It's Starting ... Rally Running Out Of Steam

S&P 500 met its daily setback, one that has potential to develop over August into a more serious one. Financials and consumer discretionaries are signalling a pause in the rally ahead – a pause as a minimum, gradual rollover to the downside is more likely. Bonds made a serious risk-off turn but the bullish juices haven‘t run out yet. Well, the rise in long-term bonds that I first called for to happen in mid May is unfolding, and we have higher to go – yields have peaked, and Treasuries are now set to rise in reflection of deteriorating economy.

The Fed isn‘t done with its tightening, wage inflation would be getting as much checked as commodities lately – and the optimistic take on the July FOMC would give way to more down to earth interpretations – quoting from yesterday‘s extensive analysis:

The stock market pendulum has since decidedly swung in the bullish direction, yet I‘m looking for this rally to run out of steam, and roll over. Remember that Powell said that with the 75bp hike, the Fed funds rate is now close to neutral. Sure that inflation is peaking and the following CPI readings would be a little more pleasant deceleration rather than acceleration continuation (PCE at 6.8% annualized is highest since 1982), but the Fed would take the opportunity and try pushing the Fed funds rate a bit above what it sees as the natural rate. And I am not even raising the aspiration to be shrinking the balance sheet by up to the whopping $95bn a month (something similar went on into spring 2019, well after the hikes of 2018 ended), which would cool down the housing market a lot more than it appears to be the projected case now. Also the job market effects would take the unemployment rate noticeably higher, and that would deal with the wage inflation while the cost push one would decelerate, yet service driven one remain unyielding. Simply put, inflation is to cool off somewhat.

Apart from macroeconomic reality catching up with the bear market rally, it‘s also earnings projections where I am looking for quite a few downgrades in the 2H 2022. Coupled with the Fed surprising the markets on the balance sheet reduction front (there isn‘t enough attention paid to this yet – let alone to the liquidity withdrawal aftermath), and the deepening yield curve inversion, we‘re in for a lot of recessionary trouble – at the very least teetering on the brink already. Deteriorating consumer sentiment would also cascade into retail sales – coming full circle to the earnings ahead.

The S&P 500 and crypto short profits can keep growing. 

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

Gold, Silver and Miners

gold, silver and miners

Precious metals are pausing, but likely to carve out a higher low next – especially when it comes to gold, followed by silver. Miners aren‘t yet the ideal place to be in, but that could start to change on a sharper daily stock market drop.

Crude Oil

crude oil

Crude oil is thus far defending $93, remaining kind of in a no-man‘s land between $93 and $98. Inflation trades continue being taken down a notch or two, but black gold is to remain better insulated than base metals.

Copper

copper

Copper is set to lose some shine, bearing the brunt of the real economy and liquidity prospects sensitivities. $3.00 should hold throughout Aug.

Bitcoin and Ethereum

Bitcoin and Ethereum

Cryptos continue being vulnerable – their path ahead is of a slow and steady grind lower, taking on or exceeding prior lows, especially in Bitcoin.


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