The above daily chart shows closed gaps in blue and two open gaps on the right in green.
A gap occurs when the market opens above the previous day’s high or below the previous day’s low and stays there for the rest of the day.
I have commented on gaps several times before and they tend to act like magnets.
Stacked Gaps
On June 10th the S&P 500 gapped down below its lowest point on June 9th. It did so again on June 13.
On June 23, someone on Twitter asked me about the strength of the market. Neither of the gaps had yet closed.
Impossible to say, but most likely just a small continuation of the relief rally. There are two open gaps above and it would not be shocking if they filled.
But also look at 10-year yield
3.5% on June 14
3.1% todayWow
Top might be in— Mike “Mish” Shedlock (@MishGEA) June 24, 2022
Q: Is there any reason why all indices went up today?
A: Impossible to say, but most likely just a small continuation of the relief rally. There are two open gaps above and it would not be shocking if they filled.
The idea of a top in long-term US treasury yields will be the subject of another post.
On June 24, Friday, we saw a big continuation rally with the S&P 500 up 113 points (2.99%), and the Nasdaq up 375 points (3.34%).
The rally Friday closed one of the stacked gaps but left another gap in its wake.
I am very confident the new gap closes.
Order of Closing
It would be more bearish for the June 10th gap to close first, the idea being unfinished business to the down side.
If the gap up on June 24 closes first there is still easy room for another rally to close the June 10th gap.
None of this really matters in the long run, but for traders looking to get short, that stacked gap lower was a big warning to take some chips off the table,
The VIX
Another thing that helped the rally on June 24th. At 10 am that day, JPow and co decided to do a massive currency swap with Canada. I am not a subject matter expert on currency swaps, but it looks like they have since unswapped on Friday 10 pm. https://t.co/Vdb4AvuyEF
— practicalOpinion (@practicalopini1) June 25, 2022
It’s unclear what rates the above Tweet is referring to.
At the long end, the top may very well be in for now. At the short end, at least one more 50 basis point hike is coming.
I have no opinion on whether or not a currency swap contributed to Friday’s move, but VIX manipulation is silly. The Fed is not doing a currency swap to influence the VIX.
S&P 500 Monthly Chart
Clockwork!
The S&P 500 bounced right on the monthly support line. So if you are looking for another reason for the bounce, technical support is arguably the best one.
There’s more support at 3200, 2800, 2400, 2200, and 2000. I’m inclined to think the stock market has a date with 2400 and more likely 2000.
Much depends on the path the Fed takes. But if we get there, don’t think stocks will be cheap and it’s off to the races again.
Most People Have No Idea How Much Stocks are Likely to Crash
Flashback February 23, 2022: Most People Have No Idea How Much Stocks are Likely to Crash
2400 is where I drew a line on a chart. Jeremy Grantham mentioned 2500.
The S&P 500 was about 4300 at the time, down from 4800. It’s now 3911 after a big rally. Lot’s more downside is likely.
Monthly Trendline Addendum
One of my readers asked about Grantham’s trendline hitting 2500. Technically, it’s not a good line. I see it like this.
The thick blue line is my preferred trendline and the thin is an alternate. The only way I can get Grantham’s proposed trendline is the thin red line.
I believe the 3200 line is correct but that support will break.
Also, 3200 is monthly support. There are two reasons to like that area for another bounce.
I try to draw trendlines that hit the most points and are closest to other points. My 3200 line does that and encompasses support areas a well.
This post originated at MishTalk.Com
Correction
I said I doubted the Fed was watching the VIX but they did mention it in the latest minutes.
But watching is one thing and doing is another. In the previous cycle, the Fed suppressed the VIX via QE and lowering interest rates.
We are in a period of QT that just started and the Fed has penciled in more rate hikes.
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Mish
Inflation in 1980 averaged 13.55% & the FFR started the year
at 14%, dipped to 9% & shot up to 19% to start 1981. The FFR is currently 1.5%.
CPI has undergone several adjustments since 1983. Nowadays, CPI under reports
inflation by treating all housing as rent. In addition, CPI only started to
capture asking rent prices in early 2022, and according to Wolf Richter will take upwards of 24 months to fully hit CPI. In addition, CPI completely ignores home cost appreciation
in favor of owner’s equivalent rent which subjectively surveys owners what they’d charger themselve. What? As such,
real inflation is in the ballpark of 1980, while consumer’s inflation expectations are firmly
entrenched and wildly off the mark when they look out 12 months or more. In 2006 & 2007 just prior to the Great Recession, the FFR was
5.25%, inflation averaged 3.3%, & unemployment averaged 4.65%. So, the current
FFR is 3.5x lower, inflation is about 2.7x higher, and unemployment a full 1%
lower, creating an exceptionally tight job market with lingering supply chain
issues that will take years to correct.
