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Quantitative Tightening is Here, and the Effect Will Be Devastating

Lee Adler

At its May meeting, the Fed announced the beginning of its program to shrink its balance sheet. That program is colloquially known as QT or Quantitative Tightening. It will begin with reductions of $30 billion per month in its Treasury holdings, and $17.5 billion per month in its MBS holdings. That will last through August. Then in September it plans to go to $60 billion per month in reductions of Treasuries, and $35 billion in reductions of MBS.

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For comparison, under Janet Yellen’s attempt to shrink the Fed’s balance sheet in 2017-2019, the peak monthly reduction was $30 billion per month in Treasuries, and $20 billion in MBS.
That resulted in plenty of havoc in the markets, and Powell was forced to abandon the process in 2019.

This new attempt is a big deal, because through this program, the Fed will actually pull money out of the banking system at a time when the system is already under duress. Inflation is raging, and bond prices have been plummeting, and yields surging, for 22 months. Banks have hidden losses on their books from that. Those losses will start to be recognized as the Fed puts additional pressure on the system.

Stocks have also been cratering. Financial markets are likely to become even weaker than we have already seen as the Fed embarks on this additional level of tightening. As stock and leveraged bond portfolios decline in value, there will be margin calls. And that will exacerbate the situation.

Not only will the Fed now not be the biggest buyer of Treasuries in the market, it will force the US Treasury to issue even more supply. By demanding that the Treasury repay a portion of the money that the Fed lent it via its purchases of Treasury securities, the Fed will force the Treasury to sell more debt to the public to raise the cash to repay the Fed. That cash will then be extinguished. It will leave the banking system and be gone. Poof. Just like that.

At the same time the Treasury will continue to need cash to fund its regular outlays.

Recently, the TBAC (Treasury Borrowing Advisory Committee) has raised its forecast for tax revenue and lowered its estimate of Treasury supply. As usual with economic forecasts, they are backward looking and ignore current, actual conditions. The booming tax revenue trend that we saw beginning over a year ago is already showing signs of weakness in the economic component that is hidden by the inflation component. If revenues are not up to expectations, Treasury supply will increase beyond the modest levels that the TBAC expects. But even those levels are sufficient to pressure the markets.

The money to repay the Treasury’s debt to the Fed will have to come from somewhere, and that somewhere will be investors, banks, and dealers. They’ll need to liquidate other securities, and other assets of all kinds.

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This report will show you in charts and clear discussion, how we got here, where we are, exactly where the markets are headed, and what you can do about it to protect your assets, and even grow your capital in the dangerous, even deadly, months ahead. Non-subscribers, click here for access.

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A Great Week for Swing Trade Screen Picks

Lee Adler

Last week, the list had an average gain of 11.2% with an average holding period of 2½ weeks. It was a very good week indeed. We have to be careful though. We’ve seen previously that when the list has double digit gains, the stocks on the list have reversed sharply. So I continue to tighten stops to close out the pick at an opportune time and protect profits.

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The percentage gain is based on 100% cash positions, with no margin and no use of leverage or options.

Last week, 4 picks hit those stops. 3 were shorts put on in early May. The gains on those were 1.1%, 23.3%, and 28.1%, with an average holding period of 3 day. One pick was a natural gas play that whipsawed and still looks good, so I put it back on the list.

The final list of double screened output for last week resulted in 24 charts with multiple buy signals, and 7 with more than one sell signal.

The screen results come from a universe of approximately1200-1500 stocks daily that meet the criteria of trading above $6.00, and with average volume greater than a million shares per day.  I start the weekly process by screening for daily buys and sells from the previous Friday through Thursday. I then rescreen that output, for additional signals in the progression on Thursday and Friday.

I reviewed the charts from the final output visually. I didn’t see any worthy of adding to the list, on either the buy side, or the short-sale side. We’re in an in-between stage where nothing looks particularly interesting either way. So I’ll ride the ones what brung us as shown on the table below.

