One Last Bear Rampage in 2022: Communication Services

Open Door

The orange line marks the 52-week low in ZB. It doesn't have to break for a bear move, but a break would be more bearish for the market than a rally because a rally would signal the long-end of the bond market finally pricing in lower interest rates. It's possible stocks and bonds drop and rise together, but my expectations is bonds will lead a move higher. If bonds rally now, then stocks probably bottom in a month or so. If bonds drop now, then the final low in stocks is probably lower and closer to or into November. That is a general sense, not a hard forecast.

Technicals say bounce from oversold indicators and bearish sentiment. ES shouldn't clear 4020 and SPY $400. A move above could result in a ripping short squeeze.

If the markest break, there are bearish targets galore. These are only the few I've posted recently or noticed as I'm going through charts this AM...

A Moment of Silence for the Dip Buyers

Meta Near Support Again

This is one to keep an eye on whether bull or bear. A break of the upper resistance or lower support will unleash a monster move.

Waiting to Short Again

I was slow on the trigger yesterday. I expected ES to pop above 3930 area, but waited too long for calls. I'm waiting to re-enter on the short side. This is a bear rally. The payroll report was perfect for this setup. Stocks are rallying, but bonds aren't because employment was better than expected.

I sold some September puts in MPWR on that sucker's plunge, and was stopped out of a weekly (next week) put position in Meta, which gives me a nice big cash position of about 40 percent (MPWR rained, down nearly 20 percent in 5 trading days).

Bonds have already started sinking and stocks too, so maybe this isn't the rally. If not, another scenario is stocks plunge early next week when all the vacationing traders and managers realize they're two weeks late to the next wave down. Then maybe a bear rally. Or not. If I'm right about this bear, at some point the market will relentlessly sell off like MPWR did the past week.

I will be focused on bonds. As long as they stay down, I will be shorting with very high confidence because even a mistaken entry too early will end up paying off. Whereas if bonds rally, a rally could potentially get ugly in the short-term for bears, ugly enough that you don't want to short too early.

Meta Doomed or a Great Buy

I saw the twin inverted hammers on Meta yesterday and it gave me pause because that's sometimes a reversal candle, but then I see a similar (though not fully formed) candle on the S&P 500 Index, and if that one is correct, it's also a reversal signal but for the rally. With Meta near 52-week lows (less than a 3 percent drop here on Tuesday morning), I predict a break will be explosive on the downside. I change my mind frequently, but right now I am thinking to play this with weekly puts, every week, until the break occurs. Entries will be timed. My hunch here is big selling across the markets kicks in post-Labor Day.

Meta Bear

Meta looks doomed if the broader market sells off. Extremely weak during the rally and next support is around $115 area.

Meta Gala

Meta Bear

If the market tops here, it looks like Meta is in deep trouble. It hasn't even reached its first fib level on the bounce. ARKK hasn't reached that fib level either, but it rallied 50 percent off the low.

Bear Market Rally Failure Signals

ARKK has to stop leading. It took out its Monday high today, negating an immediate reversal in the market rally. It has its own resistance line coming up though, and it is still not at a relative new high vs SPY or QQQ.

Animal spirits: BTC and ETH have a lot of room to run.

Tech drove the market down. It drove the rally up. If things "go back to normal" for the post-2008 bull market, tech will continue leading higher. The ratio chart of QQQ to SPY is at the perfect level for a reversal.

On the prior post, I mentioned long Meta as a possible play for a market that goes up. Look at Meta from the bearish side: if this market is going down, Meta is going to implode because it barely bounced in a 20-percent-plus rally in the tech sector. It's going to at least the $115 horizontal and maybe lower. I don't think Meta is particularly important one way or another as a signal yet. It could get squeezed higher for no reason even as the market stalls. It has to break to a new low to really give a clean bear signal, but it will probably be a superfluous signal at that point.

Another is Apple, that should not get materially higher than its gap around $173 and change.

Finally, there are charts such as XLU. Utilities got back to their high in May 2021 so rise to that area wouldn't negate a bear market, but it would be anomalous for a sector to achieve a new all-time high breakout within a primary bear market.

XLU was less than 1 percent off its all-time high in May 2021:

New Bull Market

Seeing reaction to the CPI report, I am concerned the rally could go on longer than anticipated. My sense is many bears are all-in on the "inflation bad" formula. The zero print for July isn't causing a reassessment. It's only one month, but it's a significant move from 1.3 percent in June alone to 0.0 percent in July. I expect August will be negative and the 12-month CPI will start plunging.

Look at prior CPI spike peaks. They came in February 1970, November 1974, March 1980, October 1990, July 2008 and June 2022. 

Stocks bottomed in: May 1970, October 1974, March 1980, October 1990, March 2009 and June 2022. 

The only case where there wasn't a low at the CPI peak was in 2008, and only in 1970 was the low months later. Whether this proves to be a major low or merely a blip will become evident rather quickly because a continued move higher will eventually take out key resistance levels.

The bear case is something more like 2008 unfolds with an ongoing recession that doesn't bottom until 2023. If inflation doesn't crater at least several percentage points, it will break with history.

For the bulls, peace with Russia is the "free lunch." If sanctions lift and energy prices come down, there's the fuel to run much higher. Recession would probably be avoided and new all-time highs on the indexes wouldn't be out of the question.

XBI is one of the most bullish charts out there in terms of arguing for a major bottom in stocks. ARKK, XLC, META and so on are also bottoming if the market is going higher.

I'm not bullish yet. I'd be more confidently bearish if bulls picked up the argument laid out above and ran with it. I'd love to see Apple fill its gap around $173 for example.

Meta Kills XLC

The rally in the market could have a bit more to go, but Meta all but killed the XLC trade following weak earnings. Weakness in the chart also makes it a good short candidate as soon as the market turns. I went looking for gaps. There's a big one that runs from $26.53 up to near $33 per share.

Here is Meta ratio with XLC and QQQ. I was expecting Meta could outperform QQQ, and had it, the XLC would easily be well into the green now. Instead, a small loss here. Earnings are a nice excuse, but other firms reported bad results and still rallied.