2022-09-12

Going Short as Rubber Hits Road

Everyone has a plan until they're punched in the face, but the shorting window is opening again this week barring a bullish breakout. The window closes after the Federal Open Market Committee meeting next week.

The bear market still hasn't started yet. It's all computers, traders and derivatives. The casino games. Last week and into this week, it will be the CPI. The bulls are hyperfocused on the minutiae of macroeconomic data and missing the forest for the trees: valuations and earnings peaked. Bear markets are blamed on events, but at heart they are an internal market event driven by social mood. Extreme optimism leads to extreme pessimism.

There is a bullish scenario though: CPI peaks before economic growth weakens. In this scenario, wild speculation ignites again. I don't think this scenario is likely, but it's out there. It also wouldn't last long because speculative activity would quickly flow into housing and commodities, and suddenly we're going to be talking about a double-digit Fed funds rate.

In other words, this is the Federal Reserve's moment. Inflation is on the ropes. They have to deliver the killshot and that will be evidences by major pain in the financial markets. There is widespread disbelief in a major recession, but Europe doesn't appear ready for surrender yet. They're going to shut the lights out this winter. The world saw the effects of lockdowns and Europe is repeating, while China implements rolling lockdowns as part of zero-covid, yet people think this is going to somehow result in economic growth. In April 2020 the market had bottomed and bears were screaming, "How can the market go up when there are lockdowns?" Yet it was all priced in. Now all the economic pain is ahead as far as data goes, but even the bears think the future is some kind of stagflationary growth scenario.

Cryptos are popping. That sure looks like it could develop into a substantial basing pattern if there's any Fed capitulation:

The ES died right at my resistance area in early trading. I could go short at any moment if I see signs that this move isn't going to produce a gap-up overthrow.
Crude oil is wrecking the disingflation party, but ZB is getting constructive for bulls or bears. For myself, my focus is on crude and long-bonds until I see stocks crack because of the dance between these three. If crude rises too much, bonds and stocks tank. If bonds rally too much, it probably means crude and stocks are tanking.
The U.S. dollar is a wildcard. I cannot predict the fallout from its move. In the short-term, dollar down should lift stocks, but a large reason why inflation has died is dollar strength. If a weaker dollar translates into commodities rallies, then the Federal Reserve will be hiking rates soon. For now, dollar strength is also mainly euro weakness. The yen did rally on Friday, but it hasn't continued rallying. I see 1.036 on EURUSD as a likely resistance area.
It will take time, but when the market realizes the dropping CPI is not good news, then we will see "Wave 3" get cooking: Amazon Closes, Abandons Plans for Dozens of US Warehouses
MWPVL International Inc., which tracks Amazon’s real-estate footprint, estimates the company has either shuttered or killed plans to open 42 facilities totaling almost 25 million square feet of usable space. The company has delayed opening an additional 21 locations, totaling nearly 28 million square feet, according to MWPVL.

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