The Market: Mid-Correction

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The Market

Discussion

Friday’s market update suggested that a retest of SPY $510-520 was likely by today. Instead, SPY is up over 1% to $546 as I type at 12:06pm EST. I am no longer on X so I don’t know exactly what sentiment is like today, but my strong hunch is that BTFD bulls abound, SPY is on its way to new ATHs in vertical fashion, and chartists are claiming loudly: “I told you so”. I exited X so that I could better conduct my own analysis with blinders on to insulate myself from the distraction that minute-to-minute information is - that insulation led me to conclude that a hawkish Waller into a window of weakness that is open until September 18 FOMC would catalyze a retest of SPY $510-520 by today in a classic “markets don’t bottom on a Friday” move lower into today. I was wrong. Now the question is: Was that it for the correction and now we’re off to new ATHs? As stated in the title of this note, SPY is only mid-correction based on my read of the cross-asset market evidence. As such, today’s seemingly bullish move higher only serves to lay an even stronger foundation for a move down to SPY $510-520.

I’ve been tracking the 2018 post-Volmageddon retest analog for a while now, and I continue to believe it is highly pertinent. The analog puts this bounce lasting into tomorrow, followed by a gap down to new lows and then 1-2 weeks of choppy bottoming action. This lines up well with CPI Wednesday perhaps putting a fork in the 27% probability the Fed cuts by 50 on September 18…which would in turn be self-defeating, as another leg down in markets would likely catalyze a 50 bps cut.

Exhibits

Structure of the VOL market looks nearly identical to the mid-correction SPY bounce in 2018 before the final leg down into the retest low.