Picks closed out in May have so far averaged a gain of 3.4% on an average holding period of 2 weeks. There have been 25 closed picks. All were shorts.

5/9/22 April was a challenging month. The final tally of closed picks in April had an average loss of 0.4% with an average holding period of 11 calendar days. My system does not do well when the average low to low cycle duration drops below 4 weeks.

March was better. Picks closed in March had an average gain of 4% with an average holding period of 23 calendar days.

This week we start with 8 picks including the one rebuy. All 8 are longs. Six are direct energy plays.

I’ve adjusted stop levels to protect profits and close out picks as they age.

All active picks and those closed last week are shown on the table below. Charts of open picks are below that.

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Last week we started with 23 picks on the list. There were 6 longs and 17 shorts. I set one to be covered on Monday’s open. 13 others hit their stops during the week and were closed out. Including those and the picks still open at the end of the week gave us average gains of 3.6% with an average holding period of 13 days.

Closed picks closed out in May have so far averaged a gain of 1.4% on an average holding period of 13 calendar days.

April was a challenging month. The final tally of closed picks in April had an average loss of 0.4% with an average holding period of 11 calendar days. My system does not do well when the average low to low cycle duration drops below 4 weeks. Normally that doesn’t happen too often, but we must roll with the punches when it does.

March was better. Picks closed in March had an average gain of 4% with an average holding period of 23 days.

The percentage gain is based on 100% cash positions, with no margin and no use of leverage or options.

This week we start with 11 picks including the 2 new ones. 8 of the 11 picks are longs. Only 3 remain short. If the market crashes this week, I’m sorry, but we’ll miss it and hopefully the 8 longs being mostly energy and one precious metal, won’t be among the casualties.

I’ve added new stops to the picks from last week, and adjusted stops on the remainder. This week’s new picks will be added without stops as usual. I like to give them breathing room at the beginning, and manage risk by having multiple picks.

The new picks, along with picks that remain open, and those closed out last week, are shown on the table below. Charts of new and open picks are below that (subscriber report only).

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Shot from Guns, This Market Looks Like Puffed Rice

Lee Adler

Did I misread the technical indicators last week? I was leaning bearish because of them, even though the liquidity analysis was warning of an oversold reaction rally being imminent. So was the 13 week cycle setup. But the 6 month and 10-12 month cycles still looked bearish. I allowed for a short term rally, but with the proviso that I did not expect it to amount to much, because the longer cycles were still pointing down. “A 13 week cycle low is due in late May or the first half of June, with the projection of 3800-3820 now done. The up phase shouldn’t amount to much with both the 6 month and 10-12 month cycles in down phases.”

Fortunately, the chart pick list, which is born of a more mechanistic process that doesn’t allow for much thought pollution from me, was 100% long by mid week last week. The longs that I added early in May are doing really well. Maybe too well. I’ll get to that in the upcoming chart picks update.

As for the broad market as of now, the question is whether the rally will amount to more than “not much.”

This report lays out exactly what to look for, for the answer, including a new price target for the 6 month cycle high, and expected time frames for the 13 week, 6-8 week and 4 week cycles. It shows which price targets have been met, and which haven’t.

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These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

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We Hold Our Gold Miners, Add Another

Lee Adler

There were few new short term swing buy signals last week, unlike the previous two weeks. The new list had only 3 final buy signals and 2 final sell signals, indicating that there’s no strong impulse in place.

In the prior two weeks there was a heavy preponderance of buy signals after a very strong down wave. That indicated that it was at least time for a dead cat bounce, if not an intermediate bottom. I took a few picks from those and am adding another one this week.  Now we wait and see for a week or two, adjusting stops to take us out along the way.

Meanwhile, the metal hints at an intermediate bottom.

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Even Steven in This Week’s Swing Trade Screens

Lee Adler

The final list of double screened output for last week resulted in a near tie. There were 28 charts with multiple buy signals, and 27 with more than one sell signal.

