Table of Contents:

1) To a certain degree, this is February 2020 all over again.

2) Sentiment is getting VERY bearish, that could be bullish over the short-term.

3) The Fed is stuck between a rock and a hard place.

3a) Chairman Powell’s testimony was actually quite hawkish.

4) When oil prices rise significantly, it is usually followed by a recession.

4a) The Fed is NOT accommodative right now, so they won’t offset higher oil prices.

5) It’s almost planting season, and fertilizer prices are off the charts.

6) Updated charts on the S&P 500 and the NDX 100 indices.

7) The KBE bank ETF is close to an important support level.

8) Crude oil has become EXTREMELY overbought.

9) BA & INTC are “too big to fail”…AND “too important…not to succeed”!

10) Summary of our current stance.

1) Based on what we’ve read and heard from many geopolitical experts over the past few weeks, it sure looks to us that the crisis in eastern Europe is not going to get resolved any time soon. This is a big change from what people were thinking a week ago…and it is very reminiscent of what took place at the beginning of the Covid-19 pandemic. No, it’s not exactly the same, but once investors realize the extent of the crisis, the renewed decline in the stock market should be swift.

As we have studied the situation in Ukraine…and listened to (and read) the comments from several different geopolitical experts…there is a strong feeling that Putin is going to have tough time surviving this crisis as the head of Russia. The question is, however…if these experts are correct…how long will it take? Yes, the idea that the world could get rid of Putin as a leader is something that most of us agree would make the world a better place. However, it’s going to be a much better outcome if it takes place this weekend…than if it takes place over the summer! (It’s great that we’re confiscating the yachts of so many Russian oligarchs, but this doesn’t mean their going to push out Putin any time soon.)

What we’re saying is that as things stand as they do now, this geopolitical crisis is going to be with us for the foreseeable future. As investors, we can hope that Putin is pushed out (or taken out) by internal forces quickly, but since “hope” is always a lousy investment strategy…we cannot rely on in it at all. Also, based on what we’ve seen and heard recently, “hoping” that Putin ends this crisis on his own…and walks away from his goal of taking control of Ukraine…seems even more unlikely. Therefore, the odds that we’ll see the kind of quick resolution to this crisis that we saw in October of 1962 (with the Cuban missile crisis) seem very, very low.

The good news for humanity…but the bad news for the markets…is that the people of Ukraine have a very strong backbone. They’re brave and daring…and they seem very willing to stand up to Putin at a very high cost. This is great news for humanity…as nobody should back down from tyrants…..The bad news is that Putin cannot backdown from his goal of taking control over Ukraine…if a very small force is able to rebuff his takeover attempts quite easily. If he does, he will be thrown out and lose power. (Those in the Russian elite who don’t like the war are not the only ones that have power in Moscow. Making Russia look weak even more likely to get him removed from this inside…than his attacks on Ukraine.)

In other words, Putin has painted himself into a corner by not realizing that Ukraine could not be conquered quickly. (We keep hearing how the U.S. and Europe don’t want to paint him into a corner. It’s too late, he has already done that himself.) In fact, listening to some experts, even if the west gives him a way out, he won’t take it…because he has indeed painted himself into this corner. He will not back down over the near-term. It will end his career…..Yes, it might turn out that this results in a bogged-down war…and he will eventually get pushed out…but it sure doesn’t look like it’s going to happen in the next week.

Of course, the sanctions could have a devastating impact on Russia’s economy…and it could cause the kind of economic collapse they saw in 1998. However, that’s not going to happen overnight either. The sanctions take time…and since Europe is so strongly dependent on Russia (and not just for oil and gas)…those sanctions CANNOT be as strong as some would like them to be anyway.

If it becomes evident that this crisis is going to last quite a while…as it is becoming more and more evident that it will…stock investors in the U.S. will finally stop whistling past the graveyard. This is very reminiscent of what took place before the full impact of the pandemic hit investors in the face in February of 2020. Both were situations in which history told us that these sort of problems usually don’t last very long…and any decline in the stock market is usually very short-lived as well. Therefore, in 2020, the initial response in the stock market was muted. It wasn’t until people realized that this pandemic was going to last a lot longer…and have a much broader impact than usual…that the stock market felt the full forces of the crisis. The same is very likely to take place this time around as well.

