Trade Inflection Trading from the trenches Weekly update 20th March -

GM All

Well here we are, spring looks like it is arriving in London and for once we can hope that our days will get longer and the weather somewhat warmer. It is the season to be optimistic … and well that’s what we had this week for sure in the markets, there can be no doubt about that! What a face ripper we had from Tuesday onwards, another all in long, buy the hell out of equities 3 day event that got us from the lows to bang on the 200 DMA on ES. Some 300 points. It was a hard week to trade a lot of trapping and then just one way traffic, so where does this leave us?

So if we go back to my 1st post I mentioned the 3 bogeymen - I will annotate the below in bold.

“Background - Where are we - The 3 bogeyman

When British Prime Minister Harold Macmillan was asked what was the greatest challenge for a statesman, he replied: 'Events, dear boy, events'. This is where we are. Russian / Ukraine and the spill over to the West, in particular Europe is clearly a major event. Whilst the West rolled over the markets loved it, but this is always a game of cat and mouse …. If at any time Russia uses its strongest card and turns the gas or oil taps off to Europe then to put it politely, Europe is screwed! Germany in particular (Europe imports 30% of it’s oil and Germany imports 40% of its gas from Russia) it also happens to be Europe’s strongest economy. Depending on how long Russia turns of the taps it could pretty much land us with a recession. This event would not surprise me even if just a quick shot across the bows as Russia will need to remind the world how it can hurt if provoked. War risk has dissolved unless we something really dramatic like nukes, chemical weapons or NATO being involved then all odds seem to lean towards a ceasefire and some agreement in the near future. Markets have now priced this in.

Bogeyman #2

Everyone over the past week has forgotten about Inflation… The market can never think about two things at one. Inflation PCE, CPI where ever you look, Europe, USA the world over inflation is flying high. This will continue. Clearly the events of the above could also keep inflation high particularly in the Oil / Commodities space. Inflation is still very much here and will continue to rise this will be the bête noire for markets as we go forward.

Bogeyman #3

Fed, BOE. ECB tapering and increasing rates - This hasn’t changed and will start in the USA in earnest over the next few weeks at the next Fed meeting. Can the market actually stand on it’s own two feet. It is my view it never has, it certainly hasn’t in the past 12 years. Constant injection of money via bond purchases has completely distorted the equity markets and this is all going to stop.

So to summarize Political events, Inflationary/ Stagflation pressures, Central Bank tightening, recessionary risk and increasing rates is not a bullish market. “

We had the FED meeting this week - this was the main event and the trigger for the face rip. This is where it gets laughable, the markets now believe that there is a policy error. The FED dot plot summary showed that there will be 7 rate hikes …. then they will start cutting rates … for fuck sake this is a joke. The bond market inverted 7/10year 5/10 year almost 2/10year This means the market is expecting a recession and of course this means more QE! So markets are now front running the next QE! To boot they will only raise rates to around 2 to 2.5 % which historically is still a sweet spot for equities who can live with that. Now just remember folks the very people (the FED) who are implementing this have never got this correct previously i.e. inflation was transitory etc, they never saw the 2007/08 crash nor the 2001 tech crash so I would advise some caution here.

So where are markets heading from here?

My take on this guys is the following. Firstly Inflation is certainly heading higher, all over the world we see this. Secondly it is now becoming very political as us plebs are getting screwed. So the FED have to act and act fast. So put yourself in Mr Powell’s shoes. He has to slow demand and stop people spending. The easiest way to do this is cooling the stock market as this takes excess money out of the system. (note they are also stopping QT) If the market goes higher it is very easy for him politically to raise rates faster and harder. We can not politically be in a situation where the market is screaming higher and plebs like us are getting screwed day by day it just can’t happen, fuck me Biden was talking about price controls only this week! So in essence the higher this goes the easier it is to increase to 2/2.5% quicker and hopefully start to bring down inflation. Remember the FED’s mandate is dual, Stable Prices and Employment. Currently they are failing massively on point 1. So in my eyes this latest face rip is a mean reversion and at some point we will have a lower high possibly around 4656 and before the next fed meeting on May the 4th. After this it will be sell the calls. If this market goes back and makes a new high then in my eyes this will only confirm the market is just plain nuts or rigged!

So to the week ahead

The only way to play to these markets on daily basis is level to level especially as we are day traders. We want our daily bread, that’s all and we can then be thankful.

Lets have a look at the big picture - These are the levels I will use to determine market trajectory. Each level captured indicates to me where the big players are willing to take the market - which ever direction. I then trade level to level with runners.

One thing to note here is market is extremely overbought on RSI5 so I would expecting some basing possibly between 520 and 4452 this week.

So in summary breakout over 4450 bullish below 4395 play level to level. Trade accordingly. Good luck. TI

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