One of the largest banks on the planet is warning of a 2023 recession that could tank the S&P 500 another 20%.

The index has already lost about 16% this year – falling up to 20% lower at one point. Bank of America is making the media rounds with estimations of a recession-level loss in the index.

Stock market price action to kick off the first full week of December appeared to agree with the bank as all three major indexes were down heavily on the day.

Before Father Time morphs into Baby New Year, Simpler Trading team members are tracking bullish movement that could lead to a merry run into Christmas.

Bullish price action may curb recession claims

Any session in the stock market can be down day, and Monday market action backed that statement.

In the market today, the Dow closed at 33,947.10 points to fall 1.4% (dropping 482.78 points on the day). The Nasdaq dropped to 11,239.94 points for a 1.93% tumble while the S&P 500 lost 1.79% to 3,998.84 points.

The Dow was down more than 500 points during afternoon trading before the slight recovery.

One down day may not kill bullish market signals indicating upside movement.

Sam Shames, Vice President of Options at Simpler Trading, is keeping a watchful eye on market indicators as 2022 counts down.

“The setup is there for bulls to try for a year-end melt up in the indexes,” Sam said. “We want to know our levels and continuously check our work on structure and momentum as days pass, but for now bulls have a lot here.”

Bullish signs to watch in key stocks and indexes include:

• Weekly momentum crossovers
• Large, positive momentum divergences
• U.S. Dollar Index (DXY) falling with structural damage
• Bonds attempting to bottom
• Historical, seasonal upside momentum through the holidays

Watching key signals, volatility,

Watching key signals, volatility

Sam noted the importance of following the dollar and bonds.

“DXY may bounce at the support zone from $103 to $104, but the damage is rather severe and typically takes time to cool off and reset,” Sam said.

Bonds have been helping bullish movement.

“Although the signals are not overly clean, they are mostly aligned to stabilize bonds and the dollar which provides stability to other markets,” Sam said. 

Simpler’s traders always keep tabs on the Volatility Index (VIX). The “fear index” jumped by 8.66% Monday to 20.75 as stocks fell across the board.

The VIX has pushed above 30 this year, and anything above 20 is considered high volatility. 

“The only rub I see is the VIX is so low now near 18-20 and that has historically been a place to de-risk not add risk,” Sam said. “The signals imply VIX could continue lower, so no immediate issues there other than a support zone, but careful with sizing just in case.”

Sam is seeing more action in zero days to expiration (0DTE) options trading which indicates a lack of conviction among traders across the stock market, and this increases short-term, sharp price movement.

“Markets overall are more illiquid than we know,” Sam said. “This dynamic cuts both ways up and down as it’s more difficult to rebalance large books with this low liquidity.”

Central banks might cool December ‘melt-up’

Traders should be cautious of what is happening among central banks and how they address concerns of economic struggles.

“For the upcoming two weeks the calendar is peppered with many central bank rate decisions, and this increases the volatility day-to-day,” Sam said.

Economic data releases on the horizon include the U.S. Producer Price Index (PPI) on Friday and the U.S. Consumer Price Index (CPI) on Dec. 13. The much-anticipated Federal Open Market Committee (FOMC) meeting is set for Dec. 14 where the next round of raising benchmark interest rates is expected.

“All the pieces are in place for a continued year-end melt up, but also remember Federal Reserve Chairman Jerome Powell and a rate decision comes next week,” Sam said. “I doubt anything will change so close to the holidays, but just be aware of event risk due to central bank decisions.”

Sam is leaning into bullish possibilities through the end of the year.

“Markets have actual significant signals across all asset classes that they want to go higher, even in the bottom of the barrel assets… This is bullish,” Sam said. “Go forward, but stay smart and tactical day to day.”

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