Market Analysis, Insights and Perspecetives

The US equities market, which had technically fallen into bear territory spanning the first three quarters of 2022, has been on an absolute tear.

After bottoming out exactly one month ago, indices have returned a cumulative average of 14.79%, marking the best month for equities in 46 years. The Dow Jones Industrial Average (DJI) led the charge, climbing 17.8%, with the tech-heavy Nasdaq Composite Average (NDQ) rising the least at a modest 12.3%. While September is traditionally a bad month for markets, questions remain whether the shorter term relief rally will find a way forward, or if bears will overcome current euphoria to close out what remains of the year.

A number of factors have been weighing on the market, including — most notably — 40-year high inflation as measured by the Consumer Price Index (CPI), and the Federal Reserve's response to heightened inflation by raising interest rates from near-zero to its current level of 4%. As inflationary headwinds still persist, such as the ongoing Russia-Ukraine conflict and consistent supply chain disruptions, the CPI appears to have peaked — at least for now.

The latest 12-month reading of the CPI came in at just 7.7, falling below both the previous high of 8.2 and median forecast of 7.9. Markets soared on the news, with the NDQ and Russell 2000 (RUT) closing up 7.35% and 6.11%, respectively. Besides the limited decline in the CPI, the rally was attributed to the probability the Fed could begin tapering rising rates, which it could announce at the conclusion of its next FOMC meeting on December 13 - 14.

Despite its ups-and-downs over the past year, the future of the market remains highly uncertain. Throughout the uncertainty of high inflation, rising interest rates and fears of a 2023 recession (yield curve has remained inverted since July, 2022), we should continue to expect periods of dramatic swings in equities prices — in either direction — until uncertainty abates. 

When assessing the likelihood that macroeconomic and financial markets conditions persevere, a number of interesting technical formations — and potential buy opportunities — are beginning to take shape.

Since the market peak in January and subsequent decline, NDQ has underperformed relative to other US indices — including RUT. Narrowing in on the 3x leveraged market-cap-weighted semiconductor index, or SOXS, we see massive potential for bullish support at current levels with significant medium term upside, as defined below.

We also see the same technical formation developing in the SDOW — a 3x inverse of the price-weighted average of DJI. 

While current prices of inverse indices are flashing buy signals, there is still risk that the greater market continues upward in the shorter term, sending their inverses into "oversold" territory. One month into its rally, DJI is still showing signs of potential upside, where it could test technical resistance at 34,255. If its price fails to test highs beyond this or its current levels, anticipate a period of moderate selling — at the very least. 

A more probable scenario suggests inverse indices overselling and/or consolidating at current levels, so it's important we first identify confirmation in the VVIX, VIX, and underlying longer term MACD before considering entering either of these positions.

The MACD (1-day) for VVIX has crossed over its signal line and is currently trending upward. Its price is also finding support above its 20-day moving average (dma). If the MACD continues upward, prices will test longer term moving averages or previous highs. Moves upwards will correspond to selling pressure throughout the equities market.

However, the same technicals in the underlying VIX might be telling a different story. Its MACD (1-day) is still trending downwards, and if its price doesn't find support at the 22.6 mark (which it's currently testing), it will fall to lower lows, sending indices even higher in the shorter term.

A quick look at the S&P 500 (SPX) shows there's still room for upside, as well, where its price can test its 200dma or previous medium term highs. If the current rally fails to lose steam, VIX will continue its descent, sending SOXS and SDOW below baseline support. The closer VIX falls to its baseline lows, the greater the opportunity to enter either position, further mitigating potential downside risk.