Don’t get us wrong, this situation is definitely different to a certain degree, but there are some very important broad similarities. One difference is that the odds that the global economy will completely shut down due to this crisis like it did in 2020 are extremely small. (It would take something like a nuclear strike for that to happen. God help us if that takes place.) The other difference is that the stock market HAS reacted to this crisis in the early stages…as the S&P 500 has already fallen almost 10%. Back in early 2020, the initial response was a very mild decline (in January). The S&P 500 fell by less than 4%...and it was followed by a rally to a new high in February! Therefore, the threats were COMPLETELY ignored back in 2020…and the result was a straight shot lower (by 35%) when investors finally woke up to what was really going on.

This time around, the market HAS responded somewhat. However, the decline has still been pretty docile. The S&P has fallen 10%...but much of that decline had more to do with concerns over the Fed’s new tightening policy than Ukraine. Therefore, much of the 10% decline has been due to the removal of the steroids the market has been on…not the possible slow-down in economic growth. Thus, the impact of a prolonged crisis…even if it only lasts several months…are not yet fully priced into the U.S. stock market right now (as we will examine in further bullet points). With this in mind, we believe that investors should expect a much deeper correction…and likely a bear market…before we see the ultimate bottom for this decline.

2) Having said all this, maybe Putin will come to his senses. Maybe he will come to realize that he badly miscalculated…and he’ll look for an avenue in which he can back down…while still saving face. Given the level of bearishness in the stock market right now, any significant reduction of tensions in this crisis will send the stock market skyrocketing higher…at least for a while.

In the previous point, we talked a lot about what the geopolitical experts that we respect are saying about Putin. They are also saying that it is quite evident that he badly miscalculated the situation before he invaded Ukraine. He thought the Ukrainians would roll-over quite quickly…and that he would take control of the country in a very similar manner to the way he took control of Crimea. He also miscalculated the response from Europe and other countries around the world. Now that he realizes that it’s going to take much longer to gain control of Ukraine…and that the impact on the Russian economy will be much harsher than he thought, maybe he will look for a way to back down…while still saving face. (Of course, he could also get pushed out by other leaders in Russia as well. So that is another way the severity of this crisis could wane.)

Needless to say, this would give the stock market a huge boost over the near-term. Investors have become quite bearish, so if we can get some positive news on the geopolitical front, it should create the kind of buying power that will take the stock market back towards its all-time highs. Just look at the Investors Intelligence data. There are now more bears than bulls. The percentage of bulls in that poll has fallen to 29.9%...while the percentage of bulls has increased to 34.5% in the most recent poll. This is the first time since April 2020 that the percentage of bears has exceeded that of the bulls (just after the market bottomed following a 35% decline due to the pandemic. Since “sentiment” is a contrary indicator, this is a bullish sign for the stock market.

We’d also note that the AAII sentiment poll for individual investors has had more bears than bulls for several weeks. The most recent poll (ending March 2nd) showed that the bears outnumbered the bulls by 41.4% vs. 30.4%. This 11% gap in favor of the bears is a big divergence from the historical average of an 8% gap in favor of the bulls. So, you can see that sentiment for the individual investor is quite bearish as well……As for the futures traders, bullishness stands at 22%. That 22% reading is not an extreme number (it was down near 10% at this year’s low in the S&P 500), but anything below 25% is still considered bullish for the stock market.

Since sentiment has become quite bearish…and since sentiment is a contrarian indicator…the stock market could see a sustained bounce at any time. This will be especially true if the get any concrete positive news out of eastern Europe. (We’ll need more than just stories about some Russian and Ukrainian delegations getting together for some peace talks. Those sessions are becoming the “boy who cried wolf.”)……However, we do need to point out that during bear markets, these sentiment readings can remain quite bearish for many, many months. Therefore, the bulls will need to be very careful when using these sentiment readings as a reason to think the market will bounce back in a substantial manner...if the crisis in Ukraine persists.

