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Equity Downtrend: The Week Ahead – 26 Sep 2022

S&P has fallen to 2680. It’s down by 1.7%. How serious is the equity downtrend? The market is in a longer-term downtrend. Do we expect sharp rallies into the long-term trend or new lows for the year and a test of 3300-3500 on the S&P? Eric Barna talked us through this from the technical perspective.

Also, we looked at the Fed’s view of a better balance in the labor force. Sam Rines has written about that and he talked us through that as well.

Lastly, we have Tracy Shuchart who shared more of the energy issues in Europe and some issues around potentially moving manufacturing out of the region in a way that will hit the most.

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S&P500 has fallen to 2680, down 23% from the ATH in January. How serious is the equity downtrend? Eric Barna (@doublewidecap on Twitter) talked us through this from the technical perspective. He says the market is in a longer-term downtrend and to expect some sharp rallies as we head lower. We may see new lows for the year and a test of 3300-3500 on the S&P. 

Also, we discussed the Fed’s view of a “better balance” in the labor force with Sam Rines, including a detailed discussion of the vacancies to unemployment ratio (V/U). 

Lastly, Tracy Shuchart shared more on how energy issues in Europe are pushing manufacturing out of the region toward North America.

Key themes:
1. How serious is the equity downtrend?
2. Fed: “Better balance” in labor markets
3. Energy intensive mfg exiting Europe
4. The Week Ahead

This is the 35th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

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Time Stamp

0:00 Start
0:55 Key themes for this episode
1:46 How serious is the equity downtrend?
8:19 In what level are we done with the downtrend?
17:00 “Better balance” in labor markets
22:20 Is the Fed still in the demand destruction path?
26:15 Base effect to kick in because of inflation?
28:24 Energy intensive manufacturers exiting Europe
32:01 Where will the energy manufacturers in Europe go?
34:00 What’s for the week ahead?

Listen to the podcast version on Spotify here:


Tony Nash: Hi, and welcome to the week ahead. I’m Tony Nash. Today, our special guest is Eric Barna. You would know him as @DoubleWideCap on Twitter. We’ve also got Sam Rines and Tracy Shuchart today.

So we’re just joined by an amazing group this morning. As we wake up this morning, we see that the S&P has fallen kind of to 2680 or something like that. It’s down by 1.7%. It’s been that kind of weak. And we thought it would be really good to get Eric in to talk us through kind of how serious our situation is right now.

So in our key themes, the first one is how serious is the equity downtrend? And Eric’s going to walk us through that. We’re then going to look at the kind of the Fed’s view of a better balance in the labor force, and Sam has written a bit on that, and we’re going to talk through that. And then Tracy Is going to talk us through more of the energy issues in Europe and some issues around moving manufacturing, potentially moving manufacturing out of Europe in a way that will hit the most. So guys, thanks so much for joining us today.

Eric, welcome. I know you’re very Technical, and I’m hoping you can bring us into kind of quite a lot about what’s happening technically in markets right now. So really, how serious is the equity market downtrend How long will it last? What will that downtrend look like?

Eric Barna: Yeah, just to start it off. Coming into this year, if you follow me on Twitter for a while with really starting in the fall of 2021, maybe it takes me or it takes the market a little bit longer to realize it, but we were heading out of this just support. 2021 was ridiculous as far as the market goes, I Mean, it was just ridiculous. Pal started signaling this kind of over. We got to kind of adjust things back.

And so that’s when I started thinking, okay, this is going to be a different set of circumstances, but I was looking at just recent history of 2018, 2019 type of market through 22 and 23. And that’s great for people like me because it gives us good to find ranges.

It took a little bit longer than I Thought to really test down into the prepandemic Highs. The first real upshot from not the lows, not the lows at 2100, but the initial push over that precoded low and then the retracement. So there’s kind of a Level. And once you release this on Saturday, I’ll put the SDX levels I’m looking at es the futures, and I back adjust contracts. So everybody’s levels are going to look a little bit Different. But 31 65 to 35 44 is kind of the meat of that first push over the precoded highs, off the 2020 lows and then the retracement back in there.

