“ 'Risk-off is front and center thanks to the hawkish words from the Fed, which came on the back of the Chinese government-led directives over prior weeks,’ said Michael Cuoco, head of hedge-fund sales for metals and bulk materials at StoneX Group. ‘Central-bank stimulus helped the markets gather steam in the spring of 2020, and now there is a bit of a macro reset.' ”
- Bloomberg, June 17, 2021
The biggest surprise last week, judging from the reaction of the bond and commodities markets, was the Federal Reserve’s dot-plot projections following Wednesday’s Federal Open Market Committee (FOMC) meeting, which forecast two interest rate hikes in 2023. This caught market participants by surprise, as inflation expectations plummeted, sending investors out of plays such as commodity and financial names, into bonds, which helped push recently lagging tech stocks higher. Federal Reserve Chairman Jerome Powell made it a point to note these were only projections, leading some media commentators to wonder why publish such dot plots if the forecast should be taken with a grain of salt.
Regardless, the market’s reaction to the projections and Powell’s comments was that the Fed perceives more inflationary risks relative to prior meetings, perhaps contributing to a “macro reset,” as one hedge fund associate explained. Expiration week can exacerbate volatility in specific stocks and sectors, so this remains to be seen.
“...the S&P 500 Index’s (SPX - 4,247.44) early May, all-time closing high of 4,232.60 remains important in the short term. After struggling to overtake this level early last week, Thursday and Friday’s trading sessions established a new record closing high. But Friday’s intraday low was back below 4,232.60, implying these closes are hardly convincing breakouts…With respect to the SPDR S&P 500 ETF Trust (SPY - 424.31) open interest configuration, the big call open interest at the 425-strike – which is equivalent to SPX 4,250 – stands out to me. Most of these calls were bought-to-open, implying that if the SPY remains below the 425-strike into Friday, there will be selling of S&P futures related to this call open interest, generating expiration-related headwinds for stocks.”
- Monday Morning Outlook, June 14, 2021
From a broader-market, price-action perspective, there were few surprises during expiration week. As I observed last week, if the S&P 500 Index (SPX - 4,166.45) remained below 4,250, or the 425-strike on the SPDR S&P 500 ETF Trust (SPY - 414.92) as we moved closer to expiration, the broader market would face headwinds related to the gradual unwinding of long SPX futures associated with calls that were bought-to-open at the June 425 strike. By Tuesday’s close, the SPY found itself back below the 425-strike, after barely closing above it on Monday, June 14. A steady stream of selling followed into Friday’s low.
“If sellers emerge and push the SPX back below the May closing high, potential support is between 4,170 and 4,190, or the lower boundary of the channel in place since November, plus the vicinity of the SPX’s 50-day moving average.”
- Monday Morning Outlook, June 14, 2021
In the first five minutes after the market opened on Friday, sellers pushed the SPX down into an area of potential support from the lower boundary of a channel in place since November, as well as its 50-day moving average. The latter marked troughs on a closing basis in three of the previous four pullbacks this year. After the morning gap lower, the SPX stabilized at support well into Friday afternoon.
The bearish “tri-star” doji pattern that emerged on the SPX in April is something that continues to stand out, given the obvious loss of momentum higher we saw from late March into April. In other words, there has only been 72 points maximum upside, versus 120 points maximum downside, since the bearish “tri-star” doji pattern was completed on April 28.
It took the index six to eight weeks to fully recover from similar bearish patterns in January and February. Bulls have a glimmer of hope that we are closer to the backend of bearish ramifications of this multi-candle sell signal, as this latest “tri-star” doji bearish pattern surfaced nearly two months ago. Coincidentally, Friday’s pullback was in the vicinity of those late-April SPX closes, as you can see by the yellow line segment in the graph below.
Unless the SPX quickly rights itself (like it has in the past) after Friday’s close below the aforementioned channel and 50-day moving average support (the first significant close below both since March 4), I see the next area of potential support between 4,056 and 4,131.
Additionally, 4,056 is around six times its 2009 closing low, and 4,131 is a round 10% above last year’s close. In between these levels is the round 4,100 century mark, which is the site from which the SPX broke out above its channel in early April, as well as the less-popular 80-day moving average, which marked the early March trough.
With a perceived shift in how the Fed is eyeing inflation risks, one could make the case that the SPX will spend a longer period below its channel, but only time will tell.
If buyers surface, the first area of potential resistance is between 4,193 and 4,212, or the lower boundary of its channel. The second area of resistance is between the early May closing high at 4,232, and last week’s closing high at 4,255. For what it is worth, Thursday and Friday’s candles look very similar to May 11 and May 12, which is the last time the SPX closed below the lower boundary of its channel.
“'A continued unwinding of the bearish sentiment from a few weeks ago could finally push the (Nasdaq 100 Index) NDX above the elusive 14,000 level this week. In fact, the price action around the 14,000 level since mid-February resembles that of the NDX’s behavior around 12,000 in late August through November 2020. If a breakout above 14,000 occurs, the next hesitation level could be 14,176, which is about 10% above the NDX’s 2020 close.'”
- Monday Morning Outlook, June 14, 2021
While it was not a big surprise, per my comments last week, the Nasdaq 100 Index (NDX - 14,049.59) did take out the 14,000-millennium level. The actual surprise may be in that it did so in the context of SPX weakness, as part of a rotation into technology as bonds and a massive shift out of reflation trades.
However, as you can see in the top pane of the graph below, the level that coincides with a round 10% above the 2020 close marked last week’s peak. But the NDX still managed to close above the formerly elusive 14,000 level each day last week, unlike the one-day and two-day closes above that level in April, that were quickly greeted with selling activity.
With the NDX trading in an area of resistance, and the SPX experiencing a disappointing close below a first area of potential support last week, a legitimate question to ask is who will come in to drive these indices through resistance and off support, respectively.
I ask this question because fast-money traders are at or near an optimistic extreme. For example, a weekly National Association of Active Investment Managers (NAAIM) survey revealed a reading of nearly 99, or fully invested. There is room for these managers to move into a leveraged bullish position, but one wonders if they will, after the market dropped soon after they were leveraged long in late April.
Moreover, per the graphs below, option buyers are approaching optimistic extremes on both NDX and SPX components, as buy-to-open put/call volume ratios are approaching recent record low levels. Relatively low readings usually precede short-term weakness, but the direction of the ratio is also important. Currently, the direction favors bulls, but consider the color of the waving flag as yellow, implying caution is now warranted, especially with the Cboe Volatility Index (VIX - 20.70) closing above 20.14, or half its 52-week closing high of 40.28 in October.
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