have said many times, markets do not move in a straight line.
In our mid-week report, we very clearly suggested to stop and reverse (cover shorts and position long). While that trade was quite profitable, it proved very short lived.
With that as a backdrop, do we see a continuation of the trend, or do we reverse back up to test upper levels?
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