Special Risk Capital Management LLC

Are We (“There”) Yet?   (OK to Buy?) February 26, 2022

Feb. 25, 2022 – Last Thursday was a “face ripper”.  A massive gap down (overnight) followed by a big rally into the afternoon.  So . . . that’s “it”, right?  First off, no one knows, but let’s take a step back and see what happen.  On Thursday morning with the world markets in a free fall, as the US market opened there were sell order in place and virtually no buy orders.  The market went lower.  A few minutes later “sell stops” (resting sell orders) where hit; the market drops more.  And the whole thing repeats since no one wants to step in front of a moving train.  This continues until all of the stops are hit, then a brief moment of calm, then short term traders see opportunity and step in to buy.

Note that the volume on Thursday was very high touching the red line, but on Friday it came back to the 20 day average (the blue line).  So Yes, there was a big reversal that flushed out all of those stops and Friday continued higher but only in an “average” way.  Likely we’ll see a “test” of a lower price, maybe the low of Friday or mid-range of the Thursday bar, but if something breaks over the weekend, well that’s a different story.  My point is that we need confirmation and right now we don’t have it.  I’d like to see longer term traders / investors return first before re-entering this market.  Oh and yes . . .  volatility is not dead.  We’ll likely see some pretty sharp ups and downs over the next 2-4 months.

One thing that I am looking at is the appetite for risk.  I’m watching the spread (difference between) the large cap SPY vs the small cap IWM.  We’re starting to see that in the very short term reflected in the table below.  Longer term investors consider small cap stocks risker because they are less liquid and more susceptible to economic hardship; they are more exposed.

Short Term Sector Strength –

(note: VPA “trends” are L=long, M=medium, S=short term.)

I’m not going to be a hero in here.  I’ll be a little more patient until I see some confirmation of a trend change.  Perhaps a base being built as a stable point.  My metals and energy related holdings have held up well and I’m happy to be holding Cash.  I’ve done some significant changes to areas that are interest rate sensitive since rates are very likely to rise over the next 1-2 years.   Have a good week and stay flexible.   …. Tom ….

Price chart by MetaStock; table by http://www.HighGrowthStock.com. Used with permission.

Waiting for the “Other Shoe to Drop” February 19, 2022

Feb. 18, 2022 – This market has been in a very large trading range which I’ve labeled as “The Box” on the chart below.  I’ve broken it down into the “Upper Range” and the “lower Range”.  The “Upper Range” is where the trades go when the market leans toward optimism, the “Lower Range” where it gets more pessimistic.

You’ll note that with the latest news about Ukraine that we’ve returned to the Lower level.  Since the U.S. markets are closed on Monday (keep an eye open for indications in the international markets) we’ll have to see how they react to the news that came out after the market close on Friday.  I’m thinking that we’ll see the lower end of that low range.  13097 (previous swing low) / 1300 levels look very “do-able” right now. 

But then what?  If the economy was weak, I’d say we were in for more of a drop, but it isn’t.  Note the rather low volume late last week . . . . Traders are waiting; they’re not buying or selling much.  Leads me to think that we’ll make a double bottom then recover IF things don’t spiral out of control in Eastern Europe; a big “IF”.  Friday was options expiration day and there were a lot of Puts just below the previous lows.  These were likely bought as protection.  The question was this protection rolled over (renewed) or just left to expire?   If the markets go much below the lows there could be an “air pocket” taking the market lower.  I think it all depends on how “hot” the news is out of Ukraine.

On the bright side, we could easily see a big move up on positive news.  We have to stay nimble and keep things in perspective.  The world may have “issues” but is not necessarily falling apart.  The U.S. is in an enviable position of having a strong, growing economy and low unemployment.  Not exactly conditions for a major crash.

The Short-Term Sector Strength table is shown below:

(note: the letters “L,M,S” above the columns “VPA” indicate Long, Medium & Short term trends.)

That’s it for this week.  Watch the S&P 500 futures Sunday night & Monday (index futures trade 24/6) and also what the European markets are doing on Monday.  A clue to what may be coming our way on Tuesday.        ……………  Tom  ………………

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

An Indecisive Market February 5, 2022

February 4, 2022 –  This past week started out good, but fell back.  Again, there is no consensus on direction or market leadership.  Sentiment is neutral, Money Flow is neutral, Volume Flow is negative and Price Strength is positive; net result is fairly neutral right now.

A close above 14532 would be a bullish sign, but there is also a case to be made for a retest of the lows at 13097 and a ‘W’ type bottom.  Volume is light and that confirms the “No Commitment” side of this market.  We’ve had good economic news, earnings are mixed and it looks like the markets are factoring in multiple interest rate increases over the coming year.  So what gives?

Well markets don’t like not knowing what’s ahead.  Color that Ukraine, but mostly it’s about profits this year.  Inflation is up, commodities are up and wages are trending up . . .  this puts the squeeze on profits and that’s the concern.  The coming week will have two big impacts on the market.  First Wednesday is a Treasury bond auction.  Are investors (worldwide) concerned and bid prices higher (lower bond prices) or will they demand higher interest rates?  Then on Thursday we’ll get another inflation report and that could spook the market. 

I haven’t shown the health of the stocks in the broad S&P 1500 Index for a while.  The pie chart shows the number of stocks in relation to their 20 day moving average and where they are in relation to the standard deviation (a.k.a. volatility) from the mean.

Not surprising that most are either Weak or Neutral, but there is more ‘Strong’ than I would have expected.  Next is the Short-Term Sector Strength table:

Not a lot of strength there either, though Oil / Energy was done very well over the past month.  With oil around $90 / barrel it could be at the top of its range and maybe ‘running out of gas’ (pun intended).  Right now I’ve raised a lot of Cash and waiting for some indication of the next trend.  And in the short term it could go either way, though longer term things looks fairly bright economy wise.  This could be short term pain for long term gain.

Take Care and have a good week.   …………  Tom  …………

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.