3) Chairman Powell made some soothing comments in his testimony in front of Congress last week. Yes, he did say that they are going to go forward with their plans to raise short-term interest rates, but he was not as hawkish as other Fed members have been recently. However, he also said that he wanted history to know that he would do whatever it takes to tame inflation as well. With inflation at such a high level…and the geopolitical issues pushing inflation even higher…the Fed is between a rock in a hard place.

The stock market saw a nice rally on Wednesday after Chairman Powell made some soothing comments about their upcoming tightening program…when he said the initial rate hike this month will only be 25-basis points, not 50. However, they are STILL going to tighten their monetary policy…after just putting an end to their QE program this month. (As we have argued ad nauseam over the last 10 months, “tapering” IS tightening…so the fact that they are about to raise rates means they are engaging in the SECOND leg of their tightening program.)

We’d also note that he was quite emphatic about stating that he would do whatever it takes to tame inflation. In a question from Senator Shelby of Alabama…who asked him whether “the Fed was prepared to do what it takes to get inflation under control and protect price stability,” Mr. Powell responded by saying, “I hope history will record that the answer to your question is yes.” Senator Shelby followed that up by asking, “Then you’re prepared to do whatever it takes, without any reservation, to protect price stability.” Chairman Powell responded with a one-word answer. “Yes.”

“I hope history will record…….” Wow, you cannot much more emphatic than that!......Before the situation in Ukraine erupted, inflation was already a growing problem. Therefore, even if the situation in eastern Europe subsides, it’s still going to be a problem throughout 2002. NOW, with oil & wheat prices going through the roof, it’s a much bigger problem…and Chairman Powell just told us that he will do whatever it takes to control this problem. In other words, even though he tried to indicate that the geopolitical crisis might cause them to go more slowly in their tightening cycle one day…the next day he basically said just the opposite. (This makes total sense. If the geopolitical crisis drags on, inflation is going to continue to be a bigger and bigger problem…so the Fed will have to become MORE aggressive, not less aggressive.)

What we’re saying is that if you listen to everything Mr. Powell said last week…especially when he used the phrase, “I hope history will record”…you’ll realize that the Fed is not going be back down at all by the issue in Ukraine. If anything, it will force him to be even more aggressive, NOT less aggressive!!!......Ok, ok, we readily admit that if the geopolitical situation becomes particularly precarious, the Fed would adjust their policy accordingly. However, if this thing gets bogged down…with no resolution in sight (which would mean that oil, gas, wheat, etc. prices will stay elevated)…the Fed just told us that they’re not going to sit passively by and sit on the sidelines. They are going to act in a very aggressive manner…just like Volcker did 40 years ago.

3a) During that exchange between Sen. Shelby and Chairman Powell, they both talked about what Paul Volcker did to combat inflation 40 years ago. Some people say that Powell NEEDS to be more like Volcker…while other say that we should be careful about wishing for that outcome. Those who say that we should “be careful about what we wish for” in terms of what Volcker did way back when, highlight that we went through 2 recessions in the early 1980s…and that Volcker was vilified at the time for his actions. In other words, Volcker caused those recessions…and thus people should not be hoping that Jerome Powell is another Paul Volcker.

Well, we TOTALLY disagree with this thinking…and we agree that Mr. Powell needs to act more like Paul Volcker did several decades ago…..Who the hell cares if we went through two recessions in the early 1980s??? Their severity paled in comparison to many other recessions in the past (like the early/mid 1970s and the Great Financial Crisis). Those recessions kept us from having a much worse one later on in the 1980s!!!!!! THAT’S why although Volcker was vilified a the time, he is considered one of the greatest Fed Chairpersons in history!!!! He was willing to make the tough decision. He was willing to make us feel some meaningful pain over the short-term…so that we didn’t feel a much more serious level of pain in the longer term! (It wasn’t until the easy money polices of the 1990s…that created the crash of 2000-03.)

