Coiled Spring Capital Mid-week report 1/31/24

Did the stock market just top? A question that can only be answered in hindsight. We knew this week was going to be chock full of risk, and we opted to largely stay out of the fight. We have been selling down our long exposure aggressively since the middle of Jan and have very little left in our trading accounts. It’s been one heck of a 3 month trade from when we got aggressively long the market and the SMID cap growth names in early Nov, only to pivot largely into mega caps in early Jan. This trade has served us well, and while trading always results in a few cuts and bruises, they were just that, minor injuries. We have to admit we are getting better at controlling our losses, and this last stretch of trading has been some of the best in our history. Trading/investing is never going to be 100% perfect but with every passing cycle our precision on timing market swings, when to remove risk and when to press the gas, is becoming more finely tuned. We sure hope our readers appreciate the precision in our market calls, especially over the last 2 years. We haven’t missed a single major swing, up or down. Does that mean we are always right on our timing? No, in fact we got caught a little too long during the 1st week of the Jan market swoon despite our signals telling us to be cautious. But we redirected some of our energy back into the mega caps and they have since gone on to new heights…until this week.

One of the reasons we came into this week with trepidation was that the bulk of the Mag 7 were reporting. While the expectations were for good prints, the reality is after the incredible run they have and the crowding in these names, the risk/reward we felt was poor. In our report last week, we highlighted the complacency with respect to the option implied volatility for their respective reports.

So far, the Mag 7 has not really delivered and given their weight in the indexes, it’s problematic. The chart now has a very unsightly gap that it will have to contend with. More on this in the premium section.

The other looming risk coming into this week was the FOMC meeting, that took place today. This was a bit of a disappointment for the bulls as Powell seemingly walked back his dovishness for future rate cuts. While he cemented the view that rate hikes were over, the timing of those cuts were pushed back. The bond market was pricing in a ~50% chance of hikes last weekend at the March meeting and that has now shifted to <35%.

Changes in expectations in the macro, usually are met with risk adjustments in the equity markets. And that’s what occurred today. Is it over? Likely not. This now makes future macro reports that much more market moving, starting with payrolls this Friday. While some may say that Powell is still done hiking and likely starts cutting this year, and thus why does it matter if they pushed out the cuts. Theoretically it should’nt. But when a stock market is trading at ATH’s and up nearly 20% since the Nov FOMC meeting, meeting the expectations that are priced into the market matter, and this was clearly a disappointment.

Interesting take by the Bloomberg economist team, that thinks slowing inflation and payrolls will give them cover to actually move in March. We shall see.

Couple those event risks with our own analysis that were firing DeMark sell signals everywhere, coupled with negative divergences, and why would we be long?

Shifting gears a bit. The Jan month close occurred and the SPX finished up almost +1.6%. This is typically good news for continuation and is referred to as the January Barometer.

So that begs the question? Did we just see a market top or just a bump in the road?

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