🗞 Commitment Issues

WHILE YOU POUR THE JOE… ☕️
Fed Contradictions

As you may already know, the Federal Reserve (the Fed) has now cut interest rates in the past few weeks, but there’s a divergence in their words and actions.

Typically, with interest rate cuts come balance sheet expansions and more money being injected into the system. However, today’s rate cuts are different for some reason. 👀 

I do have a few roadblocks in mind keeping the Fed from expanding its balance sheet:

• NFP jobs report just came in at double the expected number

• Price gauges for both PMI indexes came in hotter than expected

• The yield curve is back into near inversion

So, CPI this week and other data coming out later in the month will be key to watching for the Fed’s next move in their balance sheet and asset repurchases.

Cuts are one thing, liquidity is another, and they both need to be present; otherwise, we have a crash on our hands.

Speaking of a crash, let’s get on with today’s email 📧…

ROTATION FIXATION
Overcommitting To a Bad Relationship

The commitment of traders report (CoT) measures the amount of inventory held in the futures market, including commodities, indexes, and bonds.

Keeping track of where participants are keeping their inventory trends is important since it can guide you to where the big bets are being made.

Before I break down the inventory levels for the S&P 500 futures and what they mean, here are two things you should understand for this report:

1. There are commercial inventory holders (these are the banks and other issuers like local dealers)

2. Then there are non-commercials (you and me, but with millions to trade with)

Knowing where the dealers and non-dealers are positioning themselves can be a helpful gauge as to where the market might be expected to go next. 🎯 

Here it is:

The green line and red line, respectively, show non-commercial and commercial inventory levels for the S&P 500.

Notice that the non-commercial side (green) is as long as it has been since pre-COVID, which is also where it was before the 2008 financial crisis.

This means that the market is quickly running out of buyers, and any spike in volatility could send everyone running for the door simultaneously.

On the other hand, the commercials (red line) are as short as they were for the same two historical periods. This means that the institutional side of the market is comfortable being net short and accommodating all the late buyers into the S&P 500.

Let’s zoom in closer to the S&P 500 through the $SPY ETF:

Let me break this down..

On the left, we have the bar chart for the $SPY, with the light blue bars representing a volume profile that shows where the most (and least) interest in transacting is found.

On the right, we have a volume profile with light blue bars and a market profile with white and turquoise dots representing the time spent at each price level.

Notice that we are at the upper range of the year’s distribution, which means (at least for now) that there is little to no interest in transacting at these levels 📉. This also coincides with the vertical volume bars trending down below the bar chart.

Just like any other product on auction, these higher prices are sticking on for less time and for less volume, and that’s all we need to know on a technical level to place our bias on the bearish end.

Looking at another Intermarket indicator of rising risk in the equity markets, we have equity risk spreads vs. the $SPY ETF itself.

The white bar chart shows the difference between the treasury ten-year prices and the corporate bond prices. The higher the range, the lower the perceived risk for stocks, and vice versa.

It has been lowering recently, meaning there is a higher perceived risk to owning stocks, yet the S&P 500 has been flirting with all-time highs.

This is not a good mix, and we expect a swift and sudden correction to occur soon. 🕰️ 

TRADE OF THE WEEK REVIEW
C’mon, Do Something

We are going to review our existing trade in Boeing stock, one we pitched a couple of weeks ago on some seriously attractive levels.

However, the stock hasn’t done much since, and in today’s fast-paced short-memory market, that’s a bad thing.

But for the pros, that’s actually perfect, here’s why:

Going back to the same format, we have the Boeing bar chart on the left and its volume/market profile on the right.

What we are seeing now is that the stock got to a new yearly low but spent so little time there that not a lot of volume was able to transact there.

This is good; it means people perceive Boeing’s value to be higher.

How much higher?

Look at the thick red bar, where the most volume for the year took place (volume control). Typically, this acts as a magnet as stuck institutional orders must reach a historically liquid level to get inventory moving again.

So, that’s of course our immediate target, but with enough momentum we could even break a bit higher to where volume cuts off again, which would be the $190 📈 target we gave out when the pitch was published.

Look at all these low-skilled workers demanding higher pay for something that a machine can do much better. We should really learn from China.

Anyway, strikes at Boeing have been ongoing, with a recent settlement reaching for nearly 30% wage increases for its workers. While that’s a big hit to the company’s profitability, it needs these workers to come back to fulfill its $518 billion worth of backlog.

Soon, though, Boeing should start making new investments in automation, but we won’t be around for that to happen as this is a 30-60-day trade at most.

What we do want to see, especially as our catalyst for the next quarter, is fulfillment of deliveries, especially with Chinese demand coming back online 🔥.

This could significantly boost EPS and lead the stock to a breakout into the levels we’ve provided.

In more recent news, Boeing delivered up to 33 planes this month, which is lower than what the market expected but still impressive, considering the whole month saw machinist strikes pretty much stopping all production.

This gives us better hopes of seeing a turnaround, especially when and if these strikes get resolved, to allow for backlog turnover in the coming months.

That should take care of the Boeing's bottom and get us to our price targets. 🫰 

NOW GO AND MAKE IT HAPPEN
Welcome To the Future

Whether you are a long-term investor, a swing trader, or a scalper, you are always looking to buy or sell a stock at the best possible price.

While timing may not always be perfect, watching the market's order flow and volume structures is as close as one can get to perfect timing.

Today's book recommendation 📖 is a cheap and quick read to get your feet dipped into this new way of looking at financial markets, I hope you branch out and buy many more books on the subject as I did.

To your success,

G. 🥃