Special Risk Capital Management LLC

FED Freak Out September 24, 2022

September 23, 2022 –  If anyone thought that this market was strong or getting stronger, they had their “head handed to them” after Wednesday afternoon.   Powell reinforced the FED Board’s hawkish stance that was stated earlier at Jackson Hole . . .  fighting inflation and whatever it takes.  Hopes of interest rate increases slowing and then going down in early 2023 were pretty much dashed.  My old adage: “Weak stock markets react badly to bad news, while strong markets sluff it off”.  Folks are nervous about corporate earnings.  The “bottom line” is in fact the bottom line.  Forward earnings guidance is generally not that good in a slow or receding economy.

This last rally was primarily driven by retail investor with FOMO (Fear Of Missing Out) clearly on their minds.  Rarely do we see a ‘V’ shaped bottom and if we do, we also see big institutional volume coming in.  This time there was only average volume.  Very typically institutions need time to accumulate shares so as to not affect prices and this takes time.  We’re not seeing that accumulation / base building phase yet.

My past anticipated move down to the 9400 level (blue lines) panned out OK, but what next?  I’m of two minds: 

Scenario A is we continue a little lower early next week then rally back up toward resistance at about 10565.  And then begin the process of building a base via the double bottom scenario.

Scenario B is that we bounce around late next week with a minor recovery (a.k.a. head fake) then head steadily lower to 11500 via a selling climax where everyone gives up on heavy selling volume.

A clue as to which one might develop is the US Dollar.  To simplify things, a strong US$ equals a weak stock market (yes, that includes crypto too).  A weaker US$ would support a stronger / basing stock market.  Precious metals, especially silver, will also provide some evidence.

And of course News is going to be a major driver.  Coming up on 9/30 we have the PCE data which is an indirect measure of inflation, then 10/13 the latest CPI data.  These are potential market movers in either direction.

The Short Term Sector table will also provide an idea if money is flowing into or out of growth sectors or defensives sectors (a.k.a. risk on or risk off).

Hope this provides some perspective (at least one guys view; I can be wrong) of the market.  Please feel free to comment.  Have a good week.      ……………  Tom  ……………..

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

A Hard Time September 17, 2022

September 16, 2022 –  If you’re having a hard time figuring out this market you’re not alone.  There has been near record amounts of option hedge buying over the past couple of weeks by big institutions.  Since it’s VERY hard to liquidate their positions without affecting the prices in the market they try to reduce risk (of falling prices) by using option strategies.  Stats show many retail traders rushed in late July (about $2 billion) convinced that the bottom was in; boy did they get burned !

Friday was a day for September options to expire.  Monday we’ll get a chance to see just how many contracts closed out (expired) and how many just got “rolled forward” into the October month.  That will be an indication of how confident the “big guys/gals” are about the future.  I doubt that there will be a surge of optimism since the next FED meeting will wrap up on September 21.  Make no mistake . . . it’s all about recession fears and earnings, and interest rates give a hint about those key metrics.  The FedEx announcement of removing forward earnings guidance on Thursday put fear back into the market.

Another thing to watch is the US Dollar.  It’s very toppy now.  If the Dollar falls, the markets tend to go up, if it remains strong or higher, well . . . we could very well see lower prices.  My totally guess about the next couple of weeks is the interest rates go higher, recession fears rekindle, and we head toward the previous lows.  Just an opinion; we have to trade the market in front of us and not rely of opinions.

The Short-Term Sector Strength table is below –

Notice the “lack of green color” there.  When the Bear Treasury Bond and US$ are at the top that is not a good sign.  I remain heavy in Cash and trying to remain patient and objective about what I see.  This will end, the question is when.  Have a good week.          …………..  Tom  …………

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

A Dichotomy September 10, 2022

September 9, 2022 –  di·chot·o·my, /dīˈkädəmē/ noun:

‘A division or contrast between two things that are or are represented as being opposed or entirely different.‘

A market dichotomy . . . and that’s what we’ve got.  One on hand the market is going up & up and on the other there are near record numbers of Put options being bought, presumably for hedging / protection.  The last three days have been impressive but beneath the surface it may be primarily driven by currency trading (the Euro and an overbought US dollar) and by short covering driven by computer algos that cover short positions when things start to look bad (prices rising when short).  The blue lines show my estimate of possible future movement.

So what to do?  Well next Tuesday we get some inflation data that could likely move the market one way or the other and on September 21 we have the next FED meeting.  While stocks are generally rising, I don’t see a rush to get onboard right now.  Volume is pretty average.  So while things (prices) are improving somewhat I remain cautious.  I’ll be a little more interested mid next week IF the strength continues, volume picks up and those Puts lurking below the current price start to dry up; and they can quickly.

The Short Term Sector Strength table –

I am lightly invested and heavy in Cash.   Have a good week.           ……………  Tom  …………..

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

Is The Market In Trouble ? September 3, 2022

Sept. 2, 2022 –  The past couple of weeks have been a big disappointment for Bullish investors.  Many thought that “the low is in” and now they are beginning to question that.  Much of the positive assumptions about interest rates plateauing are beginning to be challenged.   But let’s step back a bit.  Other than “Assumptions” and “Predictions” has anything materially changed?  Not really.  The economy moves, but moves slowly and everyone wants to ‘get the drop on the turn’.

Bear in mind that the US economy is still pretty good but Europe and China are not.  With Russia cutting off nearly all of the natural gas supply to Europe that will cause major problems.  And who buys the most stuff from China?  The EU closely followed by the USA,  plus China remains a COVID question mark with sporadic lock downs.

I think that the recent rally off the market lows was primarily driven by FOMO, Fear Of Missing Out, those trying to pick the bottom.  If we begin to consolidate near current levels for a week or more that could be putting in a Bullish base.  If we see renewed selling next week we’re likely to go down to at least the 11,066 ish level . . .  or lower.  I noted that the volume during the rally was pretty low.  Not a sign of big investors wanting to jump back in.  The next big Consumer Price Index announcement is September 13 and that could be a news driver in either direction.  Lastly, I continue to see a fair amount of Put options below the current market price.  That amount is a sign that the ‘Big Guys & Gals’ are concerned and are hedging their portfolios.  I’d like to see more optimism in option positioning.

In the meantime, the Short Term Sector Strength table is shown below –

The markets in the US will be closed Monday but open everywhere else.  Keeping my eyes open and trying to reduce ‘Assumptions’.   (For those in the USA) Happy Labor Day.  Have a good week. ….  Tom  ….

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