So, we say again, the Fed is stuck between a rock and a hard place. If they tighten policy at an inopportune time (during a geopolitical crisis), they will certainly cause some pain. HOWEVER, if they DON’T make the move, it will create a situation where we feel A LOT MORE pain at some point in the future! In other words, if the crisis in eastern Europe drags out over time, it’s going to lead to a recession either way. However, it will be a much deeper (and likely longer) one if the Fed lets inflation run completely out of control……Therefore, we hope Mr. Powell is indeed a lot like Mr. Volcker…EVEN if it causes us some pain.

4) Speaking of recessions, we keep hearing/reading that the Fed’s tightening policy is not something to worry about…because the market tends to do nicely when they tighten “outside a recession.” That’s great, but there are many reasons to think there WILL be a recession that starts this year. First of all, as we highlighted last week, the yield curve is flattening at a frightening pace….Also, the one thing we’ve see before EVERY recession of the past 50 year is a big rise in oil prices.

We keep hearing people say that when the Fed tightens and “there is no recession” (or when we have a geopolitical/military crisis and “there is no recession”)…the market is usually/always higher X number of months later. That’s great, BUT this assumes we’re not headed for a recession!

As it becomes more evident that the crisis in eastern Europe is going to be with us for an extended period, firms all over Wall Street have been lower their estimates for growth in a material way. (No, none of them is calling for a recession, but NOBODY in the mainstream of Wall Street EVER predicts a recession before it takes place!) JP Morgan has cut its full year global growth target from 3.9% to 3.1% for this year….and its growth for the U.S. by 0.1% to 2.7%. Goldman Sachs made very similar cuts in their growth estimates…as did several other Wall Street firms. However, one of the very best indicators for future growth…the U.S. yield curve…has continued to flatten out is a substantial manner. We highlighted this chart last weekend, but it has flattened further. The spread between the U.S. 2-year note and the 10-year note has fallen from 39 basis points last weekend…all the way down to 24 basis points.

This is the flattest the yield curve has been since March of 2020. Of course, the February/March time frame of 2020 marked the low point for the 2yr/10yr spread, so maybe this level will mark a bottom this time as well. However, in 2020, it took a MASSIVE injection of stimulus/liquidity to create that change in direction…and the odds of that taking place this time are very, very lows. (Chart attached below.)

4a) We’d also note that one of the things that the recession of 1973-75, 1981-82, 1990-91, 2001, 2007-09 all had in common was a BIG rise in oil prices in the months preceding the downturn. This would not be a big concern if the only reason that oil prices have risen more than 200% over the past 18 months was the crisis in eastern Europe. However, about 3/4 of that rise took place BEFORE the crisis in eastern Europe erupted….due to issues of the inability of global suppliers to meet worldwide demand (for a variety of reasons). Therefore, even if the situation calms down (or at least stabilizes), any drop in oil prices is not going to take it down by 40% (like it did after the first Gulf War ended very quickly). If WTI falls back to its pre-Ukraine level, it’s still going to be 35%-40% higher than it was a year ago!

Yes, some people are saying that we don’t have to worry about the rise in oil prices this time…because when oil prices rise when the Fed is still accommodative, it doesn’t hurt the economy or the markets. That’s great, but it’s ridiculous argument. The Fed IS tightening their policy…and they’ve been doing it for months. The perma bulls can talk all they want about how the Fed’s recent moves compares to similar ones in the past. However, they are way off base in our opinion…because this situation is not similar to any change in their policy in the past.

If the Fed was coming off a neutral stance, it would be one thing. However, with the Fed going from MASSIVE levels of steroids being injected to the economy and the markets…to one where the steroids have been taken away…they are NOT still being accommodative!!! We do NOT have to wait for several rate hikes to take place…and/or the reduction of their balance sheet…to say that the Fed IS tightening RIGHT NOW. When a high level of steroids are removed from any situation…the beneficiary of those steroids becomes weaker…period…..Today, the stock market IS the economy to a greater degree than any time in history. With much less stimulus (steroids) to push this (still) expensive stock market higher, it will have to come down to earth. As it falls, the economy will weaken…and if it includes a sustained high level of oil prices, it will weaken even more.

