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Market Update – 09.23.2022

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by Gavin in Blog
September 23, 2022 0 comments

It’s been an interesting week for the markets so far Monday and Tuesday had some fun intraday swings. As this is written the FED has announced its latest rate increase of 75 Basis Points.

Market Technicals

Price action on the SPY has turned bearish as we enter a zone of consolidation that pushed us up in the July Rally (see the shaded rectangle). I will be waiting to see if buyers take control of this area again, or if volume follows us down into the zone. Volume following us down would indicate that a bounce has not yet started. We are still in an overall down trend though so any long trades should be held with strict risk reward in my opinion.

Oil is another major factor in the price action of the broader market, and since its recent high in late June it has continued to decline. This is usually bullish for equities as the price of inputs comes down with petrol. Oil is trading around its point of control (Where the most volume is traded by price), but I think that it will continue lower with decreasing sentiment and a slowing economy worldwide.

Sector Rotation

Since 2008 Tech has been a clear leader in equities, and while I think that trend will remain for the future we are seeing some sector rotation into more defensive sectors. Mainly Energy and Utilities. These have long been considered the “Safe Haven” sectors and it appears that they still are with the recent price appreciation. I think there are still ample opportunities in the tech sector, you will just need to be much pickier about the entries until the “Buy the Dip” Paradigm returns. I think there will be a lot of potential buying opportunities no matter what sector we are rotating into though. It will just be a matter of seeing what sectors are displaying relative strength and what sectors are displaying relative weakness and play in those sectors. A strategy I employ for sector rotation is call spreads on the relatively strong sectors and put spreads on the relatively weak ones. This is not trading advice, just a sample way to play rotation.

Geopolitics and Inflation

This update would be remiss without an update on Geopolitics and the fed. As stated in the beginning, the Fed has raised rates by 75 bp. This was an expected move and I think that supports a potential market rally into next week. While the inflation numbers are still not great I think that once the market digests the rate hike and the corresponding presser it will be at the very least a relief rally.

Another piece of potentially market moving geopolitics was President Putin implementing a partial mobilization of reservists in the Ukrainian war. That was followed up with a quick not so veiled threat to the west about the threats of nuclear war. While everyone wants to see a quick end to the war, and certainly nothing nuclear, war chatter is often bullish for the markets.

Next is the US Election. With less than 2 months until midterm elections in the US, there will certainly be a push to paint a rosy picture with the markets. Politics aside, there is increasing agitation growing as inflation is eating into stagnant wages so as with all electioneering they will try and pretty it up as best they can. This is being done two-fold, one with strategic news releases and two with a historic dump from the US Strategic oil reserve. While neither one of these will have lasting impact , I think they will work well to jump the market short term.

Inflation is the large elephant in the room. While it is not decreasing in any significant way, it has stabilized in the 8-9% range. While this is high the fact that it has stopped increasing at a large rate, could be a positive for the market. Efficient markets price in potential news so the fact that we have stopped increasing inflation I think is priced in the market. This would mean that any surprise prints lower will be a tailwind for a push higher in the markets, and I think there will be several “surprise” prints lower given the election cycle in the US.

Putting It All Together

I would still be fairly cautious with longs and pick only the leaders of the industry/sectors you trade in. I think the above mentioned price action and geopolitical factors will make it great for a run up in the coming weeks. As stated above my plan is to use Verticals to play a potential increase in sector leaders, especially the “safe haven” sectors.

Trade safe!

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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