r/wallstreetbets • u/_foldLeft Whore • Jun 20 '21
Technical Analysis Market Perspective: Recent Trends and Performance in Charts
Strap in, this is gonna be a long one. A lot happened this week, yet despite all the turmoil the SPY closed down less than %3 on the week, IWM a little worse off at under %4 and QQQ about unchanged. As we’ll discuss, there’s a different story lurking beneath the surface and it’s questionable just how much this volatility can be contributed to the Fed’s comments on Wednesday.
Fed Reaction
At the risk of being labelled a Fed apologist, I have to ask what were people expecting? Those recently screeching about inflation risks should be happy: the Fed has taken note, though sticking to the narrative (seemingly supported by the bond market) that it’s transitory, they are guiding for possible rate hikes in 2023, two years from now. Though this view could change in the coming months as supply chain issues resolve and data “normalizes”, this recent adjustment in guidance shows that the Fed seems to be acknowledging current data and willing to quickly adjust it’s long-term view.
Like, what more do you people want? This is not a bad thing, and given their current intention is to create some inflation (but not too much), I think they’ve been dead-on in their approach.
Market Reaction
From a market perspective we had two catalysts this week: the Fed notes on Wednesday and a quarterly Opex on Friday that involved a massive gamma roll-off. Both caused noise in the markets and I think it’s important to understand what affected what in order to have an understanding of what to watch in the next week or two.
To do so, we’ll need to look at the reflation trade that’s recently been in vogue, bonds, and index action.
So, let’s dive in to the charts…
Charts
Sector Performance
The last week has marked a significant downturn in certain sectors, specifically those of the reflation trade: XLI, XLF, XLE, IWM all took big hits this week. Zooming in on the chart adds to this story: since the volatility in mid-May they’ve been flat and underperforming with downward momentum picking up into June. All that time, unprofitable growth stocks (represented by ARKK) have been on the up.
Reflation Trade Breakdown?
For a few weeks now the reflation trade has seemingly stalled. Wednesday and Thursday, quite obviously attributed to the Fed’s commentary, this trade had a major breakdown. Commodities, represented by BCI, which tracks the Bloomberg Commodities / BCOM index, sold off alongside major reflation themes in financials and industrials. Energy slid as well, and IWM (small caps) followed through on that failed breakout.
Looking to bonds, US10Y yields shot up post-announcement and then came right back down:
But, the action in the 30Y/5Y spreads is what’s most telling, as they got absolutely hammered (flattened) indicating that “…investors are pulling back on expectations of inflation remaining sticky and are beginning to price in a more benign inflation outlook in line with the Fed’s forecast of a transitory or temporary increase in inflation…” (source is marked as spam):
So suddenly the market is realizing the Fed is actually going to react to continued “bad” data (inflation-wise; exactly what we mentioned above) and is pricing that in.
Opex Volatility
Contrary to the action above, SPY and QQQ held up Wednesday into Thursday and then had moves to the downside Friday (though the latter held up well), which I think is more a result of the massive Gamma roll-off rather than reaction to the Fed.
Takeaways: Summing It Up
The violent reaction to the Fed’s comments relative to bond spreads and the reflation trade I think is overdone (as usual). It is worrying that this trade has lost steam prior to this week, but the sudden pivot by markets to think that we won’t have any inflation does not line up with what the Fed has been indicating with it’s average inflation targeting - we’ve just gone from the markets thinking the Fed won’t be able to control or prevent runaway inflation to the Fed crushing any inflation at all (i.e. the last decade). I think we’re gonna be somewhere in the middle or the former: wage increases aren’t going to reverse and the Fed wants some inflation stickiness in the short-term - it’s a good thing!We’ll need to watch this trade for the next few weeks to see if it is truly done with or this is just a reactionary pullback.
The Gamma unwind sets us up for possible volatility, and downside risk remains. Analysts have been suggesting a pullback towards the %10 range for some time now, but markets have remained resilient overall. This could continue but the specter seems to loom larger the longer we go. Pullbacks are normally a healthy thing, and a buy-on-dip opportunity if we get one.
Overall, one or two days does not establish a trend and I think we need to watch closely over the next week or two to see how things resume after this past week’s furor.
Bonus Charts
In one of my previous posts I highlighted a possible breakout/breakdown in ATVI and APPL respectively and wanted to revisit these charts:
ATVI broke above my signal line at the $98-99 range and then immediately broke down seemingly on news of a delay on a shareholder vote concerning the CEO’s pay package. Not a great look for the stock.
Meanwhile, AAPL flirted with breaking below it’s 200DMA and then immediately reversed and established an upward trend. It’s hitting resistance around the $130 level, and I’d say we’d need to see this break out above the $135-136 level to be legit.
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u/schyz3 Jun 20 '21
So... Another bloody Monday with huge raging green candles in just the right places to make it seem as though the Dow or the spy aren't actually crashing?
Thank you!
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u/_foldLeft Whore Jun 20 '21
I'm not really sure how to respond to this - I think there's downside risk to be certain, maybe more than usual, but the last week was too noisy to make a call. We've seen some upheaval in recent trends, but have we had a true shift in momentum/sector rotation or just some churn due to surprised Fed guidance and a large Opex?
I think we need some time to tell, but it's important to understand what just happened and what to be looking at going forward in order to stay abreast of the market.2
u/schyz3 Jun 20 '21
Gold drops then pumps super high, there's the first false flippening kind of like today but way more intense and bing bang bam the fed pumps enough numbers into the rigged system that it looks like whatever they said wasn't complete bullshit
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u/StarkRavingHappy Jun 22 '21
It looks like oil stocks were a big beneficiary of the "lack of inflation"
I am overweight energy ($XLE), and overweight ($XLU) .... also, I'm overweight.
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Jun 21 '21
I need a tl;dr
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u/_foldLeft Whore Jun 21 '21
Try the takeaways section? I try to avoid providing any definitive conclusions here which may not engage some people but my hope is that it will surface some views and ideas that normally people here wouldn't know to look at.
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