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There are many forecasters who are calling for a bottom in stocks and the big 4.000.00 level to be taken out but the big fundamentals are bearish and this rally is just a correction in a big bear trend.

Fed Dovish Pivot Bullish Stocks

The market is looking for a dovish Fed pivot, but this is based on hope and it's unlikely the Fed will change its hawkish stance. Fed Vice Chair Lael Brainard in terms of rate rises cautioned against pulling back “prematurely,” saying rates will remain higher “for some time” until inflation is brought under control. Inflation of course not under control with recent inflation data coming in above forecast.

Options Market Fuels A Short Covering Rally and its about to End

The real reason for the rally in stocks can be seen in the options market, at the recent bottom the number of put options was elevated and these puts were bought back which pushed stocks up. The excessive number of puts has now declined and this should end the short-covering rally.

Note: A put option is an option looking for prices to fall and when closed acts to push the underlying market up which we can see on the chart below.  A call option is looking for prices to rise when you get excessive put or call buying it can warn of a reversal as we can see on the chart below.


Earnings Misses Are Bearish: but the market does not care as options trading powers a rally higher.


A Hawkish Fed and QT

The Fed will remain hawkish and the market is seeing the Fed pivoting at the December meeting but this is unlikely in our view and we also have a reduction of the Fed balance sheet – stimulus and expansion of the Fed balance sheet was responsible for around 90% of the SP500 rally from Covid lows and this stimulus has now been stopped and Quantitative tightening reduction of the Fed balance sheet is heavily bearish for stocks.



How far could stocks Fall longer term?

A hawkish Fed, QT, and a market that remains overvalued historically will see stock markets move lower and we expect the majority of the rally after COVID saw the Fed provide massive stimulus to financial markets to be retraced.

Technical Analysis

On the monthly chart, we have targets on the downside at 3200.00 then 2800. On the daily chart, we broke resistance at 3800.00 as the options market drove prices higher but the rally looks to have failed into 3900 and we are back below 3800 as the Put option liquidation has eased and expect a continuation of the downtrend.





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