Morning Note: Obsessively Openminded!

Yesterday's rally was certainly impressive, and broad based (only 26 of the SP500 constituents closed down on the day), amid decent volume (9% above 20-day average).

So what gives?

Well, per our mid-week snapshot, the short-term technicals (60-minute chart in particular) had a clearly bullish tilt. 

Per the video, we came into the session with your classic (bullish) falling wedge and bullish divergences on our two chosen momentum oscillators:

I also mentioned the key 3,900 support level, which, per the daily chart, sat right atop the uptrend line coming off of the June low:

In addition to the potential bullishness represented by the above patterns, present options dealers' positioning offered up some legitimate support ("put wall") at that 3,900 mark.

Now, I did mention in the video that a break below that area could get "pretty ugly", and that, ultimately, given those (options) metrics, the bulls need to see a sustainable move above 4,000 before even beginning to breathe that proverbial sigh of relief... As impressive as yesterday's rally was, it wasn't able to check that particular box.

Here are the present key bullet points straight from the options experts:

Key Levels:
–> Bullish on a break >4000 SPX.
–> Bearish while markets hold <4000 SPX.
–> 3900 SPX Put Wall is the bottom of our range.
–> Powell Speaks Thursday, 9/8 at 9:10 AM
–> Mark 9/16 OPEX as a key turning date for markets.

Of course there's more to markets than the moment-by-moment positioning among options dealers. Indeed, had we not had what was beginning to look like oversold conditions combined with still-high net short interest among SP500 futures traders (big short squeeze yesterday for sure!), along with notably deteriorating sentiment (our own fear/greed index recently moved solidly back into a net-fear reading [contrarianly bullish]) the following commentary from the Fed's 2nd in command yesterday likely would not have provided quite the oomph that it ostensibly did:

FED'S BRAINARD: IN SOME AREAS, I AM SEEING A COOLING AND DECLINE IN HOUSE PRICES.

“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”

“At some point in the tightening cycle, the risks will become more two-sided,” she said. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with over-tightening.” At the same time, “it is important to avoid the risk of pulling back too soon,” she said.

While, at first blush, the above sounds pretty hawkish, it indeed offers a glimmer of hope for today's desperate hoper. I.e., "I am seeing a cooling."   Restrictive until "inflation is moving down to target," as opposed to "at target." "Risks will become more two-sided," I.e., anticipating the emergence of the risk of a disinflationary slowdown due to "over-tightening." 

Plus, the latest Fed Beige Book (produced roughly two weeks before the monetary policy meetings of the Federal Open Market Committee. On each occasion, a different Fed district bank compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts) was released today. 

Allow me to highlight the areas that the bulls obviously keyed on (from Bloomberg "Macro Man" Cameron Crise's take on the report):

The report downgraded its characterization of growth to stagnation, saying that activity was “unchanged, on balance” since July after a “modest” expansion in the previous report. Five districts reported a bit of growth, and five others reported a slight to modest softening in activity.

Consumer spending was seen as steady, with demand for discretionary goods waning but travel remaining a bright spot. Manufacturing was mixed, with supply chain bottlenecks continuing to constrain activity in some locations.

There was a notable weakening in housing activity, consistent with recent data and the general narrative. More broadly, most districts expect a further softening in domestic demand over the next 6-12 months. Labor markets remain tight but show some signs of softening amidst improved worker availability (a la the last payroll report), with some moderation in wage expectations. That being said, in general pay is expected to be notched upward at the end of the year. Still, price gains appear to be moderating across nine of the 12 districts, though most of those interviewed expect price pressures to remain elevated at least through the end of the year.

Yes, I cherry-picked the lines that suggest the economy is anything but an inflation breathing dragon. Which, alas, is what investors and advisors who, in this case the permabulls, wed themselves to their theses and/or are entirely beholden to their personal biases forever do.

