We don’t know what happens after a huge week. But we can guess: Profit taking.
Last week saw major indexes move up over five percent. That’s a big move. The question is why?
The main reason is likely the softer-than-expected CPI data. This suggests the Fed may be able to slow its pace of rate hikes.
But what about the election? In a word – messy. In the end, it looks like Washington will remain both bitter and disfunctional. However, it’s still not decided. So who knows? If the adds were anything to believe though, there is very little to get particularly excited about. The end result is likely a continued fight between Federal over-spending and the Federal Reserve trying to quell inflation.
So strip all the other stuff away and what matters? Probably this chart:
The takeaway is pretty simple. The VIX has continued to decline. It’s now at the point it’s likely near a reversal. Why only likely? Because there’s no guarantee this relationship illustrated continues — past performance doesn’t guarantee squat — but if the trend is to continue, it suggests we’re near an inflection point.
What’s different about this chart from the past is the purple channel lines. Those are a linear regression channel for year-to-date movement in the SPX. It shows the downtrend. And it shows last Friday’s close at almost exactly one standard deviation above trend. Meanwhile…
You can see the index is also in over- bought (as we measure it) territory. And, to top it off, it’s also outside the range of expectation for a really big options hedge that JP Morgan runs.
What does it all mean? Again, no guarantees, but a huge push higher last week, an election that probably changes nothing, and a bunch of over-bought indicators suggest… a pull-back is pretty likely. We’ll see, but 3750 looks like a big magnet. And, for the more pessimistic out there, we still have 3300/3000/2800 on the table.
We’ll keep watching. Meanwhile, this is the projection for the week:
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