DeMark webinar takeaways: S&P 500 to have one more selloff then “shocking” rally coming (within days)

Non-consensus takeaways from Tom DeMark Webinar and views from Mark Newton, Head of Technical Strategy

Today’s note is a recap from our webinar with Tom DeMark, founder of DeMark Analytics and Symbolik.com. Tom DeMark has gained a large following over his >50 years on Wall Street, having developed many key market timing tools used today. He is a longtime friend of FSInsight and our clients might recall the very prescient webinar we did on March 24, 2020, where Tom D. identified the day and hour of the market bottom.

Today, markets are facing a similar decision point. Stocks have been under unrelenting pressure since the start of the year, reflecting mounting uncertainty about rising inflation, war risks, earnings visibility and Fed needing to mount a battle against inflation. (But as our clients know, we have highlighted that many leading measures of inflation are weakening.)

It is not that different than the uncertainty that surrounded March 2020 and at that time, Tom D. and his tools proved of enormous value in identify possible market turning point. Back in 2020, Tom D. called it to the day and hour.

Per Tom DeMark, Markets nearing turning points for S&P 500, Nasdaq, FANG, Bitcoin, interest rates, commodities

Tom D. sees key markets approaching a turning point for a reversal. Some of these still have several days longer to reach key fulfillments of price or analytics, but that a reversal is soon expected.

Here are the non-consensus takeaways:

• S&P 500 likely to see one-more selloff, with two closes below 3,858
• then a “shocking rally” towards 4,453 or ~4,400 to 4,500
• crude oil likely to make a top within 4 trading days at $117.29 before turning lower
• interest rates (10-yr) make one more high and that is the peak

Apologies in advance if our explanations do not mirror Tom D. view exactly, as we did not record this webinar and these are solely my notes:

• S&P 500 –> one more selloff (needs two more closes below the low of 3,858) and then a rally starts. This should happen within the next few days. Tom D. sees a “shocking” rally >15% to S&P 500 4,400-4,500.
• NASDAQ –> Nasdaq has fulfilled the downside objective, so there is not as much downside but a few days needed to establish a combo buy-set up “13” and then a similar +15% rally. NASDAQ probably rallies before S&P 500. A similar MB momentum indicator has also confirmed a low.

• FANG –> Already signaled a combo “13” buy setup and a rally recovering 50% to 60% of the decline is expected.
• Bitcoin –> Bitcoin count is “silent” at this moment. Bitcoin would ideally be down morning today 5/19 and then weaker for next week or so, recording 3 new “lows” and that would mark the end of this selloff. This didn’t happen. But this doesn’t have to happen. Bitcoin looks similar to NASDAQ in that way.
• Interest rates –> One more high expected on the 10-year.
• Crude Oil –> Crude oil within 4 days of completing a “reinforced 13” which is a sign of trend exhaustion. Possibly 4 more days of gains before a peak. DeMark sees oil reaching $117.23 and “becoming dead.” In other words, oil essentially reaching a top. Not clear if this is a long-term or near-term.
• Natural gas –> Natural gas (Natgas) could be peaking within 4 days (~$9.08). Natgas set up looks like an ideal 9-13-9, and with the “13” in place, but the latter stage is “5” on its way to 9. He sees this peak as a key level and a subsequent breakdown exceeding >20%.
• Inflation breakevens 1-year –> The surge in 1-year breakevens in March was a “13” and he believes this was a near-term high.

IMPLICATIONS: Rolling over of crude, natural gas and commodites and peaking of rates = positive developments

In our view, the most intriguing takeaways are Tom D. view that many inflationary drivers (energy and commodities) are peaking. Mechanically, this reduces the risks of further eruptions of inflationary pressures if these commodities are flattening and rolling over. I realize that war, crop cycles, demand and China impact these markets. But commodities often adhere to technicals.

• falling commodites
• means inflation risks should be abating
• this would strengthen the quality and conviction of the rally Tom D. suggested is possible.

On crude, he pointed out a “reinforced 13” might be underway, which is a sign that a trend exhaustion is happening might be near. And in the case of crude:

• a possibility of 4 more days of highs
• then a bearish reversal

Market still debating wide outcomes, but consensus sees a recession and further downside…

In conversation after conversation, consensus generally sees Fed hiking cycle inevitably leading to a recession. But this is only the central case, and the reality is investors see massively wide outcomes.

• on the downside, many see Fed hiking leading to a breaking economy and a deeper recession given the advance of markets since 2020
• on the upside, an achievement “soft landing” would be a positive surprise, as the >25% decline in the NASDAQ (and 20% in S&P 500) means downside is baked in.

While stocks have been gut punched for 6 weeks straight, it should be no surprise that consensus has markedly shifted towards the doom camp. And pundit after pundit sees further downside. Granted, the technicals are pretty bad as well, so there is a buyers’ strike in place.