And I’ve been waiting, waiting, waiting for that retracement to kind of finish off, but we put the highs in early this year and this will be the third leg down. So first leg down was January through March, and then we had our March high, then we sold off again to the June low. We came back up to the August high, and this is the third leg down. So I’m looking for me a dip down.

We’re getting close to that area, but it’s not quite there yet. And when I say by the dip, few people know that November 2020, I sold my house that I’ve had for 20 years. I banked the money and it’s been sitting, drawing ridiculously small interest waiting for this when I put the money in. And this retracement here would get us down into somewhere in the 3000 503,300 and that’ll give us a new low for the year. And we’re generally weak through the first week or so, through August or October.

And if it’s going to happen, you’re going to get a bounce there. But you got to remember, you can kind of look at 2018 and that October, December, a little bit of crash we had there. So it’s possible it goes slower, but I think there’ll be good bounces at, like I said, that level, that 35 44. And like I said Saturday I’ll put the SBX levels in the comment of that or the Prepan Democrat, which on my chart is 33 27, somewhere in that area, a good sustainable bounce.

But it’s just kind of like yesterday on a short term basis, people were all excited about trying to buy that 72, try to buy that dip, and there’s just nothing, there’s nothing to tell you that this is over. The downtrend is pick a timeframe and the downtrend is intact. So the easier trade is still to the downside.

You may get some tradable bounces in there, but for me it’s more be patient for that bounce and then sell it back down. And until that confirms right now my swing high is the August high. And there’s a great deal of volume in that area, the 4000, $104,200.

If buyers can break back over there, I’ll get bullish on the market again. But for now, of course, for me, being typically a day trader, I’ll trade each way, but in the market structure like that. So the same patterns on a monthly show, up on the weekly, show, up on the daily, show, up on the intraday.

But for me, my kind of bearing on my trade is the weekly. And the weekly tells me on bigger rift, you want a size and you want to short. If you are going to catch a technical bounce, you want to be small, you want to be out quick. So that’s just kind of how I use the weekly. But for now, the weekly is solid, trend down.

TN: Great. Sam, do you have a question?

Sam Rines: I’m just listening, just taking notes.

TN: It sounds to me that you think we’re going to bottom out, say around 3400, we’ll say in a general range, and then we’ll see things maybe up around 4100. And if they’re sustainably above 4100, then we’re kind of done with the downtrend. Is that fair?

EB: Yeah, yeah, that’s good. And we definitely don’t have enough time to go through all of it. But just keep following me on Twitter. I want to post a lot more on.

My two big key levels every trading day is where is the trailing week volume? What was the most traded week or price in the last five days and then the most traded price in the trailing month? The last 2022 days? Trailing trading week and trading month. And so right now the trailing week is 37 80. It was yesterday, 3890. So volume is coming down, volume is following price. And that’s what I’m always looking for is where is value for the last five days? And as price moves down, is that value moving down this price?

Because if you start losing that ability to put volume at the lows, you’re going to get that really good snapback route and you’re probably coming back up into the trailing week. And if you get over the trailing week, you look at your trailing month because that’s probably going to be the next target.

Right now. Trailing months, if you’re looking at most of September, last couple of weeks in August, is at mean the snapbacks that we can get out of this market are dramatic for me as a short term trader, but it doesn’t change my opinion that at some point I want to size back down. And so we’re just not over with it now. So heading into we’ll see what JPAL does here, I guess is speaking now, but that’ll be my line in the Sam for next week. Is that 37.80? I’ll be looking for shorts in that area to come back down on any kind of pullbacks because right now the market is dreadfully short.

