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One More High
BraVoCycles Newsletter
March 27, 2024
Howdy Market Timers,
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Market Summary
One more high is most likely. Major indexes have had a clear 3-wave correction since the post-FED Day. Recall that I mentioned a week ago that Fed Day gains are typically reversed.
Likely, all major indexes, SPX, NDX, DJI, and RUT will make another high. But, at the moment, further higher price targets are not plausible, at least without another pullback.
Repeat from last week:
The short-term analysis is becoming more in line with the intermediate—and long-term analyses, which suggests a reversal is due. The lightning could strike unexpectedly around the tops.
My longer-term expectations do not change. I will repeat from the weekend report: “Despite the market's resiliency and FOMO, I expect a correction in the next 2-4 months, initially.
Market data as of close on 27 Mar. 2024.
Chart Patterns - Flags
Flags are sideways corrective patterns within up- or downtrends. They indicate a continuation of the trend but are very exhausting for traders. They feel just like someone wants traders to abandon their swing positions. However, most traders readily recognize flags and eventually prepare for the move in the direction of the prevailing trend, i.e. trend continuation.
Pennants are also known as triangles, which is the term that I use more. Triangles occur before the terminal move in the trend. We will talk more about triangles when we discuss Elliott Wave patterns.
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Technical Analysis
The chart below illustrates the underperformance of an average stock in S&P 500 relative to large capitalization stocks most of which are techs. Similar situation as in the 1970s and early 2000s bear markets.
This is similar message to the one provided by the charts showing the ration of NDX/QQQ to DJI or IWM that I published before.
Liquidity
The FED has pulled the plug on the Reverse Repurchase Agreements, which are important for short-term market liquidity. But we do not see that in the stock market, yet.
Below is how Google AI (Gemini) explained the importance of Reverse Repos (it is a long explanation but useful to read):
The Federal Reserve's (FED) reverse repurchase agreements (repos) are important for market liquidity. Here's how they help:
· Injecting Short-Term Liquidity: When the Fed conducts reverse repos, it essentially borrows money from banks and other institutions by selling them Treasury securities with an agreement to repurchase them at a later date. This injects short-term cash reserves into the financial system, making it easier for banks to lend to businesses and individuals.
· Encouraging Lending Activity: With more cash reserves on hand, banks are more likely to lend money. This increased lending activity helps stimulate economic growth by providing businesses with the capital they need to invest and expand.
· Keeping Short-Term Interest Rates Low: By managing the supply of reserves in the banking system, the Fed can influence short-term interest rates. Reverse repos can help to keep these rates low, which encourages borrowing and investment, further supporting economic growth.
· Providing a Safe Investment Option for Excess Reserves: For banks and institutions with excess reserves, reverse repos offer a safe and secure way to earn a small return on their idle cash.
Here's an analogy to understand how reverse repos work:
Imagine the Fed is like a large library (the financial system) with a limited number of books (cash reserves). When banks and institutions need more cash reserves (books) to lend out, the Fed can conduct reverse repos. This is similar to the library lending out some of its own books (Treasury securities) to patrons (banks) with the agreement to get them back later. This temporary increase in the number of available books (cash reserves) helps ensure everyone who needs a book (cash) can access one.
Overall, FED's reverse repurchase agreements are a crucial tool for managing market liquidity and promoting a healthy financial system.
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Sentiment
Insider selling in Tech is high.
Ethereum
A strong bounce but in a corrective 3 waves, so far. I expect ETH to hit the red box, the 40D cycle targets. We will re-evaluate if/when it gets there.
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