S&P down nearly 1% at one stage (Nasdaq -1.95% intraday), indices have recovered substantially off their lows. While the initial swoon was led by talk of “an AI slowdown (ref: Anthropic CEO’s warning, echoed by Open AI and Space X CEOs), the intraday recovery would suggest that markets have rightly, shrugged off this “slowdown” narrative - the “slowdown” is more in the form of guardrails around development rather than a change in the demand equation, which remains robust.
While we previously classified equities as being complacent to a rate hike probability (now 93%), they now appear to have priced in a 25bp increase on the 16th, and moved on. What will matter more is the guidance and commentary, rather than the hike itself.
Cutting Through The Noise
Sometimes it pays to just zoom out and look at the big picture. Fig 1 below plots the S&P on a “noiseless” Renko chart (for reference, Renko charts only plot if there is a specified move - in the chart below 2%). Not only is the uptrend since pandemic lows intact, the index is less than 3% below its all time highs.
What will it take to break the trend? We previously identified 7400-7600 as the “must defend” zone - these remain critical levels to watch (see Fig 2).
For now, the trend remains in force and it’s not broken until it is.
Risks & Opportunities
Inflation remains the top risk - not from oil prices directly, but from 2nd order effects, already visible. Resulting, continuing FED hawkishness, is a risk that hasn’t gone away.
The opportunity is a mirror flip - and price action above 7800 opens up real opportunities for long positions.
Long Strangles, either in isolation or to protect broad based equity portfolios remain a preferred way to position.
Fig 1 - SPX Renko (2%/ Log Scale)
SPX - Daily Heikin Ashi