If you look at breadth, if you look at the options market, we’re sitting at like a billion dollars in negative gamma. Right now. The VIX is high. 28. Short term VIX is 29. So there hasn’t been a reversion yet. And that’s kind of and if you were watching yesterday on Twitter in my feed when we started rallying yesterday, I was like, no, that’s not the dip to buy anything weight for a key level like previous low and short the heck at it because it’s coming back to 80 and that’s what it did.

But we’re inverted on the deck and we haven’t quite recovered from that. We haven’t reversed back to a normal looking VIX. Until that happens, any price lower the 2022 low right now is my key target. What would it take for us to get a normal looking VIX from your perspective? You’re going to have to start seeing as time happens, you start to cane those puts. You get people covering those puts and the dealers can get rid of the hedges that they have. And that puts it in a situation where I call it a dumbbed or mechanical bid, where it’s buy at any price. 

They don’t care about my levels. They don’t care where the trailing week and then the second part of that dumb money, the pension funds, the insurance companies who are trading more on risk and volatility, they have those volatility algos that run and again, those are dumb bits. So I look at realized volatility, where’s the three month realized volatility, where’s the one month volatility trailing volatility and who’s in control right now? It’s the short term volatility. It’s higher than the three months. And that gives you it’s great for me as a day trader because it’s going to give me good ranges introduced.

Once the three months realized volatility is higher than the one month, then the market kind of calms down. And so you start looking at big days in that trailing three months. And if those days fall off, so say back in June, we had some really good 3% down days and those days fall off. And if you’re not replacing them with big ball days to replace that volatility, the volatility will drop.

That will set those pension funds and those insurance funds to buy. And it’s just dumb bit. They don’t care if S&P is at 3700, 3800, 3900 they’re just playing volatility. Those are things that I look for for me to go, okay, you know what, I’m going to put a chunk of money long here. And when I say a chunk of money long is it’s usually a couple of weeks, a week. I don’t even know what the retirement fund is. Somebody else. Totally. And it’s that it’s not my game.

TN: Great. Tracy, do you have a question here? 

TS: No, I’m just listening to this.

TN: Eric, we’re not super technical. We don’t really talk technicals that much. I think we’ll start doing it a bit more. But this is great. So thanks for that and I think it’s all new for us and really glad to hear all of this. So thank you for this.

EB: Yeah, just follow for me, it’s follow the volume. What is volume doing? Where’s the most traded prices in area? If we’re coming back up, like I said, that 3780 is a big key level. Buyers take that over, you’re going to bring in that shortcoming. There’s going to be plenty of stops over yesterday’s high.

We’ll get you back probably into the mid 3800. And I followed on a weekly. If you look at the weekly now, the most traded price this week is below last week’s most traded price. What is the market telling you? It’s telling you it’s still in price discovery mode. We haven’t found balance. And I’m a dumb day trader.

TN: I think it’s great. Okay, perfect. Eric, thank you so much. Let’s move on to some Fed talk. I think that segues really nicely into what you’re talking about price discovery. And one thing that Sam has published a lot about Fed, he does regularly, but he pretty much masterfully nailed the Fed’s calls this week and the impact of the market.

Sam, do you want to talk us a little bit through that and a little bit about the labor markets, the better balance in labor markets that Chair Powell talked about in his discussion. We’ve got a chart up right now on what you call the switcher spiral. So job switchers and gains and vu. If you could explain I know we talked about it briefly before, but what is vu and how does that play into the better balance in labor markets?

SR: So much like Eric was saying, that the market hasn’t found a balance. Neither has the Fed. And I think that’s kind of critical to think about when we’re trying to process what the Fed might be doing, how they might be acting, et cetera. So vu is vacancies to the number of unemployed individuals, specifically job vacancies. And when, basically, economists and Fed officials were looking for a reason that they missed the embedding of inflation and the overshoot of inflation, they found that there was a pretty tight fit between an elevated number of job openings and too few unemployed individuals. And the reason that that is somewhat disconcerting for the Fed. Is pretty straightforward right now. 

