In early December, we wrote that volatility would be intense in 2022.
So far the SPX has dropped from 4818 to 4582 before rebounding to 4748 on Wednesday.
Why the vol? Because the market has never seen the Fed have to retreat from the Everest of Stimulus before: $4 trillion in two years.
Markets are obviously aware of the change in Fed complexion — but no one has ever seen any shift of this magnitude.
So while many market observers may think it’s baked into the cake, no one really knows how the market will behave.
As well, margin debt has exploded 80% in less than two years.
So, as a correction hits the tape, would be buyers are full and impaired (heavy margin).
The “double top” in AAPL and 3rd lower high in MSFT speaks to the idea that even sacred cows are a source of funds now.
That is a conspicuous change in the character of the market, as it is the big 10 that have kept the SPX buoyant while the rest of the market got taken apart.
Yesterday’s SPX high ties to the November 22 Key Reversal while yesterday’s close ties to the Dec 27 one-day-wonder breakout.
It’s crunch time with the SPX and NAZ in the Minus One/Plus Two sell position… very similar to the pattern in the eye of the hurricane in early March 2020.
While the NAZ bounced violently off its 200 day moving average on Monday and many of the former high flying glamours looked purged, another break back below the 200 would see market participants puke up what they scooped up.
The bears are growling about the second mouse getting the cheese.
The October 4 low some 1000 NAZ points below looms large.
For its part, the SPX has carved out a 3 point rising trend line from December 3.
Yesterday we offered that the SPX could drop to as low as 4640 without destroying the case for one more new ATH before the wheels come off the index.
However, below the 4640 region opens the door to breakage below this 3 point trendline presenting now at 4588.
Breakage below 4588 triggers a Rule of 4 Sell signal (a break of a 3 point trendline).
I can’t help but think that if this occurs accelerated momentum will be staring us in the face for a plunge to the 200 day ma currently at 4414.
Indeed, the SPX has not tested its 200 day ma since July 2020… eighteen months ago — a key cycle.
In sum, there is a strong likelihood that the SPX kisses the 4400 region in the first quarter.
I would not be surprised to see that play out in January.
How the rest of this week plays out will be an important tell as to how soon 4400 is hit.