One of my favorite macroeconomic websites is, of course, Investmenthouse.com. This week the newsletter talks about:
– Weak German PMI reports, weak Japanese output, yield curve inversion fears bring out the first serious sellers in a long time.
– After a solid break upside Thursday, SP500 and NASDAQ are sold back into the range.
– Small and midcaps threaten to break their uptrends.
– Friday was likely inversion panic, but was it even warranted?
– The market never peaks the first day of an inversion, so even if Friday was an yield curve inversion with meaning, the top is still a lot of upside moves away.
– Even if this wasn’t an inversion to worry about, the move itself deserves respect, and some areas look very ready to sell.
The big issue was the 3 month/10 Year inversion, however, there is not a lot of evidence that the 3mo/10yr inversion is a precursor to a recession. Most economists theorize that the 2yr/10yr inversion is a more sure sign. Of course, a short term inversion would happen before a 2 year, right? So, it can be an early indicator, but probably not an indicator with the certainty of a longer range inversion.
Note: I love their references to old-time movies or TV shows, read at their website for this week’s reference!
One more quote from the story, “The market is at one of those gut check points for the near term. Will the indices shake off the inversion worry and continue the upside, will they test back to midpoint or the bottom of the October/December consolidation range, or will they fully correct to the December low?”
So, in a nutshell, they’re suggesting a little more downside in the short-term, but saying the 3 month/10 year inversion, even if it were to show a recession, would not take shape for several more months.
Our Opinion? I believe there will be some more downside, although Monday may be tricky. The chart above shows a down arrow on Person Pivots (PPS on ThinkorSwim) and a break below the previous bar. The Implied Volatility is moving up, as well. It could be algorithims that overreacted to the inversion news, yet I believe it may just be time for some selling, too. Monday may be dubious as there is often an akward day after a PPS, which could be up at times, then a move down or flat. Tuesday will tell the real story from the technicals I keep an eye on.
I am playing this downside as an attempt to capture some long theta against the increase in volatility. I will wait a day or two to sell some calls against my long vol plays and probably adjust/roll expiring trades with the increased volatility. I have several trades that will need to be rolled starting on Thursday, so hopefully there is a few extra days of downside to get those plays in.
To read the original article, or to subscribe yourself, visit: InvestmentHouse.com