If you switch jobs, you get paid a lot more than your old job, right? Those are really where the wage gains are. You’re north of 8% as a job switcher and there’s lots of job openings. So the potential for a wage price spiral there is significant. It’s not necessarily a theoretical at this point. It’s there that’s the disconcerting part. If you have a wage spiral, then you have a price spiral and then it gets really difficult to back away from it over time.

Can I just stop you right there and say is this view concerned the wage price spiral? Is that particularly in the US. Or is that global? That’s us. Well, I wouldn’t say it’s us only it’s a particular phenomenon in the US. And I think that’s really the only central bank that I would apply that framework to.

But Powell made it very clear not only did he state that job openings were too high, too unemployed, I mean, he called out view directly, but he mentioned better balance a number of times. Right? This is a Fed that is solely concentrated on inflation.

It does not care how much pain there is in the labor market until you begin to have a decline in the Vacancies to unemployed and until they see realized, not projected inflation come down. Do they factor in labor participation rate at all? I mean, it’s labor participation rate is lagging, right? So that would make sense that there are more job openings than there are job seekers. Does that factor into the equation at all? No, because the prime age is pretty much back to where it was precovid. It’s a bunch of old people and a bunch of young people that aren’t in the labor force.

And the Fed is going to completely ignore that. COVID did cause a number of older individuals to get out of the labor market. It was that simple, right? When you figure out that you don’t have much time left and you got some money, you retire. There was a bit of a mental shift there. So I wouldn’t say that that is a significant factor. And if you back out to a normal participation rate, you’re still sitting at about 1.6 to 1.7 jobs for unemployed job openings per unemployed.

So it doesn’t take the number down to the .9% to one ratio that the Fed would actually like to see. If you look at the numbers, you’re looking at a 6% plus percent unemployment rate to get the vacancy ratio back down. And so the Fed is willing to take some pain in the labor market. And I don’t think that people are really anticipating it. And I don’t think people are prepared for a Fed that really doesn’t care about your labor market and only cares about its inflation.

TN: They’ve already said they don’t care about your house, so now we’re learning they don’t care about your job.

TS: They don’t. Care about your job either. He basically said that, right?

SR: He said, yeah. His press conference, he stated it directly. And I made a joke that their forecasts were living in a unicorn metaverse about unemployment and inflation.

SR: I stick by that because you’re not going to have a four and a half percent unemployment rate. You’re going to have closer to five and a half to six and a half percent unemployment rate before you begin to see inflation break and have it break in a way that convinces the Fed it’s not transitory.

The Fed does not want to have a transitory breaking inflation. So I’ll bring back transitory and annoy everyone.

TN: If you dial it back in our discussions about six or nine months, we started talking about demand destruction. They’re still on this demand destruction path. Right. Because it’s still really kind of the impacts of supply side inflation, not necessarily demand driven. Right. Or is the demand driven really only in the US. Because we see so much supply side inflation in the rest of the world? 

SR: Yeah, it’s two sided in the US. Right. You still have significant demands in the US. Even with inflation running hot, and you have supply side constraints. So it’s a two sided problem in the US. And the Fed knows it can affect the supply side to a certain degree, not necessarily much.

What it can really smack is demand. And so until that demand begins to come down, the Fed is not going to have accomplished its mission. It is going to be a fun time.

TN: So we hear from Eric that markets are discovering prices. We hear that the Fed is discovering its level. So on some level, nobody really knows what the destination is here. They think they do, but they don’t. Right. So the Fed seeing 4.5 terminal rate or whatever, is just like Eric saying, three thousand, three hundred S and P, right?

