Fed-Speak Triggers A Swirl of Resistance, Breakdowns, and Stiff Support – The Market Breadth

Stock Market Commentary:

How many times and how many ways does the Fed need to communicate its seriousness about normalizing monetary policy and fighting inflation? Apparently, the answer for Fed-speak is many times and a LOT of ways.

Fed Governor Lael Brainard delivered one way with a speech on Tuesday titled “Variation in the Inflation Experiences of Households“. Brainard’s speech mentioned or referenced inflation 76 times including inflation-fighting reassurance like “it is of paramount importance to get inflation down…inflation is very high, particularly for food and gasoline. All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources.” As a result, Brainard went on the explain that “the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.” While this plan is quite consistent with Fed Chair Jerome Powell’s game-changing speech on inflation last month, the market was somehow caught by surprise by the minutes from the March meeting. While the chatter in the minutes does not represent policy, the revelation of specific numbers apparently spooked markets all over again. The end result: two days of sharp selling in the stock market.

Last week’s near bearish reversal clearly put the stock market in a jittery mood. Steve Liesman perfectly summarized sentiment in CNBC’s Fast Money segment. He explained that if you haven’t been paying attention, the minutes shocked you. “The monetary policy dove is an endangered species,” and the minutes demonstrate no one on the Fed has interest in opposing the path to normalization. The result: a swirl of resistance, breakdowns, and stiff support in the major indices.

Wall Street selling off today!@steveliesman joins the crew at the Nasdaq to discuss the Fed's plan to shrink its balance sheet by $95B a month. @timseymour and @karenfinerman weigh in on if now is the time for a shift in strategy. pic.twitter.com/yWE2Z61LM5

— CNBC's Fast Money (@CNBCFastMoney) April 6, 2022

The Stock Market Indices

The S&P 500 (SPY) put an exclamation point on its false breakout. The Brainard sell-off took the index down 1.3%. The Fed Minutes sell-off took the S&P 500 down another 1.0% and even cracked support at the 200-day moving average (DMA) (the blue line below). The uptrending 20DMA (the dotted line) held as support for the day. An uptrending 50DMA is rushing higher to serve as potentially stronger support.

The NASDAQ (COMPQX) found support at its 50DMA (the red line below). However, the one-two punch of Fed-driven sell-offs cost the tech-laden index a combined 4.6%.

The iShares Russell 2000 ETF (IWM) found NO support during its 2-day 3.8% slide. The reversal from the false breakout planted IWM right back in the middle of the muck from the previous trading range.

Stock Market Volatility

The volatility index (VIX) benefited from the 2-day sell-off. Still, faders left a scar by pushing the VIX from a 17.8% gain to just a 5.1% advance on the day. This fade keeps open the prospect of a pivot around the 20 level.

The Short-Term Trading Call with A Potential Climax

• AT50 (MMFI) = 47.4% of stocks are trading above their respective 50-day moving averages
• AT200 (MMTH) = 36.0% of stocks are trading above their respective 200-day moving averages
• Short-term Trading Call: neutral

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, finished a reversal from its false breakout. The sharp pullback from the overbought threshold of 70% took AT50 all the way back to 47.4%. This follow-through sets up the conditions for flipping bearish if the S&P 500 breaks down below its 50DMA.

Since initial reactions to Fed-speak often get reversed, I moved on a new tranche of index options. I scooped up the trifecta: QQQ call spreads, an SPY call spread, and an IWM call spread. The bearish tinges of the market this week were so strong that old hedges sprang to life. Those gains gave me more confidence to reach for this next tranche of call options.

Be careful out there!

Footnotes

“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.

Active AT50 (MMFI) periods: Day #497 over 20%, Day #22 over 30%, Day #16 over 40% (overperiod), Day #1 under 50% (underperiod), Day #6 under 60%, Day #277 under 70%

Source for charts unless otherwise noted: TradingView.com

Full disclosure: long QQQ call spreads, long SPY call spreads, long IWM call spread

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.