Before the Bell May 4

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Tickers:  SPY QQQ IWM FB AAPL TSLA MSFT AMZN GOOGL NFLX SMH  FOMC Strategy

Before the Bell  is premarket prep for active traders. The note provides detailed stock market technical analysis focused on the indexes and FAAMGs. Key levels and trading locations are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Inspiration – Handling Emotional Drawdowns

Ed Seykota = Market Wizard.   Markets in 2022 have been turbulent. Unlike FinTwit where everyone kills it most days; Pro Traders and Trading Houses that have been around for decades have been clowned.  If you find yourself getting chopped to pieces or otherwise having a tough go of it the past few months, you’ve probably been drawing down your emotional bank account as well as your finances.  One of the worst things Traders often do is ramp their size in order to catch up. Emotionally stressed people often make irrational decisions. Increasing your size is the opposite of what you should be doing.   The best approach is simply to close everything out and take a couple of weeks off.  Dont turn on a screen.  Then after a couple of weeks, with clear eyes and a clean trade blotter, start slowly.  Trade 1 option contract or 50 shares.  Get some wins. Rebuild confidence and regain the flow of the market. With some luck and perseverance, you can get back on track.  Lastly, any trader that’s been around longer than since Covid, has been thru these periods. Find a trading buddy to talk to. It’s good medicine. Never forget, I am here to lend a hand as well. Lean on the resource.

 Earnings

This will be a pivotal week of earnings as much of mega-cap tech reports. Make note of when the big names report, especially if you are in the Q’s or individual names. These names can / will move the entire market.

Today’s Companion Video  

The video is a detailed technical review of the indexes and FATMAAN names. All the key trading levels are identified along with commentary and trade plans for each ticker. Trade ideas are also discussed.  Run the video at  1.5x to maximize efficiency without loss of clarity.

Find the Companion Video HERE

Macro Data Releases Week of  May 2

  • Monday –  PMI / ISM / Construction Spending
  • Tuesday – Factory Orders / JOLTs
  • Wednesday – ADP / International Trade / PMI Composite / Oil inventory / FOMC 2pm / JPOW Presser 2.30pm
  • Thursday – Challenger Job cuts / Jobless Claims / Productivity / NatGas inventory
  • Friday – April Jobs Report

ALL about the FED

50bps rate hike plus details on QT are expected this afternoon. All that matters for us is the reaction to the announcement and that is a coin flip. There are bullish developments in the charts that have knocked down my bearish short term outlook. I plan to take risk off heading into the announcement. My first obligation is to preserve capital and heading into the announcement significantly net short seems a bit irresponsible. THey’ll be plenty of time to participate in a bear market if one develops. But being more or less neutral heading into the event leaves optionality to participate in a relief rally should one develop after the FOMC announcement. More color on the video.

SAXO Theme Basket Performance

Mostly a dash for trash yesterday as the previously worst performing sectors raced to the top.

Mortgage Rates Dig in

Panel 1 shows the unprecedented speed of the rise in mortgage rates and the spread between the 30 yr mortgage  and 30 year treasuries. The 2nd panel shows the Mortgage industry already starting to shed headcount. Note the graphic is as of March 2022.  In April Rocket Mortgage, Wells Fargo and other big mortgage origination and re-fi hubs have announce more layoffs.  They are not waiting. Here is the flow in housing.   Mortgage Applications >> Real Home Purchases >> Permits >>> New Home Starts.  The reason I bring this up is that JPOW wants to activate the reverse wealth effect.  Number one on that list is home prices and demand.  THe stock market is number 2.   THe problem is, home construction is a big chunk of the real economy. If housing grinds to a stand still, its tough to keep the economy expanding.   Watch housing as a canary in the coal mine.

 

OPEC – Not Meeting it’s own Production Quotas

Remember a year ago when panic raced through the energy markets that OPEC+ was going to dramatically increase production quotas to meet the demand of a re-opening world?  Since then, member nations have mostly fallen behind even their own goals. The spare capacity just isnt there.

Macro Framework until further notice

Shrinking Liquidity

The combination of aggressive rates hikes and balance sheet run-off are bearish for markets.  Markets thrive in times of ample liquidity and starve in times of low liquidity.  JPOW & Co. now have a singular mission to knock down inflation by the reverse wealth effect. These guys won’t stop until the market is down substantially. There will be lots of trades both bullish and bearish between now and then, but they’ve made themselves clear, they will insist on the market going down. This will be the over-arching theme from now through the summer. Here is an excellent 75min video that explains the linkage between global liquidity and capital markets.   HERE

Persistent Inflation

While inflation may moderate later this year, I think that inflation will be persistent for at least a year. The FOMC’s rate hikes will tighten financial conditions and thus make it tough on financial assets, but it wont affect oil or gas prices, a grain shortage or a myriad of other commodity based inflation inputs that are the root causes of the problem.  s

Commodity Super Cycle

“Spot Prices cure Surpluses; Long-Term Contracts solve shortages”  Jeff Currie Head of Commodities at Goldman Sachs.  Commodities, historically speaking, tend to trend in broad 10 year Boom –  Bust cycles. This is also coincident with capital funding of the sector. The commodity boom of 2000-2008 was met with a wall of capital investment. THis greatly expanded capacity of all manner of commodities. Then from 2012 – 2020 was a period of capital destruction and collapsing returns. The emergence of ESG has constrained re-investment into these “dirty Sectors”.  We are now in the upswing of the commodity cycle.  We are probably in just the first year of the upswing. We are literally YEARs away from seeing supply expand because no capital is yet flowing into the sector.  The exception of course is a recession. A recession will kill demand and cause most asset classes , including commodities.  Here is a 60min podcast that summarizes the commodity situation.  Find it HERE

Earnings Season & Bracket Trades

As earnings season kicks into gear, a reminder that this is prime time for Bracket Trades. Bracket Trades are those trades created when a stock gaps up or down from a news driven event. Bracket Trades are set up as “2nd day trades” where you alarm the high and low of the prior day’s trading range, then patiently wait for price to either break lower or higher from the range.  You then follow price out of the range. I will do my best to help identify them for you, but you can easily find them yourself by doing a sort for “GAP ups” and “GAP Down” on your trading platform.  I add additional filters for only stocks above $10 and at least 500,000 shares traded. You can add additional filters to cut down the sort further. Generally speaking, stocks favor continuing in the direction of the gap higher or lower.

You can find out more about Bracket Trades in the video Run the Player at 1.5x      HERE.

 

INDEX CHARTS

Use the following pivots and levels in your active and swing trading. Added color is provided on the video.  Link above.

SPY Daily

SPY 1hr

QQQ Daily

QQQ 1hr

IWM Daily

IWM 1 hr

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