Fed Ambush

S&P 500 short squeeze attempt ran into a brick wall in the second half of the regular session as narrow market leadership took its toll on the high betas – industrials, materials and Russell 2000 felt the heat (unable to keep intraday gains) as tech played the stock market safe haven role.

Crucially, not even relatively flat S&P 500 showing could prevent key market breadth metrics from further deteriorating. As I say, markets are most vulnerable at their narrowest, and this is definitely such a case – after making it almost to my 4,209 target yesterday, the (fundamental, realistic) clouds are darkening with the surprise RBA rate hike earlier today (elephant in the room is of course Japan with its own inflation figures). The Fed won‘t be as dovish as the markets expect, and that‘s an understatement – higher yields are already helping USD over 102.

S&P 500 is gearing up for a cautious session today – one of positioning for tomorrow‘s FOMC already. Rather than the key levels specified (4,136 – low 4,150s – 4,177 – 4,188), it‘s about sectoral and intermarket performance (today) and risk-off clues that I‘m looking for manifesting earliest in silver, copper and perhaps also oil (these tomorrow).

Quoting latest extensive analysis to illustrate how premature it is to celebrate end of banking crisis with FRC:

(…) The elephant in the room is continued deposits outflow – and it doesn‘t end with FRC no matter how much KRE and XLF rejoice. Fed is still raising rates, Fed is still shrinking its balance sheet, and the Treasury needs to roll over almost $7T in debt this year alone (and some $3T next year). Inflation, core components especially, aren‘t declining nearly fast enough, personal income is up, job market in spite of all the increase in unemployment claims still quite hot – summing up, the Fed has no reason to pivot.

Victory can‘t be declared, oil prices have bottomed, and will continue adding to headline inflation and will work to sink consumer confidence. Credit card usage is up, gasoline prices are up, and the market expectation for Sep 2023 rate cuts is at odds with everything Powell said, and what other officials are hinting add. Remember, the Fed‘s intention is to slowly take rates restrictive, and keep them there long – long enough without first hiking excessively and too fast (in the hopes of avoiding triggering recession, the thinking goes) – it is so no matter how much the bond market craves the end of tightening and rate cutting.

The bulls‘ undoing would come from waning liquidity inflows, VIX bottoming a tad below 15, bond market volatility picking up again, weak market breadth, narrow rotations and overall sectoral vulnerability (have a look at precarious industrials – and these are supposed to lead early in bull runs).

3m and 10y yields

The rising temperature in bonds across the yield curve doesn‘t bode well for the stock market, for risk-on really.

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Let‘s move right into the charts (all courtesy of www.stockcharts.com).

S&P 500 and Nasdaq Outlook

S&P 500

After 4,209 rejection, stocks must refuse to run to 4,188 today, and ideally close below, well below 4,177. As with the proverbial straw breaking the camel‘s back, I‘m afraid we have to wait for realization that the Fed is really hawkish (conference time), and enjoy a good second look at the lowered bar (with guidance) AAPL would beat.

In the meantime, JOLTS would highlight further weakness ahead in the job market. Hello, recession.

S&P 500 breadth

See the plunging market breadth indicators already (previous chart), and here the rejection even at the relative level of stocks trying to trade above their 50-day moving average.

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Gold, Silver and Miners

gold, silver and miners

This is still relatively sideways, but tougher times for precious metals and commodities would come on the hawkish Fed recognition (applicable to copper and oil as well).

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All essays, research and information represent analyses and opinions of Monica Kingsley that are based on available and latest data. Despite careful research and best efforts, it may prove wrong and be subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or thoroughness of the data or information reported. Her content serves educational purposes and should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks and options are financial instruments not suitable for every investor. Please be advised that you invest at your own risk. Monica Kingsley is not a Registered Securities Advisor. By reading her writings, you agree that she will not be held responsible or liable for any decisions you make. Investing, trading and speculating in financial markets may involve high risk of loss. Monica Kingsley may have a short or long position in any securities, including those mentioned in her writings, and may make additional purchases and/or sales of those securities without notice.

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