What a wild week. I think the best way to convey the various forces at work across the financial market is to look at what I consider the nine most important charts of the week.

Major stock indices started the week with a blast, gaining some 6% between Monday and Tuesday, which was the largest two-day rally since March 2020.

By midday Friday, both the SPDR S&P 500 (SPY) and Invesco Powershares Nasdaq 100 (QQQ) had given back more than half those gains. It’s a schitzo market. 

Bulls had been bolstered last week by the fact that SPY and QQQ had slightly undercut their June lows and then we got the powerful rally with strong breadth. In fact, it was back-to-back “90/90” days — 90% positive breadth and 90% up volume — which is usually indicative of a major turning point. When you couple this with the oversold conditions and extreme bearish sentiment, one would have thought we’d see a few days of upside followthrough. 

But it was not to be. You can blame relatively strong jobs data today, the decision by OPEC to cut production by two million barrels, or whatever…

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The fact is we remain in a downtrend and the first part of the week seems to have just been another vicious but short-lived bear market rally. 

My longer-term thesis remains that both SPY and QQQ will decline to the February 2020 pre-pandemic highs; about another 10% lower. 

CHART 1: Downtrend still firmly in place

While Monday and Tuesday produced two positive 90/90 days, Friday is now shaping up to be a negative 90/90 day.

Dragging the indices down are the mega-cap tech names such as Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL) which have been “catching down” to the broader market.

The silver lining is now that the generals are in retreat, you know the soldiers have already abandoned their posts and are pretty washed out. Indeed, only 8% of the Nasdaq 100 is above the 200-day moving average, which typically is associated with market lows.

Chart 2: New lows still on the floor but reaching wash out levels

Next up is the jobs data. Today’s report showed more jobs added than expected, a steady increase in hourly wages, and a surprising drop in the unemployment rate.

In the perverse world where “good news is bad news,” this stronger-than-expected report was interpreted as a green light for the Fed to remain on its aggressive path of hiking interest rates.

Again, I find it mind boggling that the Fed is willing to force a recession that will include massive layoffs or reduction of wages to fight inflation. All signs point to inflation pressure having peaked; it may take the lower input costs six to eight months for end users to see on the shelves or housing is indisputably working through the system.

In fact, the labor market is already softening. You can see new jobs added have been in a steady decline for about a year. If monthly job gains can now stabilize around 200,000 to 250,000 per month, it would be great. The Fed, for some reason, wants to get that number below 100,000.

Chart 3: New jobs added continue to trend lower

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Another chart showing the cooling of the labor market came on Tuesday in the form of the Job Opening Labor Turnover or JOLTS shows companies no longer have too many unfilled positions and workers are no longer confident they can quit or job hop.

Chart 4: Corporations no longer finding it difficult to fill job openings

I’ve discussed how the strength of the U.S dollar has moderate benefits for U.S. consumers but basically wreaks havoc on the profit margins of multinational corporations and can be absolutely devastating for the rest of the global economy.

The extreme move has not just impacted developing nations, which depend on exports such as oil and agricultural products, which are denominated in dollars, but also the developed nations across Europe and Asia.

Chart 5: The runaway dollar is in danger of forcing extreme and coordinated currency intervention

Housing is finally showing signs of cooling.

To give some back-of-the-envelope math to show just how berserk the housing market has become, we can compare the cost of owning in late 2020 compared to today.

• 2 years ago: 30-year mortgage rate was 2.87% and average new home price in the US was $405,000.
• Today: 30-year mortgage rate is 6.29% and average new home price is $547,000.
• Result: $28,000 increase in down payment (assuming 20% down) and 101% increase in monthly payment (from $1,343 to $2,704).

Or put another way, you can only afford half the house you might have purchased two years ago. 

Chart 6: The surge in home prices and mortgage rates have put ownership out of reach. It is unsustainable, and prices must come down

The next item speaks to just how tough the market has been this year. As I’ve discussed, there really has been no place to hide. Unless you were bulled up on energy exposure or long the dollar, nothing has provided protection. Again, the standard plain vanilla 60/40 stock-bond allocation is suffering its worst year ever.

Even using put options as a hedge has offered no protection. This is a function of how this bear market has been fairly orderly. A steady downtrend with the occasionally oversold rally has left puts as a wasting asset where the time decay is greater than the delta hedge.

Chart 7: Put protection has actually not mitigated losses

Oil continues to be a bugaboo for the inflation picture. As mentioned above, OPEC has committed to cutting production even as demand remains robust.

My biggest concern is that Biden continues to deplete the Strategic Petroleum Reserve.

Whether you think this is being done purely for political reasons ahead of mid-term elections or to truly provide relief at the pump, it strikes me as misguided.

The SPR is meant for a crisis, such as a major disruption in production. Not to save consumers $0.50 a gallon. This is very short-term thinking.

I think once the election passes and the siphoning off of the SPR comes to a halt, it will come back to bite in terms of a jump in prices and the cost and urgency to replace the reserves. Options360 is looking to get long some oil names.

Chart 8: Oil prices will remain elevated and could soar once the tapping of the SPR comes to an end

Lastly, let’s look at the CBOE Volatility Index (VIX). It has finally popped above 30, and though that’s still far from a panic, it indicates a whiff of concern. 

More interesting is the term structure. It is currently in backwardation (front month at a premium to later dates), which is also a sign of concern. 

But what is really notable is the big drop in late November, presumably on the notion the options market is bracing for an upcoming FOMC meeting, earnings season, and an election, and then expects volatility to contract once these events have passed.

But note, there is then the expectation volatility will once again increase heading into the new year.

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Chart 9: The VIX term structure is a sign of market uncertainty but still has not hit panic levels associated with market bottoms

All told, there are a lot of cross currents creating whiplash action. You might need to be a little crazy to trade this schitzo market.