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The Ghost Of 2018 Threatens This Bull Market

By:

Portfolio Manager with Interactive Advisors, CEO of Mott Capital Management

STOCKS – UPS, JPM, MU

MACRO – SPY,

Today was no different than days past when the S&P 500 gapped higher and then gave back all the gains throughout the day to finish lower by around 20 bps. We may be in the early phases of resolving this stalemate between buyers and sellers, with the S&P 500 finally breaking the uptrend on the rising wedge pattern before the close.

Also, as you can see, the green line has served as resistance for the index a few times. That trend line, of course, is the March 2020 uptrend. Unless something changes dramatically tomorrow, that uptrend is now looking as if it is broken for good.

S&P 500

If the 2020 trend line is indeed broken, then the monster’s rising wedge pattern going back to 2019 is now broken.

S&P 500 1 Day

This rising wedge pattern has a lot of similarities to that of 2018. In fact, there was a rising wedge pattern in the S&P 500 going into October of 2018; once the pattern broke, it was pretty much lights out.

S&P 500 1 Day (1)

While one can argue, things were different back then because we were in a Fed tightening cycle, I would argue they are not that different at all. In 2018, the fear was the Fed would over-tighten, causing growth to stall out or perhaps even cause a recession. But really, the underlying concern of slowing growth back then is the same as today. As I have been writing for weeks now and noted in my latest tactical updates, next year’s growth rate is expected to drop dramatically.

In fact, in 2018, you know what led the S&P 500 lower, the transports, and the housing sector. The housing stocks and the transports both started to turn lower just before the S&P 500 did back then.

S&P 500 vs DJT

You know which two sectors had brutal days, both finishing lower by more than 1%, housing and transports. That adds to a brutal couple of weeks.

S&P 500 vs HGX

If you look really closely, in 2018, the S&P 500 stalled out for several days as the DJT and HGX began to diverge lower. It doesn’t look all that different today.

S&P 500 vs HGX (1)

Reflation Trade May Be Done

The big problem for the market right now is that inflation expectations are collapsing. The 10-Year breakeven inflation rate is now at 2.32%, and the 5-year breakeven rate is at 2.42%. In fact, the 5-year TIPs yield rose today by 7 bps to -1.69%. If you are not taking notice, you better because something is happening here, and it is a clear signal for the reflation trade, which appears to be breaking down.

Inflation

Refinitiv

JPMorgan (JPM)

JPMorgan broke the diamond pattern today and is now likely heading lower to $157.25. The RSI has broken the trend too and took out its recent lows. This is confirming the lower price action in the stock.

JP Morgan

UPS (UPS)

UPS was crushed today after giving inline guidance for 2023. There may be an underlying message here, but on the surface, that message seems to suggest that upside surprises may not exist in the future and that this is the best it will get; that is my takeaway. The stock fell below support at $210, and that gap at $178 is just screaming to be filled.

UPS

Micron (MU)

Micron was down another 2% today, and there were many bearish options betting on this one yesterday. This stock appears to be heading for around $76, although the put options suggest an even lower price by the middle of August.

Micron

Originally Posted on June 9, 2021 – The Ghost Of 2018 Threatens This Bull Market

Disclosure: Mott Capital Management

Mott Capital Management is the portfolio manager for one portfolio offered by Interactive Advisors. Interactive Advisors clients do not invest directly with the Portfolio Managers like Mott Capital Management, and the Managers do not have discretionary trading authority over Interactive Advisors client accounts. The Portfolio Managers on the Interactive Advisors platform simply license their trade data to Interactive Advisors, which then allows its clients to have the same strategy and trading decisions mirrored in their accounts if the Portfolio is in line with their risk score. Portfolio Managers like Mott Capital Management implement their trading philosophy and strategy without knowing the identity of Interactive Advisors’ clients or taking into account these clients’ individualized circumstances.

Mott Capital Management has entered into a Portfolio Manager License Agreement with Interactive Advisors pursuant to which it provides trading data IA uses to offer a portfolio to its investment advisory clients.  Mott Capital Management is not affiliated with any entities in the Interactive Brokers Group.  

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Pursuant to the Investment Management Agreement between Interactive Advisors and its clients, all brokerage transactions occur through Interactive Brokers LLC, an affiliate of Interactive Advisors. The use of an affiliate for brokerage services represents a potential conflict of interest as Interactive Brokers LLC is paid a commission on trades executed on behalf of Interactive Advisors. Interactive Brokers LLC does not consider this conflict material as it does not sell, solicit, recommend, trade against or otherwise attempt to induce Interactive Advisors to place any orders in any products. Interactive Advisors does not offer services through any other broker-dealer.  All trading by Interactive Advisors is self-directed. Interactive Advisors clients acknowledge this potential conflict of interest and authorize Interactive Advisors to execute transactions through Interactive Brokers LLC when they open an Interactive Advisors account. Clients should consider the commissions and other expenses, execution, clearance, and settlement capabilities of Interactive Brokers LLC as a factor in their decision to invest in an Interactive Advisors Portfolio. Interactive Advisors believes it satisfies its best execution obligation by trading its clients’ trades through Interactive Brokers LLC. While there can be no assurance that it will in fact achieve best execution, Interactive Advisors does periodically monitor the execution quality of transactions to ensure that clients receive the best overall trade execution pursuant to regulatory requirements.

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