5) Let’s get down to the details of how the situation in Ukraine is affecting Inflation. It is not just an issue of rising oil prices. We have wheat skyrocketing…and other food prices are going to rise dramatically in price due to soaring fertilizer prices…..The government can hide the cost of rising prices of many products to serve their own purposes, but when the sharp rises move to food, it changes everything. People start to gather up their pitchforks and torches when food prices rise in an uncontrollable manner.

We all know that WTI crude oil had already rallied in a major way over the 16 months BEFORE the crisis in Ukraine erupted…with WTI crude oil rising more that 150%. We all also know that the crisis has exacerbated the rise with another 25% rise over the past several weeks. Therefore, WTI now stands more than 220% above where it was trading in the fall of 2020. Needless to say, this is having a severe impact on inflation expectations we move through 2022.

Most of us also know that many other commodity prices has seen a moon shot. Copper closed the week at an all-time high…and stands more than 70% above its pre-pandemic highs (and 132% above its 2020 lows). Wheat has also seen a parabolic rise…given that Ukraine is the “breadbasket of Europe. It has rallied 60% in just one month…and just saw its biggest one-week gain ever last week. Corn is another on that has moved substantially since the beginning of the year…with a rally of almost 30%. Therefore, it should not be a surprise that the CRB Commodity Index now stands 60% above its pre-pandemic highs (and 182% above its pandemic lows).

Of course, natural gas is yet another commodity that has been strongly impacted by the developments in eastern Europe. Europe relies on natural gas in a significant way…and they import more than 40% of their needs from Russia. However, natural gas is also quite important to the process of making nitrogen-based fertilizers used in many of these crops around the world. Therefore, the skyrocketing price of these crops in the future will not just be impacted by an important decline in supply of wheat from Russia & Ukraine, but it will also be heavily affected by the surging prices of fertilizers for these crops in other parts of Europe (and around the world)!

Needless to say, if these price increase continue (or even just hold) for an extended period of time, we’re going to start worrying a lot more about stagflation…and not just inflation. In other words, what we’re looking at right now goes a lot deeper than a lot of people seem to realize. (Have you seen the empty shelves in the supermarket lately?)…..Crops are going to be planted soon in Europe, so this crisis will not have to drag on for many months for it to have a serious impact of food prices (and thus inflation/stagflation) for the rest of this year! Sure, if things calm down in May/June, the prices at the gas pump will fall just in time for the summer driving season. However, it’s going to be too late for the farmers…and food prices will remain high all year this year.

As we said earlier, inflation was already a problem before the Russia/Ukraine War began, so it will still be a problem if it dies down over the next few months. However, it will remain a bigger problem that people are thinking right now…if the crisis lasts for just a month or two longer…..REMEMBER, WHEN INFLATION IS CAUSED BY A RISE IN DEMAND, IT’S GOOD…BUT WHEN IT IS CAUSED BY A DECLINE IN SUPPLY, IT CREATES STAGFLATION.

6) As strange is it my sound, last week was the least volatile week of the year so far (at least by one measure). This doesn’t mean it was boring or calm, but it just might be signaling that we just saw some “relative calm”…before an even bigger storm hits our shores. Either way, we want to update the support and resistance levels for the S&P 500 and the NDX Nasdaq 100. (For the S&P 500, the chart is going to be different. We’re going to look at the weekly chart.)

It was another wild week in the stock market last week, but believe it or not, it was the least volatile week of the year so far for the S&P 500 Index. That’s right, the 3.1% range for the S&P was the smallest range it has seen since the last week of December! Don’t get us wrong, a range of more than 3% is not a small move by any standard…and the smallest one-day move last week was still 1.3%. However, the net move was not extraordinary…and it left the SPX almost exactly where it closed two Fridays ago (on February 18th). In other words, even though it feels like the stock market has continued to fall out of bed, it has actually been churning in place for the last two weeks. It’s just that the “churning” has been quite violent!