The screen results come from a universe of approximately1200-1500 stocks daily that meet the criteria of trading above $6.00, and with average volume greater than a million shares per day. I start the weekly process by screening for daily buys and sells from the previous Friday through Thursday. I then rescreen that output, for additional signals in the progression on Thursday and Friday.

I reviewed the charts from the final output visually. The charts were as equivocal as the numbers suggested. There were no screaming buys or sells, but I took flyers on XXXX and XXXX on the Buy side. I chose no shorts. Technical Trader subscribers click here to download the complete report.

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Last week we started with 23 picks on the list. There were 6 longs and 17 shorts. I set one to be covered on Monday’s open. 13 others hit their stops during the week and were closed out. Including those and the picks still open at the end of the week gave us average gains of 3.6% with an average holding period of 13 days.

Closed picks closed out in May have so far averaged a gain of 1.4% on an average holding period of 13 calendar days.

April was a challenging month. The final tally of closed picks in April had an average loss of 0.4% with an average holding period of 11 calendar days. My system does not do well when the average low to low cycle duration drops below 4 weeks. Normally that doesn’t happen too often, but we must roll with the punches when it does.

March was better. Picks closed in March had an average gain of 4% with an average holding period of 23 days.

The percentage gain is based on 100% cash positions, with no margin and no use of leverage or options.

This week we start with 11 picks including the 2 new ones. 8 of the 11 picks are longs. Only 3 remain short. If the market crashes this week, I’m sorry, but we’ll miss it and hopefully the 8 longs being mostly energy and one precious metal, won’t be among the casualties.

I’ve added new stops to the picks from last week, and adjusted stops on the remainder. This week’s new picks will be added without stops as usual. I like to give them breathing room at the beginning, and manage risk by having multiple picks.

The new picks, along with picks that remain open, and those closed out last week, are shown on the table below. Charts of new and open picks are below that.

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Stocks Are Ahead of the Curve

Lee Adler

The gradual flattening of the CLI is now visible. Starting in June, it should turn negative. The Fed will begin literally removing cash from the banking system and the markets in June, when it starts shrinking its balance sheet. That will have ripple effects in at least 3, if not all 4, or the components of the CLI.

In the meantime, however, stock prices have gotten ahead of the curve. They are now oversold versus the historical norms of the liquidity band over the past 13 years. Does it matter? Or is this a new paradigm?

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No question it’s a new paradigm. The Fed has ended, for the foreseeable future, its previous 12 year campaign of aggressively adding money to the financial markets in its program of inflating asset prices.

It had a trial run of this policy once before from October 2017 to December 2018, but stocks were bubbling then and the ECB and BoJ were still printing massively. That help from the rest of the world kept US markets liquified, resulting in a series of overbought readings that lasted 22 months.

The market cracked a bit in the middle of that tightening experiment, and finally fell apart when Covid 19 came around. The Fed then panicked and opened the QE floodgates. Now, we’re reaping the whirlwind from that.

As the Fed persists in tightening, in its fight against CPI inflation, my thought is that if the market can stay overbought versus liquidity for most of 22 months, it can stay oversold against it for just as long. However, with the oversold condition comes the likelihood of vicious vertical spike rallies along the way, as overconfident short sellers load up on their positions.

When they do, and the market starts to rally, they’ll spontaneously combust, driving inexplicably big advances in stock prices. Wall Street will come up with all kinds of recovery narratives to justify those rallies, but they will merely be, as Joe Granville called them, of the genre, “The Rally that Fools the Majority.” I’d make that plural, because of the probability that there will be more than one of those before this bear market is finished.

This report lays out in graphs and clear analysis, just what you should expect in the weeks and month ahead, along with how I’m approaching both the short term tactical aspects, and the longer term strategic approach for both stocks and bonds.

