Professor’s Comments March 16, 2023

Posted by OMS  at March 16th, 2023

Stocks fell sharply yesterday as Wave 3 down continues to unfold. The Dow was down   over 700 points before staging an afternoon rally to finish down 281 points, closing at  31,874.  The NASDAQ finished with a gain of 5 points; the S&P lost 23 points. Volume on the NYSE was heavy, coming in at 136 percent of its 10-day moving average. There were 12 new highs and 266 new lows.

From a wave count perspective, yesterday’s decline may have completed sub-wave 1 down of the decline that started on 6 March. The five-wave decline was 2,000 points.  The afternoon rally appeared to be part of sub-wave 2 up, a corrective rally within Major Wave 3 down. Once this rally completes, stocks should experience another massive decline as sub-wave 3 down of Wave 3 down unfolds.  

Because of the failures of SVB and Signature Bank, there has been a lot of talk about what the Fed will do at its meeting later this month.  Does it continue to raise interest rates to fight inflation, or do they pause for a bit, so as not to risk the banking crisis from becoming a world-wide contagion?  No matter what it does, the Fed is between a rock and a hard place. If they keep on the present course of increasing rates, they risk more bank failures and lower portfolio values. If they pause or lower rates, they risk hyperinflation.  The Fed’s overzealous policy of rapidly increasing interest rates to fight inflation is one of the reasons the two banks failed.  Its not the only reason, as mismanagement of the basic banking business and woke social policies were causal factors as well. I won’t go into the details now, but just let me say that you can’t pay depositors more money than what you’re receiving from your T-Bond investments. That doesn’t work in the banking business.  And when lose focus on the basic business model of banking and become totally engrossed in woke environmental, social and government policies not related to banking, you lose focus on the basic business model and things go downhill from there.

Anyhow, just because these two banks lost focus and mismanaged their investment portfolios doesn’t mean that the thousands of other banks in the country don’t know how to do this.  They do.  That’s why I don’t see any need to ‘rescue’ or ‘bail out’ these banks for their incompetence. It’s also why I don’t see any reason for the Fed to change its current policy on interest rates to fight inflation. Inflation is a terrible thing. Hyperinflation will be ruinous to the country. It will impact just about everyone in America, whereas the two bank failures, while costly to those involved, is limited. So, from a political perspective, I believe Powell and the Fed won’t be making too many changes to the current policy on interest rates, which means the current Bear Market will likely continue.  From a technical perspective, I believe the steepest portion of the Wave 3 decline still lies ahead.

So where are we now?  After shedding over 2,000 Dow points, it appears the markets could use some type of corrective rally. The rally may have started from yesterday’s low.  At this point, the shape of the correction is still problematic.  That’s because there are still two possible scenarios for the retracement…either a single zig-zag (a-b-c) or a double zig-zag. If it’s a single zig-zag, prices should start an immediate decline once sub-wave 2 up completes, probably in a day or so.  The decline should drop prices well below the October lows. This is the 3,492 level on the S&P.  (Remember, my target for sub-wave 3 down is the 3,500 level). Yesterday, the S&P closed at 3,892, so you can see why I’m concerned.  On the other hand, IF …and it’s a Big IF, sub-wave 2 up turns into a complex double zig-zag, the large decline I see coming could be delayed until after the Fed meeting scheduled for 21-22 March.

Protect yourself!

The Dean’s List is negative. The Tide is also negative.

The Market Timing Indicators for the Dow remain negative. The same market timing indicators for the NASDAQ have turned neutral.

The Sector Ratio weakened to 3-21 negative after Monday’s session. The top three strong sectors were Semiconductors (3), Leisure (0), and Cap Goods (0). The top five weak sectors were Banks (-10), Insurance (-5), Energy (-3), Financial (-3) and Consumer Products (-3).  Students should note the EXTREME weakness in the banking sector. Not good!

My Trades:  With a negative Bias on the 4s for most of the morning, I boarded the TZA train at 11:30 and got off at 13.02.  I had similar trades on SDOW and SPXU.  Total for the day was just under a cigar. Because I was out of the market, the large gap down at the open limited my opportunity for profit, but I made a day of it anyway. I chose to stay on the sidelines during the retracement, mostly because I wasn’t sure if sub-wave 1 down was over.  Also, because the Bias on TNA (the positive ETF for the RUT) didn’t turn positive until 14.18, I didn’t want to get into a retracement trade unless the Bias was in my favor.  So, I stayed on the sidelines.

I’m driving to Orlando this morning to pick-up my granddaughter, London, for the weekend. We plan to do some serious shopping on the way back to Jax, so I won’t be trading today.

That’s what I’m doing,

h

Market Signals for

03-16-2023

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