So where does this leave us? Is this sideways move something that is forming a base…or is it just a distraction before we head lower over the coming weeks? Well, when the market bounces around in a violent way…even if it does so within a range…is usually tells us that the stock market is not very healthy at the moment. However, there is no definitely rule when it comes to the kind of action we’ve seen recently, so we’ll see which way the market breaks over the coming week(s). With this in mind, let’s look at the updated support and resistance levels for the S&P 500 and the NDX Nasdaq 100 indices.

We’re actually going to look at the weekly chart on the S&P 500 this week. In that chart, we can see that the 50-week moving average has stopped the rallies dead in its tracks each week. Two weeks ago, it closed right at the line on Friday…and it retested that line several times this past week. However, it was not able to breach that level on any of those occasions. Therefore, the new “first resistance” level will be that 50-week MA…which stands at 4,411. This is not a major resistance level, but it would certainly give the stock market some relief if we broke above that moving average…..The next (more important resistance) comes in at the level we highlighted last weekend…the 4590 level (the highs from early February).

As for support, the first support level is unchanged. It comes in just below 4,300 (4,290 to be specific)…and that is the “neck-line” of the “head & shoulders” pattern we’ve been harping on recently. Below that, we’ll use the lows from two weeks ago of 4,114. Any meaningful break below 4,100 would confirm the breakdown from the “H&S” pattern…which, in turn, would confirm that a new leg of the 2022 decline has begun.

Turning to the NDX Nasdaq 100 index, the key support levels remain the same. (Remember, we’re using the NDX 100 instead of the Nasdaq Composite Index because the QQQ Nasdaq ETF corresponds to the NDX, and the most popular stocks in the Nasdaq are in that key index.) Even though the support/resistance levels are the same, we do want to point out a new development from last week.

First, let’s review those levels. The key resistance level for the NDX is the February highs of 15,140. Any significant break above that level would give it a nice “higher-high”…and THAT would ease a lot of tensions in the marketplace……As for the all-important support level for the NDX Nasdaq 100 Index, it is 13,500. The NDX also formed an “head & shoulders” pattern. As we mentioned last week, the “neck-line” of that pattern is a descending one, but that really doesn’t matter. Any significant break below its closing lows from last week of 13,500 will give it both a key “lower-low”…and take it well below that “neck-line”…so it would be a very bearish development.

We also want to point out that the 50-DMA on the NDX crossed below its 200-DMA last week. This is not an official “death cross”…because the 200-DMA is not declining yet. However, the same thing took place in Q4 of 2018 when those lines crossed. The 200 DMA was still rising back then, but it still signaled that more weakness was in store for this tech laden index. In fact, the NDX fell another 16% after that “cross” too place……We do need to point out that we saw a very slight negative cross in the spring of 2020, but that was followed by a big rally in the NDX. However, “death cross” was only a very slight one…and it took place as the Fed was just starting to implement its historic QE stimulus plan to save us from the pandemic. (That stimulus plan just came to an end.)

7) Last week, we warned about the bank stocks…and JPM in particular. Sure enough, the KBE bank ETF fell over 5% last week…and JPM (which did indeed break below its key support level of $140) declined over 9%. JPM is getting quite oversold, but it’s not out of the woods on a short-term basis. As for the KBE, it sits at a key technical support level, so if (repeat, IF) it sees any further weakness next week will not be good for the group over the short-term.

As we have said a zillion times over the years, sometimes great companies…with great management teams and great prospects…sometimes see outsized declines. Last weekend, we highlighted how JPM…which is one of those great companies with great management teams…saying it was close to a very important support level. If it broke below $140, we said, it would likely lead to a meaningful (further) drop in the stock. Well, it did indeed break below $140…and proceeded to fall out of bed…dropping as low as 132 at one-point last week. It did close at 134.40, but it finished the week with a loss of more than 9%. Thus, there is no question that this second “lower-high/lower-low” sequence of this year is a negative development for the intermediate-te

Posted to The Maley Report on Mar 06, 2022 — 11:03 AM
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