Paul Revere and the Minutemen : a narrative poem (1975)
Will the freaky Fed keep market hopes alive with their minutes on Wednesday? Probably, for now.
A short one this week: deadlines and lack of change of view on the market.
There’s been a strong rally and it is tempting to fade: respect the momentum.
For longer term investors, it’s an easy one - the sectors showing relative strength are not the ones that you want to see at the start of a new Bull so, even if this kicks and screams for another few months…..or years….patience will pay off at some point with prices at lower levels.
Percentages of sectors making new highs last week (from ~8,000 stocks on Finviz)
Consumer defensive, utilities and financials leading the way - doesn’t scream ‘new bull market.’
For shorter term, we are waiting for bonds to point the way.
Among other things, it’s not great to see a lack of confirmation in HYG and LQD while the S&P spikes higher.
SPX at the top, then LQD and HYG at the bottom. They are both still in consolidation while the S&P breaks higher…..
But the momentum is there for now and the timing isn’t quite right. Similar to the two reversal days last week that blew impatient shorts out the water, it’s worth waiting for this momentum to stall out.
Sunday Twitter Poll
Slightly bearish but no great divergence of opinion yet.
(Of the last 18,000 tweets containing SPX, $SPY or $ES, those including bull/bulls/bullish/bear/bears/bearish extracted, then % totals of each. Started April 2022; plan to track % of times Twitter is correct compared to the following weekly close. Tracking data will be added after the first 20 weeks.)
Roadmap
Wednesday - (early) - RBNZ rate decision & statement
- (later) - FOMC minutes
Equities:
As noted above.
FX:
In general, given that it’s still summer trading for another week or so, economic data probably won’t move the needle too much this week. However, it’s worth seeing if RBNZ follow the Fed’s lead and become ‘dovish hawks.’ It’s doubtful. There’s an interesting potential dynamic shaping up as the US produces plenty oil and the Dollar is the world reserve currency so in theory the US shouldn’t face the same inflationary pressures as many other countries.
Was that why Powell took his foot off the peddle ever so slightly at the last Fed meeting? Potential clues will come from the minutes too. The usual reminder here - they are shaped and used as a form of forward guidance, not an exact reflection of the meeting.
Talking about forward guidance, Powell seemed to retire it at the last meeting. Let’s see if that point is hammered home or not in the minutes.
Diverging inflationary pressures will change the FX dynamic significantly: watch for increasing FX volatility over the coming months. If other CB’s are forced to tighten due to inflation and the Fed stands pat after the next meeting, the USD will swing lower.
AUDUSD weekly and HG1 (Copper front month futures) underneath. A decent little turn up last week and AUDUSD getting firmly above that 0.7 mark. A copper rally and equities staying bid for another week or so should help commodity currencies make back some more ground.
Precious Metals:
Looking better than a month ago but unless your time horizon is 6 months+, better to wait for more strength to come in.
Trades Update
This has moved to a free Thursday trades record, also available (most weeks) on Substack:
Risk Index
Under 50 = bullish, over 70 = bearish, over 90 = potential correction within 6 months
The Risk Index is a combined read of the trends of 68 intermarket spreads and indicators, from credit spreads to car sales in Spain.
1-year look-back:
The Vix moved back below 20 last week. That is a requirement for 20%+ corrections (although this is slightly messier as we haven’t recovered from the last one). It can stay below 20 for a long time, but given the weakness in other intermarket signals, doubtful that it will manage more than a few weeks.
Themes to Watch
Keep reading with a 7-day free trial
Subscribe to Risk Index to keep reading this post and get 7 days of free access to the full post archives.