Market Tides: Riding the S&P 500's Swells and Dips
Actionable Market Insights from Tuttle Ventures
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Turn in Technicals
The S&P 500 was down 2.1% this week. Energy was the best performing sector (+0.6%) while Consumer Discretionary was the worst-performing sector (-4.1%).
Last week we highlighted similar trends:
Based on the table above, the biggest recent winners are in energy, health care and financials.
We will be looking at those sectors over the week along with the reverse repo levels.
While we do not trade individual sectors, we view opportunities for individual stocks in the short term within these sectors as having more potential upside pushing the runners to higher highs.
As an investor, I am neither a permanent Bull nor a Bear. I am not pessimistic or optimistic. I look at the facts and data—positioning investments on the right side of the cycle.
Here are two reasons why we believe a defensive positioning makes sense in the short term heading into the second half of the year.
1. Lower Liquidity
Liquidity is the ability to convert assets to cash.
The inner financial plumbing of the market is overly complex, but let’s keep things simple.
I aim for simplicity whenever possible.
Today, the FOMC uses a standing overnight reverse repurchase facility as a tool to help keep the federal funds rate in the target range. The facility effectively puts a floor on the federal funds rate because no bank would want to earn less in interest than what the Fed is paying.
Since the regional banking crisis, we have seen a strong relationship in the Reverse Repo and market liquidity conditions.
As of 8/17, RRP makes up nearly 26% of the Fed’s Liabilities:
When RRP decreases, more liquidity is available in the market because counterparties are not required to hold billions overnight. Banks can extend risk-taking beyond one day.
When RRP is stable or increasing, liquidity is lower because counterparties are required to commit $1,819B back in repo to be held by the Fed overnight. This limits risk taking to one day.
Over the past 6 weeks, the RRP has held steady or increased, which has decreased banks’ liquidity and capacity to trade stocks freely on longer timeframes.
In the chart below, you can see how RRP and the SPY daily close have had a strong negative relationship…
There could be many explanations for this.
One theory I have is for operational reasons - Banks would prefer enough Bills to cover earning market interest on their excess cash.
It is a pain to go to RRP everyday.
Banks have to hold back and preserve capital, which limits risk taking in the stock market.
Turn in Technicals
SPY 0.00%↑ just recently crossed below its 50-day simple moving average.
When a stock's price falls below its 50-day moving average, it is seen as a sell signal that indicates the stock may be headed for further losses.
Historically, only the 150-200 day Simple Moving Average (SMA) periods have added much value as a standalone trading rule.
It’s no secret that the market technicals have had a huge impact on all stocks irrespective of their individual fundamental strengths.
This is not a time to panic, but it is a time to be cautious.
The market drops 5% three times every year, and 10% every 18 months.
We have had 34 times the market has dropped 25% or more, and it’s come back 33 times to new highs (we are in the 34th).
That being said, because of the liquidity conditions mentioned above, I do not think we are in a “buy the dip” era.
Buy strength after institutions prove they are willing to support it.
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This is not investment advice. Do your own due diligence. I make no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness, or reasonableness of the information contained in this report. Any assumptions, opinions and estimates expressed in this report constitute my judgment as of the date thereof and is subject to change without notice. Any projections contained in the report are based on a number of assumptions as to market conditions. There is no guarantee that projected outcomes will be achieved.
Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.
Unless there is a signed Investment Management or Financial Planning Agreement by both parties, Tuttle Ventures is not acting as your financial advisor or in any fiduciary capacity.