EB: I don’t think everybody was talking about the palate of it as far as the market is concerned. And it’s just my personal feeling until you get to the prepandemic high, powell doesn’t care about the market in July. At his press conference in July, I was like, here we go, this is going to be it. I listened to it and I was like, damn, he’s hawkers. And the market rallies. And then I started hearing, oh, they’re going to pivot, they’re going to pivot. And then dad came out the last week in August, or, you know, that Friday before the last week and said, son, ain’t done. 

If you didn’t take the clue from July, you certainly should have taken it from August. And then even in his press conference in September, he had the perfect scenario in the market to rally this thing, hundreds of points. And all he had to do is say, hey, it’s working. We’re on our path. Everything’s cool. Month on month.

Things are slowing down, right? Yeah, everything is doing exactly what we thought it was. And he came out and he did it again. We’re not done yet. We’re coming after your house and we’ve got to get some people out of the workforce. I don’t know what else you need.

TN: Well, I said earlier this week, everybody is, whether they’ll tell you or not, everybody is secretly hoping the Fed will save their portfolio. Everybody’s secretly hoping for that.

EB: I haven’t done the math over, say, from 17 to 22 or whatever it is, but my guess is before this is all over, that average gain you’ve had in your four hundred and one K over the last 20 years or so, you’re coming back to it.

TN: So Sam, just a question that’s been in the back of my mind before we wrap this up on your side is

we really started to see inflation accelerate last probably November of 21, something like that, right? October, November, somewhere in there, is it possible we see base effects kick in at some point around inflation? And does the fed care?

SR: There’s a possibility we begin to see base effects on headline. With energy prices coming down, food costs beginning to moderate somewhat. But remember, shelter wasn’t running last year at all, right. And shelter is a much larger component of CPI. It’s a smaller component of PC, but it’s a much larger portion of CPI. So in a way you’re likely to see a headline begin to headline, CPI, everything begin to have those base effects take hold. But on core you’re in trouble if you’re betting on base effects.

That’s the dynamic there. And the other thing is it’s been a much broader base this year on the month over month accelerations that you’ve seen. So that’s something to pay attention to. The base effects are not here to save you. 

TN: Okay, good. I just wanted to get that out there because it does come up, but it is in the back of my mind, I’ve heard people say it and I just wanted to make sure that’s on the table. Okay, thanks for that.

EB: I’ll give you my N equal one sample. So we moved down, we sold the house, we moved down here to Houston for a couple of years and didn’t want to buy. I should have because I would have made a lot of money. But. November is my lease renewal. It’s my power to choose renewal and everything. And I’m looking at 15% to 20% on housing and electric this November. It’s still ugly. It’s still ugly.

TN: Okay, great. Let’s move into speaking of energy prices, Tracy, you put a Tweet out earlier this week talking about the high natural gas prices pushing European manufacturers to shift to the US.

So really interesting to me, I think we’ve seen kind of some China manufacturing start to shift to the US. Interesting to hear about european manufacturing shifting to the US. Can you tell us a little bit more about that? What’s driving it, and what sectors do you expect? 

TS: All right, so Disney kind of has to go back to this fall in Europe. When prices started spiking, we started seeing a lot of the smelting industry come offline, and that had because of high natural gas prices, everybody forget all of this started happening pre Ukraine invasion. So this all really started I mean, it was years in the making, but this really did start happening really in the fall where we really started to see these effects. And of course, with high national gas prices, they have secondary and tertiary effects, such as if you can’t produce fertilizer because that prices are too high, then meat packers are in trouble that buy the CO2 from the fertilizer companies.

So we started kind of seeing a meltdown of these supply chains because of high natural gas prices and then moving forward, if we look, we have almost 40% of fertilizer production is offline in Europe right now. We have iron, copper, nickel, aluminum, zinc smelters, and stainless steel mills all offline too. Over 50% of their metal capacity is down right now. And these companies, if you’re a smelter, they’re so energy intensive, you can’t just restart those up again.

