Scary Trend In SPY – The Algorithm Is Short (NYSEARCA:SPY)

The long-term trend in the US stock market is bullish, but the equity arena can experience scary selloffs that shake the confidence of even the most committed bulls. The last significant rally in the S&P 500 index took it from the 2,191.86- 2020 pandemic-inspired low to 4,818.62 in early 2022. At the end of last week, the index was below the 4,025 level as a correction is underway.

While many passive market participants subscribe to a buy-and-hold approach to stocks, traders and agile investors know that the long and short sides of the leading stock market index can offer substantial rewards. Since the stock market tends to take the stairs higher and an elevator lower, a nasty downtrend can be an extremely rewarding period. We are experiencing the most significant stock market correction since early 2020, when the COVID-19 pandemic gripped markets across all asset classes.

The SPDR S&P 500 Trust ETF product (NYSEARCA:SPY) tracks the diversified stock market index. As of May 13, the APS was short the SPY ETF.

Interest rates are rising, with inflation at the highest level in years

Last week’s inflation data confirmed that the US Fed is behind the curve and will remain hawkish, using monetary policy to address rising prices. April CPI rose by 8.3%, with the core reading up 6.2%, the highest level in four decades. The data was more inflationary than the market’s expectations. Meanwhile, the producer price index rose by 11%.

At the May 4th meeting, the FOMC increased the short-term Fed Funds Rate by 50 basis points to a range of 75 to 100-basis points. The CPI and PPI data will likely cause the Fed to hike rates by another 50 basis points at the next meeting.

Chairman Powell may have taken a 75-basis point increase off the table at his post-May 4th meeting press conference, but the Fed’s credibility is suspect. After calling inflation “transitory” throughout most of 2021, the stock market price action is a sign that market participants are wary about the Chairman’s comments. With inflation raging, the path of monetary policy may have no choice but to up the ante on rate hikes despite the stock market weakness.

The chart shows that the US 30-Year Treasury bond futures fell to a low of 134-30 this month, the lowest level since July 2014. The bond market trend remains lower, with the long bond future just over the 139 level at the end of last week. Rising rates cause capital to flow from stocks to fixed-income assets.

The dollar index is at a two-decade high

Rising US interest rates support the US dollar versus other reserve currencies. The dollar index measures the US dollar against the euro, British pound, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc. The dollar index has soared as US rates have moved higher.

The chart shows the US dollar index probed above the 105-level last week for the first time since December 2002. A stronger dollar typically weighs on earnings for US multinational corporations.

War in Europe presents unique economic challenges

While higher US rates support the dollar index, it has a 57.6% exposure to the euro currency. The war in Ukraine, on Europe’s doorstep, is pushing the euro currency lower against the greenback. The euro is on a path to parity against the dollar, a level not seen since 2002. The euro versus US dollar relationship was just over the $1.04 level on May 13.

Russian aggression threatens Europe’s safety and economy. NATO has supplied Ukraine with weaponry, which could cause the war to spill over to the west across Ukraine’s border with Poland and other NATO members. Moreover, Russia sees Finland and Sweden’s plan to join NATO as another threat to its sovereignty, increasing the potential for hostilities. Russia’s “no-limits” alliance with China further complicates the geopolitical tensions. Aside from the war in Europe, a bifurcation of nuclear powers created by a China/Russia alliance to counter the US and Europe presents unique economic problems. Russia supplies Europe with energy, which will likely cause shortages as Russia will not do any favors for “unfriendly” countries supporting Ukraine and NATO expansion.

Energy is only one problem, as Russia and Ukraine are Europe’s breadbasket, supplying one-third of the world’s wheat exports and significant corn supplies. The war has turned Ukrainian wheat and corn fields into mine and battlefields. The Black Sea Ports, a critical logistical hub, has become a war zone. The conflict has pushed grain prices higher and threatens to create shortages, resulting in famine in some countries that depend on the Russian and Ukrainian exports.

The S&P 500 is the most diversified stock market index- The SPY ETF tracks the performance

Rising US interest rates, the strongest US dollar in two decades, and the war in Ukraine with a threat of involving other countries create a potent bearish cocktail for the US stock market. The S&P 500 is the most diversified US stock market index, and it has been trending lower.

The long-term chart dating back to 2022 shows the move from the all-time peak of 4,818.62 in January 2022 to the 4,023.89 level at the end of last week, a 16.5% decline over the past four months.

The S&P 500 SPDR ETF is a highly liquid product that moves higher and lower with the S&P 500 index.

The SPY declined from $479.98 in January to $401.72 per share at the end of last week, a 16.3% correction. On May 13, SPY had over $353.371 billion in assets under management and trades an average of over 120 million shares each day. The ETF charges a 0.09% management fee.

Over the past weeks, every attempt at a rally in the S&P 500 and SPY ETF has been met with selling. Like a game of whack-a-mole, every time it picks its head up, it gets whacked.

The APS was short SPY as of May 13, 2022

As of May 13, 2022, the trend in SPY shares was lower. The APS was short SPY shares as the trend is always your best friend in all markets. APS holds ten highly-liquid and optionable stocks and ETF products. SPY is a component as it meets the strategy’s requirements. At $401.72 per share, the ETF has been trending to the downside, making lower highs and lower lows.

Following trends via an algorithmic system requires strict adherence to rules. We do not attempt to pick bottoms or tops in any markets and are typically short at bottoms and long at tops. Taking the most significant percentage out of trends requires removing emotional impulses from trading and investing. We ignore fundamentals, news, and all of the daily noise. Our signals are never intraday, and they can only change at the end of a session. Our system does not get caught up in the daily frenetic trading activity. News and noise are at a frenzied level with the war in Ukraine, inflation raging, and pundits opining on the central bank’s next move. We ignore the noise. The APS is always long or short its components.

The price of any asset is always the correct price because it is the level where buyers and sellers meet in a transparent environment, the marketplace. Crowd behavior that determines trends can be the optimal market approach across all asset classes. As of May 13, the crowd’s wisdom points to a bearish trend in SPY. The APS will issue a buy signal for the SPY ETF product when the trend changes.