$11T in excessive QE & Congressional spending over the last 24
months has created grossly distorted demand the likes America has never seen. Ultra-low
30 YFRM created a tsunami of up to 90% refi’s from May 2020 through early 2022,
adding the biggest source of direct-to-consumer stimulus to an already stimilus check, QE & pandemic juiced
economy.
The Fed has only runoff $47.5B in treasuries & MBS from its
$8.9T balance sheet, and $95B per month won’t arrive until mid-September. And
it’s possible that over the next two years the Fed won’t meet its MBS runoff
projections and may have to sell some portion of the $2.7T outright which would
create significant upward pressure on mortgage rates. In case you were wondering, the Fed’s balance sheet
just prior to the Great Recession was just over $800B or about 11x smaller than it is today.
The war in Ukraine is raising oil, natural gas, petrol, diesel
fuel, fertilizer, food, etc. costs and has no end in sight as the Biden
administration continues to send tens of billions of dollars to Ukraine. The
entire Biden administration is hostile towards fossil fuels & hasn’t
approved one new oil & gas lease in 18 months. The administration’s lurch
towards a rapid shift to renewable energy means perpetually higher fossil fuel
prices, & experts predict electrical blackouts from a strained national
grid. If this happens on a widespread basis, the social unrest would be
enormous, well beyond what we’ve seen in the last five years. In addition, climate
change puts the USA one bad harvest away from food scarcity which would result
in hyperinflation.
Politics aside, Joe Biden’s open border policy is adding millions
of new mouths to feed & house, will add upside to inflation, & will
hit lower income families the most due to job & housing competition.
Undocumented immigrants oftentimes receive healthcare via emergency room visits,
the most expensive healthcare option possible.
The median existing home value just hit $414,200. Counties across
the country are flush with cash from historically high property taxes, increasing
wages & capital spending. Per Zillow, my anecdotal 1,200 SF home NW ATL
increased in value over 29% in the last 12 months & 98% over the last four years, simply breathtaking. There’s a trillion dollars in Congressional
infrastructure spending coming online. There’s $2.2T in reverse repo, excess
liquidity parked overnight with the Fed & it’s growing. The Fed owns
upwards of 60% of all government-backed mortgages. These are massive
distortions. Hell, the average new vehicle sales price for June was up 14.5%
from the year prior. While there are signs of a slowdown coming, any broad
based, sustained slow down is at least 6 months out.
We’re $30.42T in debt, and our interest paid on debt averaged
$545B over the last four years. With 4 months to go in the FY 2022, we’ve paid $424B
in interest on the debt due in part to rising yields. If treasury yields stay
near 3% or above for a sustained period, trillions of short-term t-notes will
roll over at much higher rates. Medicare Part B (Drs) was $500B in the red last
year, & Medicare Part A (Hospitals) goes broke in 2026. The SSTF is
estimated to go broke in 2034, & the Trump tax cuts sunset at the end of
2025. By this fall, the increased tax revenue will most likely dissipate &
the Fed’s ability to “monetize” its assets by remitting surpluses to the
Treasury may eventually erode into loses. The Treasury’s Daily Statement shows
a cash balance of $735B, so it’s reasonable to assume a slowing economy will
cause it to run out of money by early next year, renewing a spike in debt assumption.
We face growing military & cyber threats from China, Russia
& Iran and together these countries pose an axis of evil unlike any threat America
has ever faced. China’s GDP is expected to surpass ours in 2028 and they are making
much greater progress than America in areas like EVs, solar, wind,
hydroelectric. Most importantly they’re forging quickly ahead with 4th generation nuclear power plants for reliable baseload power, including the
world’s first thorium molten salt demonstration reactor in the Gobi Desert that
doesn’t require any water for cooling. Our first SMR (which isn’t
thorium-based) isn’t expected to come online until 2028. I’m lucky. I live in GA
where within 12 months (fingers crossed) we’ll have 2GW+ of baseload nuclear
power coming online at Plant Vogle.
The market is exhibiting some cognitive dissonance…
Fwiw I agree with you that there’s a long way to fall yet, although I think it’s going to take a lot of downs and ups over many months, if not years to get there. It’ll probably go much further than we think as it usually does.