But as we look at incoming data, there are “green shoots” that point to mitigation of the bearish case. Granted, there are also “negative shoots” out there. And at the moment, this is the key statement:

• Fed Chair Powell speaking at the WSJ’s “Future of Everything Festival” reiterated the FOMC’s view on inflation
• They are not looking for “nuanced” signs inflation is cooling, but in a convincing way

…So “green shoots” on convincing declines is key — job openings

Obviously, the incoming data needs to point to a “convincing way” of a decline in inflation. In our view, this is where consensus might be underestimating the speed and velocity. Previously, we noted:

• Used car prices weakening = lower inflation
• China opening alleviates future supply chain problem = lower inflation (eventually)
• inflation breakevens are cooling off = market seeing lower inflation vs a month ago

JOLTS data, used by Fed is only thru March or 6 weeks lagged…

The standard for job openings is the JOLTS survey and this metric is used by the Fed to talk about the tightness in labor markets. Powell reiterated that there is 2 jobs for every available worker.

• the latest JOLTS data is only March report (reported in early May)
• JOLTS data, therefore, is already 6 weeks stale
• labor markets softening is key
• especially since labor market participation rates are still low

…Indeed.com data + Retailer earnings suggest hiring could be slowing

In this note, we highlight some signs that the labor market might be cooling, not due to financial conditions tightening, but due to “overhiring” due to Omicron:

• Indeed.com data shows job postings in 2022 are seasonally weaker than 2021 trends
• Both Walmart (yesterday) and Amazon (4/28) both noted “overhiring” due to Omicron in 1Q2022
• And now both firms are “overstaffed” = future layoffs

Take a look at the data from Indeed.com. This is arguably a more “real time” barometer of JOLTS.

• Indeed.com data is thru May 6th
• that is 6 weeks additional data vs JOLTS
• Later this week, Indeed.com will show data thru 5/13

• See the weakness in job postings since 3/31?
• This is a sharp contrast to 2021, when job postings surged in the 6 weeks post 3/31

…Retail + loading job postings are where weakness emerging

The weakness is seen in retail and loading jobs. By the way, this dovetails exactly what Walmart and Amazon mentioned in their earnings calls in the past few weeks.

Walmart and Amazon both said they are “overstaffed” into March 2022 due to Omicron impact

Take a look at the commentary from both Walmart (yesterday) and Amazon (4/28) about staffing.

• both firms said they are now overstaffed
• the primary factor is the expected “outages” due to Omicron illness ended faster
• this is thru March 31
• both expect to trim after March
• JOLTS only reflects data through March 31

…reiterating retail added 1.3 million jobs since end of 2019, of which Amazon was >800k

And retailers hired like mad post COVID-19 to work around COVID-19 protocols and risks of outages. And as these protocols become less central, we expect hiring to weaken.

…But weaker jobs is only partially the problem, as participation rate needs to come up…

As Goldman Sachs labor dashboard makes clear, it is not just job openings that are an issue:

• labor participation rate is too low
• there are 684,000 FEWER people working today vs end of 2019
• will higher wages bring back workers?
• will falling 401Ks bring back retirees?
• maybe

Shanghai to exit mass lockdown = first step in removing overhang

China announced that physical stores will reopen in phases in Shanghai, as community transmission has slowed sufficiently. After more than 60 days of mass lockdowns, this is welcome news for the global economy. While the extent of the economic damage from this is not entirely clear, this removes one of the major overhangs for the economy and markets.

Case trends in Shanghai have vastly improved as cases are down 90% from their recent peak of 25,000 (7D avg) in April 2022.

• It took about 30 days for cases in Shanghai from parabolic start to peak
• This is in line with Omicron surges seen in other nations
• The lockdown in Shanghai has been in place for 60 days
• Beijing is still facing mass restrictions and cases might be peaking there at 51 — yup, 51

10X: China 2022 lockdown affected 160 million citizens versus 2020 Wuhan 13 million

If you are wondering if China lockdowns in 2022 are consequential, consider this — according to Xu Jianguo:

• the 2022 lockdowns impacted 160 million Chinese citizens
• this is an estimated 18 trillion yuan ($2.7T USD)
• the 2020 Wuhan lockdowns impacted 13 million

So these are far greater in scale.

China cutting mortgage rates = policy easing

The PBOC (China’s central bank) cut the mortgage rate for first time homebuyers to 4.4% from 4.6%, in a significant move to boost the housing market. On balance, this is a positive. Other central banks stimulating while Fed hikes is not necessarily cross currents, since the Fed is trying to contain US inflationary pressures by surpressing demand in the US.

China equity market bottomed at the end of April and outperforming YTD

One of the strongest arguments for being “half-full” on China is the fact that China stocks have begun to outperform global equities (MSCI ACWI). As shown below:

• China’s Shanghai composite (SHCOMP) bottomed at the end of April
• YTD, the SHCOMP is outperforming the MSCI All-world Index
• This is a sign financial markets believe the worst might be behind

In the US, signs of easing in demand, which in turn could ease price, continue to appear

Over the past few days, there are also signs that inflationary pressures might be easing — on the margin, and this is still incrementally positive. The Fed’s primary concern is containing inflationary pressures in the US. There is growing evidence that inflation, as measured by either CPI or core PCE (personal consumption expenditures) is peaking. But peaking is not necessarily the same as declining. So accumulating data points supporting further easing will ease market anxiety.

Adobe (below) reported US domestic flight bookings fell 17% in April (month over month)

Figure: Themes in 2022 – “BEEF”

Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500

** Performance is calculated since strategy introduction, 1/10/2019