SPY Analysis: Mid September 2022This is an analysis of the S&P 500 ETF ( SPY ) for the period of September 12th through September 16th.
Weekly Expected Move
There is a 68% chance that SPY will close the week within this price range:
High price: 416.90
Low price: 396.30
There is a 95% chance that SPY will close the week within this price range:
High price: 427.20
Low price: 386.00
For those who do not already know, the weekly expected move is the amount that an asset is expected to move from the close of the prior week until the close of the current week. It is calculated using the implied volatility from the asset's options chain after the close of the prior week but before the opening of the current week. For more information on how to calculate these values, see the link at the bottom of this post.
Volatility & Seasonality
Historically, volatility typically remains subdued from about the 5th trading day of September until around the 12th trading day of September (September 19th) at which point volatility spikes substantially going into early October, as the chart below shows.
This year, the 12th trading day of September happens to coincide with quadruple witching on Friday, September 16th. There is a particularly high chance that the market will become volatile from around that time into early October.
There may also be increased volatility if the CPI report that comes out before the market opens on Tuesday, September 13th surprises to the upside. Although inflation is subsiding, I will note that the consensus prediction is higher than the Fed's prediction. In my post about the Fed pivot, I noted that we can extrapolate from the overnight reverse repurchase operations that the inflation rate may be around 8.3%, which is higher than consensus. I also note in that post that inflation is likely to continue to subside modestly in the coming months. See the link below to my post to understand how I reached that prediction.
Of note, even though we had one of the worst first 6 months of the year in stock market history, there has still not been backwardation in the VIX term structure. VIX term structure backwardation simply means that the market is pricing in decreasing volatility in the future. This is concerning because VIX term structure backwardation is a characteristic of virtually all major stock market bottoms, as it reflects the type of capitulation that major stock market bottoms typically exhibit.
Fibonacci Levels
Price found support last week almost exactly at the golden ratio (0.618) using the June bottom and the peak in mid-August. This is generally bullish as it reflects a fairly typical retracement. See below chart.
At the close of last week, the 4-hour chart became overextended and printed a bearish reversal candle right at the EMA ribbon. The stochastics are overextended as well. Thus, there is a chance that price may either consolidate or reverse to the downside for the short term.
If SPY overcomes the EMA ribbon on the 4-hour chart, it is likely to face significant resistance at the Fibonacci level around the 415, as shown below. This level also resisted price in late May and early June.
Regression Channel
Regression simply refers to the idea that price tends to revert back to its mean (or average) for a given timeframe. Regression channels can help us identify which trend is governing price action. These channels can give insight into trend reversals.
In my SPY analysis for the end of August, I posted the below regression channel.
I indicated that the June-August rally is no longer governing price movement and that price is regressing to the mean of the larger bear market channel (red line of the longer channel). Indeed, price reverted precisely to that line, as shown below.
What this means is that the larger bear market downtrend is still intact and is governing price action.
As many market participants know, our pathway to breaking this bear market will involve one or both of the following:
(1) CPI reports continue to surprise to the downside;
(2) The market begins to price in a Fed pivot (the Eurodollar Futures will provide insight after quad witching on Friday, September 16th).
Weekly Chart
The weekly chart shows that the bear market continues unabated. In the below weekly chart, I placed the EMA ribbon (yellow and orange lines) on the chart to show that it continues to resist price downward. This is the longest period of time that the S&P 500 has been resisted by the weekly EMA ribbon since the Great Recession.
In the below chart, I added the WaveTrend indicator. Do you notice the two teal/light blue shaded weekly candles?
These represent bearish crossovers. They suggest that further downside is likely.
Based on my research, when two weekly bearish crossovers occur on the WaveTrend indicator while price is consistently being resisted by the weekly EMA ribbon, further downside occurs before a bull run. Specifically, at minimum, price drops below the low of the week in which the second bearish crossover occurred before a sustained bull rally occurs. In other words, we can expect that SPY could drop below 388 before a sustained bull rally occurs. This is not a perfect indicator, but it's quite plausible.
On the flip side, there is a major positive sign in the weekly chart. Specifically, there is a possible formation of a reverse head and shoulders as illustrated below. As you know, a reverse head and shoulders pattern is bullish and the measured move up is generally the distance from the bottom to the neckline.
Monthly Chart
The monthly chart continues to undergo a bottoming process. Price is being supported by the EMA ribbon and the WaveTrend indicator is trying to build a significant bullish crossover (the third most significant bullish crossover on the monthly chart in SPY's history -- the SPY ETF was created in the 1990s). If the Fed pivots by October, then I would expect the close of November will give us a formal bullish crossover. Until then, there's room for caputilation-type candles to continue.
Stage of the Economic Cycle: Late Stage
(Stages are early, mid, late and recession)
Since the 10Y/2Y yield curve remains inverted we are in the late stage of an economic cycle.
Below is a chart of how each sector typically performs during this stage.
Credit: Fidelity Investments
We are most likely in Stage 6 of the economic cycle as shown below because stock, bonds, and commodities have all been declining to some degree in the past several months and because the yield curve is inverted. Once the yield curve inverts, economic contraction will subsequently occur. Although the general trend of all assets is down during Stage 6 there can still be rallies before contraction takes hold.
Credit: StockCharts.com
Yearly Chart
While the monthly chart suggests a bottoming formation that can lead to a rally in the 4th quarter of 2022 into the 1st quarter of 2023, the yearly chart is much more bearish.
Below is a regression channel that I created of the entire stock market history dating back to 1871. It helps us measure and compare every major market top and bottom in history.
Below is a closer view.
To put things in perspective, the June 2022 bottom was the same standard deviation from the mean as the Great Depression peak. The stock market is so overvalued from a historical perspective, that we had to undergo one of the worst first 6 months in stock market history just to get down to a level that is roughly as overvalued as the Great Depression peak.
The Shiller PE Ratio confirms this scope of overvaluation, as shown below.
The stock market is extremely overvalued because of monetary easing. Monetary easing is a central bank experiment that began in recent decades and was normalized in the years following the Great Recession. Today, the amount of assets on central banks' balance sheets due to monetary easing is unprecedented in the past 322 years for which reliable data exist. The monetary easing experiment has created tremendous reliance on its continuity. Under the surface cracks are beginning to appear, as indicated in the chart below, which shows the impending rise in cost to the U.S. federal government to finance its debt in the future.
Only time will tell how the experiment ends...
Please leave a comment if you find an error in my analysis above or if you'd otherwise like to share your thoughts. Thank you.
If you'd like to plot the weekly and daily expected moves for SPY on your chart, try the indicator "SPY Expected Move by VIX", which is calculated from the VIX rather than from the implied volatility of the options chain. The expected moves that I've posted above were manually calculated by me using SPY options chain data.
If you'd like to learn how to calculate the weekly expected move yourself, this video can help: www.youtube.com
