CVNA - That Predicted Interest-Rate-Induced Stock Sell-Off Last Week Didn't Happen... It's Coming

2023-06-12 00:22:01 ET

Summary

• I thought I would be issuing a Mea Culpa for last week's article until one of our Group Mind members surfaced some startling news set for this week.
• Last week, the Treasury sold about $100B finishing up on Wednesday. It was a sharp down day but not the sustained selling I expected. That's because I expected more debt.
• I will reset my hedges tomorrow morning soon after the open. I doubt rates will start to move until the auction is complete. So there will be time.
• I am still quite bullish, I just expect a small retreat from the current level, before we move significantly to 4,350 and up.

Shouldn't I be apologizing and looking for excuses? And why do I keep trying to call the market anyway?

Let me answer the last question first because I think everyone who is active in stocks should be modeling where the market is going and what are the factors. Most people hang on too long to what they consume from the financial media. Or what is likely be worse is their own baseline of experience especially from last year (which was generally rough). So if you don't spend time trying to project where the market is going and why you are basically going to trade and be at the whim of whatever happens to you. Or you can be a perma-bull and walk right into a major sell-off and wonder why. If you spend some time thinking about what is driving the market this week or even this month and simply write down why you think the market going to act a certain way. Then when condition "A" and "B" doesn't happen you can quickly change course and not be a sitting duck. Last week, when I realized that the Treasury was going to auction barely $100 and not the +200B I was led to believe, I immediately closed out all my general hedges (but kept my stock-specific ones), and redistributed the cash to various long positions mostly in the microcap biotechs that are doing so well for us. Why did I think there should have been more auctions last week? Well here is the NY Times article stating the Treasury Dept. telling them that they need to sell $425B before the end of this month. Naturally, I assumed that this past week would be $212B and that next week would be the other $213B. It was in fact barely half that. Not to be outdone the Wall Street Journal on the same day predicted a 6% level in interest rates for US debt.

Yes, these articles were published this week, but there were a number of articles the prior week with similar predictions. In fact, it was Bloomberg over the prior weekend that predicted that the treasury would sell nearly $600B this month, and already had a quick $100B+ for the beginning of the week. That article on June 4 set off my whole premise for my article predicting the sell-off. Missed my article last week? Sell-Off Expected: Treasury Unleashes $100B+ in Debt This Week .

I have no need to apologize.

Ok, so there was supposed to be a sell-off big last week because of bond auctions. It turned out, a much smaller amount of debt hit the market. Yet it ended up having an effect albeit shorter because Wednesday had a huge jump in interest rates from 3.6950% to 3.8010%, it also was the biggest drop in weeks from a high of 4299 to 4263.96. At the time the lazy characterization of this selloff last week was due to the coming FOMC meeting. The truth is, at least to my mind that the rapid rise in interest rates is what pressured the S&P 500. Still, it wasn't the sustained selling I was expecting to be perfectly honest. We are contending with an important milestone the 4300 level. So it wouldn't take a lot of pressure to lose quite a bit an altitude. That's because a lot of late money is coming in because of FOMO - Fear of Missing Out, yes this is a thing, especially if you are a hedge fund and net short for most of the year. Having gotten in at 4250 or so, these late-comers are not going to let their winning position turn into a loss. Moreover, most of this money is from skeptics who would immediately pull out. This weekend I was all set to issue my usual admission of defeat until one of the Group Mind Members shared this page from the treasury department:

So ignore the CMB offerings I believe those are the Fed's QT sales, the rest adds up to $200B! Bingo! Some of you might think I should include the CMB but I don't believe it will have the same effect on interest rates as an actual T-Bill or T-Bond. Also, I have to assume this is what they have been selling already every month. An extra $200B on Monday and Tuesday could set the market back enough for some bargain shopping. Though if it does take the market down, the financial media might finally have to point out what spiked the interest rate and cause a bit more selling on Friday if they are going for an additional $200B to fill the coffers. That means more bargain hunting

Experience tells us that when an index is contending with a big line to cross, it might retreat first before breaking above.

Why am I so blithe about this being a buying opportunity? We are having some real economic data to deal with next week. There are three data items independent of the auction CPI, FOMC, and quadruple witch. CPI is about consuming, and more "things" have come down in price like eggs. I got a carton for about $2. With oil down so low the cost of transportation has come down and logistics are pretty much back to normal except the west coast ports are striking. I digress, If the CPI does show inflation then though the interest rate spikes because of the auction, the CPI action might camouflage the auction as the impetus for the selling. The talking heads will opine that this might give the FOMC a reason to raise rates. This is hogwash, Powell realizes that there's an extra $200B hitting the market, and raising rates on the short end will only make prices of longer duration that much more expensive Besides raising a quarter point during this auction might just seize up the credit market too many things going on at once. As for the Quadruple Witch, if there is trepidation about the following week's auction the quat-witch could magnify the selling. I have to give an additional hearty thanks to a different Group Mind member that posed these objections. At the time I waived them all off, as not being relevant, and they aren't. However, they might appear to be very relevant even as Powell doesn't raise rates, or the CPI might have inflation a bit higher for whatever reason. The robot traders are keying off of one thing and that is the delta of interest rates, if they climb quickly they will sell off that much more steeply. Just for fun, I'm going to look at the SPY chart and see if what I am saying makes sense chart-wise. Here is a 1-Year Chart of the S&P500 Index ETF ( SPY )

We see a humungous pennant that has been forming since October. So I don't need to remind you but I will, we believe that patterns repeat. Here we see repeated retreats (note the arrows) from pushing to interim highs. In this last instance, I am surmising that after quite a bit of time moving sideways the S&P 500 makes another higher move, which will once again be followed by an exploration of the lower bound. In this case, I am guessing 4150 from the diagonal line marking out the higher lows over time. I guess if you want to know when you should start buying perhaps on Friday when the S&P500 gets near to 4150. Looking out a bit longer maybe to the end of June we'll see 4350 again. Meanwhile, we should have some nice gains to show for our efforts this week.

I predicted that we can break through to 4350 on April 17th

I didn't predict the day it would happen. I did a simple chartist exercise called a measured move and so far it seems to be working If you are curious about how a measured move works this goes back to my April 17 article so you can check for yourself. I guess what I am saying is that I believe strongly we are due for a bit of a consolidation, check back, or retreat to the lower bound of this very powerful uptrend. It's just a continuation of a well-defined pattern.

My trades:

I don't often say what I am going to do, I usually list the trades I've already done. However, this time I will say that late last week I closed my Puts against ProShares UltraPro QQQ (TQQQ), Direxion Daily S&P 500 Bull 3x Shares (SPXL), Direxion Daily Semiconductor 3x Bull Shares ( SOXL ) and ProShares Short VIX Short-Term Futures ETF (SVXY). I will re-execute them in anticipation of the auction. The rates might start creeping up late morning so I will try and get most of it done before 10 am. I am going to sell down my trading portfolio in anticipation of the selling and hopefully buy back in at a lower price. I did mention that I had several individual names short (via) Puts C3.ai (AI), Dish Network (DISH), Carvana (CVNA); I closed 3M ( MMM ) and Chemours (CC). I would get short MMM in a heartbreak if it got above 103.

Good luck everyone!

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