Stocks finished the day flatish, no surprise, given the rally last week and the trends we have seen over the last 18 months. As of yesterday, the S&P 500 call wall is still at 4,400, and that means this index will remain capped until such time the call wall rolls higher or we begin to see the index trade lower again.
I continue to think that last week was nothing more than a gamma squeeze, which will end in the same manner other gamma squeezes have ended, which is a return to the origin at 4,100. Besides, when I used to be called a Permabull, I would always be reminded how markets don’t bottom on Friday, which is what October 27 was.
These rallies have become unable at best throughout 2022, and they tend to end similarly. If correct, the call wall at 4,400 should act as a ceiling on stocks advancing, and eventually, we should trade lower again, just as we have seen since the mid-summer and most of last year.
Rates Move Higher Ahead of Auction
Rates were higher yesterday, with the 10-year up and holding to support at the 50-day moving average, but more importantly, at a short-term support level of around 4.5%. We need to see the 10-year get above 4.8% to get a better sense of where the 10-year may be heading from here. The Treasury actions that start today will give us a big clue into this.
If rates go down, then it could help to push the call wall on the S&P 500 up, push the index up, and possibly return it to 4,500.
But at this point, there is no evidence to support that, and at this point, given my view on the economy and inflation, I tend to think that rates aren’t going to be coming down but instead still going higher.
But again, this week will fill in a lot of information. So, I am trying to be open-minded. So essentially, the S&P 500 continues to trade with rates and the dollar, and to that point, nothing has changed.
Yesterday, we also saw the CDX High Yield index move up some. This is part of the equation that seems very important to where stocks go, not over the short term but over the longer term.
If credit spreads continue to widen, then it will be tough for stocks to rally whether we are in a seasonally bullish time of the year or no matter how many breath thrust indicators, Vanna and charm flows we have, or colors of the rainbow.
The S&P 500 has been trading with credit spreads for months, a measure of financial conditions. If rates continue higher and spreads widen, it will not be a happy fourth quarter.
Unfortunately, I was hoping that on October 27, when we got to 4,115 on the S&P 500, as I had talked about repeatedly since the summer, I would get some to talk and think about where the S&P 500 might go in 2024. But that opportunity was never given, so I find myself in the same position I was in 3 weeks ago, trying to figure out what happens next on the endless merry-go-round.
My biggest problem is that I like to deal in a world of facts, mechanics, fundamentals, and technical. Right now, that is where they take me.