In fact, let's do that again, but with me highlighting what a permabear would see in Crise's commentary:

The report downgraded its characterization of growth to stagnation, saying that activity was “unchanged, on balance” since July after a “modest” expansion in the previous report. Five districts reported a bit of growth, and five others reported a slight to modest softening in activity.

Consumer spending was seen as steady, with demand for discretionary goods waning but travel remaining a bright spot. Manufacturing was mixed, with supply chain bottlenecks continuing to constrain activity in some locations.

There was a notable weakening in housing activity,
consistent with recent data and the general narrative. More
broadly, most districts expect a further softening in domestic
demand over the next 6-12 months. Labor markets remain tight but show some signs of softening amidst improved worker availability (a la the last payroll report), with some moderation in wage expectations. That being said, in general pay is expected to be notched upward at the end of the year. Still, price gains appear to be moderating across nine of the 12 districts, though most of those interviewed expect price pressures to remain elevated at least through the end of the year.

So, yes, you're reading that correctly. Any news that says the economy (and, therefore, inflation) may be presently slowing is bullish for equities, as it presumably would have the Fed ease off of their inflation fighting measures. While bearish would be any evidence that inflationary pressures are still running hot, thus inspiring the Fed to keep their feet firmly on the monetary policy break.

By the way, we here at PWA are firmly committed to never, under any circumstances, investing our egos in our theses. Our responsibility to our clients demands that we remain obsessively openminded to all possibilities, 100% of the time.

Fed chief Powell happens to be speaking to the Cato Institute as I type... Equity futures are weakening as he reiterates the Fed's commitment to keeping at their tightening efforts "until the job is done." If he presses the issue à la his Jackson Hole speech, don't be surprised if the market steals back some or all of yesterday's largesse during today's session... If, on the other hand, he, like Ms. Brainard, offers even the subtlest of hints that there may be some easing on the not-too-distant horizon, I'm quite certain there remains a not-small number of shorts who'd be inclined to cover (buy) in a hurry, extending yesterday's rally in the process.

Also, by the way, the European Central Bank met this morning, significantly increased their go-forward inflation expectations and hiked their policy rate(s) by .75% -- a remarkably hawkish move (biggest rate hike ever) by a traditionally uber-dovish team! Interestingly, if not incredibly, they also upgraded their GDP forecast for 2022...

Like I said in the video snapshot, if I were a short-term trader I'd effort to stay as neutral as possible right here.

As for the rest of us patient long-term thinkers, odds continue to favor a bit more pain before the present bull market ultimately runs its course... Which it indeed will, while no doubt unlocking some very attractive long-term value in the process.

Asian equities were mostly green overnight, with 10 of the 16 markets we track closing higher.

Europe's struggling so far this morning as well, with 14 of the 19 bourses we follow trading lower as I type.

US stocks are lower to start the session: Dow down 230 points (0.73%), SP500 down 0.84%, SP500 Equal Weight down 0.91%, Nasdaq 100 down 1.10%, Nasdaq Comp down 1.11%, Russell 2000 down 1.32%

The VIX sits at 25.77 up 4.99%.

Oil futures are up 1.83%, gold's down 0.37%, silver's up 0.17%, copper futures are up 1.44% and the ag complex (DBA) is up 0.25%.

The 10-year treasury is down (yield up) and the dollar is up 0.10%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 6 -- base metals futures, uranium miners, ag futures, energy stocks, Brazil equities and silver -- are in the green so far this morning. The losers are being led lower by Eurozone equities, Nokia, Disney, Dutch Bros and communications stocks.

"Central Banks continue to play a crucial, albeit controversial role. Whereas the British banker Francis Baring1 saw the Bank of England as: “…the centre or pivot for enabling every part of the monetary and credit machine to move…”. Ben Bernanke, former Federal Reserve Chairman, more cynically suggests that: “Monetary policy is 98% talk and only 2% action”."

--Howell, Michael J.. Capital Wars

Have a great day!

Marty