In addition to his daily review of the S&P 500, José Luis Cava analyzes the possibilities and consequences of the various landings being considered for the US economy on his YouTube channel.
José Luis Cava first relies on a graphic that collects the opinions of very important economists from very renowned brokerage houses. “They all believe that the European Central Bank will not cut interest rates before June 2024.”
Regarding the economic situation in the USA, the expert makes it clear that there are three scenarios: “The first is that of a soft landing, which is the prevailing thesis of most economists, including the Federal Reserve System itself.” Another thesis is that a hard landing that has not yet taken place. And then there’s this “Non-landing thesis”.
The analyst is focusing on the latter today. “We know that most economists expected that the US economy would most likely enter a recession in 2022. Still, it didn’t happen that way. It didn’t slow down and sped up again. We saw the S&P 500 bottom in October 2022 and then begin an uptrend, which is what we are in right now.”
The question comes up: What would happen if we discovered that the Fed was no longer able to control inflation despite sharp interest rate hikes? “In this case, The most logical thing would be to increase interest rates. And we would assume that the scenario of a rough landing would become very important. In this sense, we already know that the job market is deteriorating, we are already seeing the credit card delinquency rate in the United States reach a historic record. We know that American regional banks are on the brink, and we have even seen them skyrocket in Europe. In Germany, the number of bankruptcies and payment suspensions has risen sharply.”
Therefore, according to the analyst, simply by maintaining interest rates at current levels, it is possible The probability that the US economy will suffer a sharp recession is “very high”. Now he adds this “There is no doubt that neither the Fed nor the ECB will cut interest rates before June 2024 unless a black swan occurs, an unexpected event that triggers a shock to the economy.”
The question now is: is this no-landing scenario good or bad? Is it bullish or bearish for the stock market? “From an equity market perspective, we don’t think it’s bullish, but we don’t think it’s bearish either. So I think it supports the theory of lateral movement.”
Regarding the S&P 500, Cava first takes into account that last Friday there was “a large expiration of futures and options contracts during the triple witching hour.” According to him, this meant that a large part of the call gamma disappeared. “There was a small amount of put gamma, but what dominated was call gamma, which disappeared.”
When this happens, we see that markets become destabilized and the most volatile values increase their decline. How long does this period of instability usually last? “I think they will solve the problem between Friday and Monday until we see the data of the new positioning and the structure of the call gamma and the put gamma.”
Looking at the chart below, the expert points out that “we drew a direct bearish guideline connecting the highs of the S&P 500, and if you look closer, it came just as the index reached this level on Friday reached, paper out.” It is clear to see that this line is significant, it has been touched several times and is currently a wall. If it were to be exceeded now, it would be a clear bullish signal.”
It also looks at the Nasdaq and in particular the ETF, whose mnemonic is QQQ. It also charted a clear straight downward trend, and when it got there it also stopped. What do you expect in the short term? “We believe the most likely scenario is a recovery. If we look at the chart we see that it has reached the 4,440 zone, stopped there for now and we have drawn resistance between 4,470 and 4,477. As long as the S&P 500 stays below 4,477, we remain bearish.”
Up to what level? “We believe the target is 4,418 as long as the S&P 500 stays below 4,477.”
And finally it focuses on the Triple Q. “On Friday it respected the support of the 370 zone, the most likely is that it will bounce there, but in the 365 zone we have graphic support and it also goes parallel to that bearish guideline, which we have drawn with a dashed line. In summary, as long as the S&P 500 remains below 4,477, we consider 4,418 for the S&P 500 and 365 for the Triple Q as the most likely targets,” he concludes.