October 11th, 2022

Those Looking For A Relief Rally Need To Focus On This Indicator

The bond markets were closed yesterday, and that caused equities to bounce all over the place. Any attempt at a rally in the afternoon was not able to follow through. The market will be on hold until the next round of CPI numbers come out as well as the next round of FOMC meeting minutes, where we get to see what the Fed is thinking of doing next. Of course, we should already know this. Their plan is to aggressively raise rates and I don’t think we’re going to see great news coming from the next round of CPI numbers to deter that plan.

The SPY made an attempt to retest the low from a few days ago, but there’s still talk about a relief rally coming rather than heading lower. We had one last week and gave up 80% of the gains already, so the real question will be if another relief rally is coming or if that was it. That said, volume was so low today that it’s hard to determine what will happen next, but we should get a better idea later this week.

Volatility is on the rise and the VIX is inching closer to the levels in early May and mid-June when the market hit new lows. Here’s a chart with the VIX on top and the SPY below, showing the spike in the VIX with the lows in the SPY. Remember, the VIX and SPY tend to move opposite each other.

In both charts, the orange line is the 20-period simple moving average, and you can see that both charts are following those quite closely. That is the one indicator I would use to determine your resistance levels for any relief rally.

I’ve mentioned seasonality before and how starting in the second week of October we have historically had a positive next 14 weeks.  

Another stock that has historically been positive during the same time period is Petroleo Brasileiro (PBR). Over the next 14-week period that started yesterday, PBR has risen by an average of 7.88%, using the last 22 years of data. During the next 14-week period, the stock has risen 15 out of 22 years, giving it a historical accuracy of 68.18%.

A break above the trend line connecting the recent tops could signify another move higher. PBR is in the Energy sector, which has been in a bit of slumber due to a rising recession risk and some positive progress in the Russia-Ukraine war. However, I think Energy will be back on the rise soon as some economic data is indicating that a deep recession can be avoided and the Russian-Ukraine war will continue as Putin won’t accept defeat and go quietly into the night. Both of these are positive signs for Energy.

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