It will be a busy week for the market with CPI, Retail Sales, PPI, and a slew of Fed speakers on deck. It will be an option expiration week for the VIX on Wednesday, and the monthly OPEX for stocks and indexes is on Friday.

Additionally, we are entering the part of the month where government-sponsored entities park some cash in the reverse repo facility, which could push the repo facility up, perhaps towards the end of the week, which could work to drain some liquidity.

This week’s economic data will have big impacts on rates and the dollar. But the equity market has been more of a mystery because many of the relationships that have worked well for some time have stopped working, and that tells us two things: either the equity market is way ahead of itself and is due for a very big correction to normalize these relationships, or something else is going on that is less explainable.

When one thinks about things logically, certain factors make little sense in regards to where the S&P 500 is currently. Consider that in 2021, when the S&P 500 was trading at 4,800 with overnight rates near zero, the Fed was pumping in $120 billion per month in QE, expanding the balance sheet and maintaining deeply negative real rates.

Now, the Fed’s overnight rate is 5.35%, and the Fed is draining $95 billion per month in the form of Quantitative Tightening, shrinking the balance sheet, while real rates hover around 2%. So, either some of the fundamental things we grew to accept about the relationship between real rates and QE were completely false, or something has materially changed.

People will say it is because you think logically, Mike, and markets aren’t logical. I know the markets aren’t always logical, given that I have followed them for over 30 years.

Unfortunately, I am responsible for reporting the facts and not writing about things with no basis or merit. What gives someone credibility is to do credible work, not to pull stuff from the air on a hunch. At least when I am wrong, I can have good merit for being wrong, and not because of guesswork.

So, what I try to do is think about the macro backdrop and try to form a view around Fed policy and the economy, and then think about where rates and the dollar are going, and, more importantly, the path of financial conditions, and then relate to what it means for the stock market. In this process, I also like to incorporate things from technicals and options to try and draw clues about how things will be going. Unfortunately, the analysis process doesn’t involve periods without logic.

The piece that I have recently thought about and, more importantly, why the recent rally has been a rally of just a few, while most stocks get left behind, is because the market is repricing Nvidia’s place in the world. Most companies generally do not put up the growth rate Nvidia has over the last nine months, so we don’t see this reset at this speed.

The company had revenue of $7.2 billion in the fiscal first quarter of 2024, and now it is expected to have more than $20 billion in the fiscal fourth quarter and $25 billion by the fiscal fourth quarter of 2025.

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The part we do not know is if these forecasts will prove to be too high or too low, which will put extra importance when the company reports results next week. But one could also make a case that if future growth rates are coming into better view, and given how this stock has typically been valued, there is a good chance it is closer to the upper end of the range at this point than the lower end.

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Which sort of leaves me back to where we started -- it could also mean that the relationships that have broken down between rates and equities do start to matter again, and, more importantly, we can start to think about a top to the rally in the market coming into better view.

In fact, from a technical standpoint, one could make some logical conclusions that a topping process could be in the range of around 5,025. First, as I noted on Wednesday, as per the definition of a rising wedge, it appears that is what has formed on the S&P 500, and the end of that rising wedge is pretty close to being met.

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Second, if there is a 5-wave impulse that has formed off the October lows, then wave 5 is now just about 0.78% of wave 3. In most cases, wave 3 is the longest and strongest wave, and so it would make sense for wave 5 to terminate before reaching 100% of wave 3.

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If you want to count the rally as a 3-wave structure off the October low, then wave C is now 50% of wave A.

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Additionally, if rates are going higher, then at some point, those higher rates will kick in. The interesting thing on Friday was that we got those CPI seasonal revisions, and despite no meaningful change in the revisions, rates still went higher. Even following a better-than-expected 10-year auction on Wednesday, rates still went higher.

That says a lot about the direction in which rates are heading. As I have previously pointed out, the 10-year appears to have formed a double bottom and is knocking on a potential breakout around the 4.2% level.

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Have a good week.

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