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Market Indicators Show Crash Risk Remains Intact

Lee Adler

Last week’s low took out the prior low. The market has been making lower highs and lower lows for over 5 months. That’s a bear market in my book, the Wall Street captured media’s stupid 20% rule notwithstanding.

The breakdown of the top pattern has a conventional measured move price target of xxxx (non subscribers click here to access)..  That’s just for this first leg of the bear market.

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Intermediate cycle projections point to xxxx (non subscribers click here to access).

A break of xxxx (non subscribers click here to access) should signal acceleration of the crash.

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Not a subscriber? Get price and time targets, and weekly swing trade chart picks, risk free for 90 days!  

These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

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Gold Miners Make Short Term Bottom, But Wait, There’s More!

Lee Adler

I’ve gone bottom fishing, adding 5 mining picks to our one lonely long added last week. The good news is that we completely avoided the crash. But will this move back in be too early, or just right? Download this report to see the charts of the stocks that look ready for something, here.

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Buys Beat Shorts Again in This Week’s Swing Trade Screens

Lee Adler

On the week, buy signals overwhelmed sell signals, thanks to Friday’s rebound, but they had the lead earlier in the week as well. The final score for the week was 186 Buys to 125 Sells. That compares with the prior week’s  235 Buys to 147 Sells and 114 Buys to 118 Sells the week before that. However, on Friday alone, there were 101 buys and just 13 sells. This suggests an up week ahead.

Technical Trader subscribers click here to download the complete report.

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The screen results come from a universe of approximately1200-1500 stocks daily that meet the criteria of trading above $6.00, and with average volume greater than a million shares per day. The final numbers show the number of stocks with at least one buy signal or sell signal during the week.

I start the weekly process by screening for daily buys and sells from the previous Friday through Thursday. I then rescreen that output, for additional signals in the progression on Thursday and Friday. The final lists this week resulted in 48 chart pick candidates on the buy side and 3 on the sell side.

I reviewed the charts from the final output visually. From that review, I chose 3 buys and no shorts. For the second straight week, all the buys were in the energy business.

Last week we started with 23 picks on the list. There were 3 buys. The rest were short sales. Two picks hit their trailing stops and were closed as of the stop price. I elected to close out one on Monday’s open. Including those and the picks still open at the end of the week gave us average gains of 1.9% with an average holding period of 13 days.

Closed picks in May have so far averaged a gain of 2.9% on an average holding period of 11 days.

April was a challenging month. The final tally of closed picks in April had an average loss of 0.4% with an average holding period of 11 calendar days. My system does not do well when the average low to low cycle duration drops below 4 weeks. Normally that doesn’t happen to often, but we must roll with the punches when it does.

March was better. Picks closed in March had an average gain of 4% with an average holding period of 23 days. The 5 picks closed out in May so far had an average gain of 4.3% on and average holding period of 12 days.

The percentage gain is based on 100% cash positions, with no margin and no use of leverage or options.

This week we start with 23 picks including the 3 new ones. 17 of the 23 picks are short sales.

I’ve added new stops to the picks from last week, and adjusted stops on the remainder. This week’s new picks will be added without stops as usual. I like to give them breathing room at the beginning, and manage risk by having multiple picks.

The new picks, along with picks that remain open, and those closed out last week, are shown on the table below. Charts of new and open picks are below that.

Technical Trader subscribers click here to download the complete report.

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Market Rebound Still Leaves Crash Risk Intact

Lee Adler

Friday’s rally brought the market back above downtrending support lines, but did not break any significant trend resistance lines. I must assume that the bearish intermediate trend remains in force until more evidence to the contrary.

Here’s what we need to look for, including downside price and time projections and key resistance levels that must be broken to break the downtrend. Barring those breakthroughs, crash risk remains. (Non subscribers click here to access).

Technical Trader subscribers click here to download the complete report.

 

Subscription Plans

Not a subscriber? Get price and time targets, and weekly swing trade chart picks, risk free for 90 days!  

These reports are not investment advice. They are for informational purposes, intended for an audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance. 

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