Coiled Spring Capital Mid-week Report 8/14/24

"I love it when a plan comes together." Fans of the 1980s sitcom "The A-Team" will recognize that iconic line. Yes, we’re dating ourselves, but who cares? That show was a classic. Every week, George Peppard and Mr. T brought their larger-than-life characters into our living room, leading their quirky team out of impossible situations. The plot rarely changed from week to week, yet it was oddly satisfying every time. And wasn’t it amusing how a show filled with guns and explosions never seemed to result in anyone getting seriously hurt? Times have certainly changed.

So why should you care about The A -Team, outside of it being an insanely awesome and entertaining show? The short answer is you shouldn’t. What you should revel in is the impressive accuracy of our “buy the dip” call into last Monday’s stock market massacre and having the fortitude to stay with the long trade into our predefined zones. The high end of our resistance ranges is being tested as of Wednesday’s close. This was the precise plan we were advocating for.

The SPX is now up over 6% since the Monday lows. Thats an impressive move by any standard. It’s never easy to ignore the noise and to not question your conviction, when the crowd is screaming for Armageddon.

In our weekend report, we highlighted that the stock market likely needed a catalyst to push higher, which could come in the form of a positive response to the two inflation reports that were released this week.

Here is an excerpt from the report:

We also suggested that the market would likely push into the 5400-5500 range if the CPI was status quo. The SPX closed today at 5455.

Here is that excerpt:

This reversion is bullish for risk markets since the prevailing notion that started the August swoon suggested a Fed that was behind the curve and needed to cut more aggressively. That rhetoric has somewhat died down, with 50% of that probability being washed away this week. This implies the SPX is currently at the right level and below where it was before the softer ISM/employment report drove the market lower on August 1st. Should the CPI deliver a report that keeps things status quo, the SPX should push higher into the 5400-5500 range, erasing most of the recent decline.

If you recall, our “buy the dip” call was also accompanied by “sell the relief rally.” We are into the previously illustrated area where sellers should appear. That doesn’t mean they will, it is just an obvious place for sellers to show up.

Large drawdowns are usually not accompanied by “V-shaped” recoveries. To feel more comfortable that a sustainable bottom is in place, we prefer to see a higher low or at least some debate (bull flag, cup and handle). Since Monday’s low, there has been very little debate. That doesn’t mean there has to be, and the indexes can surely push higher. There seem to be a lot of angry bears who have been advocating for a market meltdown, and that sort of loud and pervasive rhetoric, usually means to fade their crowded intentions. Those same bears that just got face lifted by the market are illustrating the very obvious sell juncture highlighted above. Since when does the market reward the obvious?

Regardless, how it shakes out, our plan was always to sell the relief rally into the predefined range.

We love it when a plan comes together.

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