It takes months to bring those back online. So what’s happening is a lot of those companies already have or are considering moving to the US. They either have plants in the US. Or are planning to move to the US. Just because our energy prices are a lot lower. And the cost after shuttering production. The. Cost to bring that up back online is very expensive. Of course, all of those metal companies, they’re going to affect manufacturing. So, I mean, you’re up some big trouble right now. The energy prices are too high.

All their industries is a huge supply chain, right. You have to know it just goes all the way down the supply chain so that supply chains are going to be screwed up for a very long time, and they’re not even better after covet. The other issue is with Europe, they’re going to have a problem with this. They’re still focusing on there’s still tripled down on the screen energy. So what it’s also going to force them to do is to rely on China even more because China provides a lot of the materials necessary to build out, say, solar panels and windmills and things of that nature.

TN: Okay, so where primarily is the industry coming from? Europe? Would it be northern Europe where a lot of these smelters and fertilizer plants and stuff are about it? Where is that general?

TS: A lot of those are well, really, it’s across eight countries. So you have France, Romania, Slovakia, Slovenia, Germany, Netherlands, Montenegro, and Spain.

TN: Okay, and so where would they go? Do they need places that are close to transportation, cheap energy, these sorts of things. Are those the priorities for them?

TS: It really depends on it depends on where they are. Right. I mean, you could essentially build a plant like times like the oil industry does. They find wells. Right. Then they build the town around it. That essentially can happen too. We haven’t really seen any solid moves yet. It’s more of a kind of a speculatory thing of this nature right now. So we kind of have to keep an eye on that to see if indeed they do move to the US. Because I would also think that they’re probably looking at Mexico, where labor is a lot cheaper in South America, labor’s.

TN: Cheaper in Mexico, and power prices are deregulated in Mexico, too, and that happened, what, seven or eight years ago? So they are competitive on the power price site as well. 

TS: So I would say let’s keep an eye on that. Honestly, there are no solid moves at this point. 

TN: Any chance they’ll move to Asia, or are they already too dependent on Asia?

TS: I think after Koba kind of scoops them from Asia in general, even though, ironically, they’re going to have to rely on China a lot more active. 

TN: Okay, interesting. Definitely something to keep an eye on. Okay. Thank you, Tracy. So, guys, let’s just go around real quick. And what are you looking for for the week ahead? Eric, let’s start with you. What kind of levels are you looking for for next week?

EB: Well, we’ll see how we close this week.  I’m still hoping we get under $3,700. We test that 2022 low, really get a good flush in the market. And so I’m kind of looking at that 3650 if we can close it at the lowest, and we’ll see what we get out of if we get some short covering coming into the weekend.

TN: I don’t know why you would, but if you do, where do we get to?

EB: But as long as we’re under that 37.80, I’m looking for lower prices.

TN: Okay, great. Tracy, what are you looking for on the energy side? 

TS: I mean, I think it’s mostly the same. I think everybody’s in that we have an OPEC meeting coming up right at the end of September, beginning of October. So I think everybody’s going to be focused on that. There’s whispers of larger cuts, like, not the token one hundred K that there was last time. So I’m sure that everybody is going to be focused. I’m sure there’s going to be a million rumors this week.

Sure, up and down, OPEC, job voting everywhere. But I think that most people involved in the energy industry are going to be kind of looking towards OPEC plus.

TN: And is there a lot of fear in OPEC that crew is going to go into the 70s or 60s, or are they seeing things continue to rise? 

TS: It’s really a strong dollar story, but is that really the main fear. They would like obviously they would like higher prices. They would like closer to $100. Fundamentally, this market is still tight. Okay. So I think that’s their main concern. If they need to spook it, I mean, they’re not making product.

TN: Real quick, what are you looking for that we get? 

SR: I’m just watching the dollar and what all the Fed speak comes out at, basically. Are they doubling down on last week, or are they trying to walk it back and what that does with the dollar and whether or not we can get the dollar to be looking a little peeky here.

TN: Thank you so much.