SPY: Market Getting Extra Resilient And This Is Bullish

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The market bottomed on June seventeenth (for now)

Right here is the headline from July 14th: Financial institution of America slashes S&P 500 goal to “lowest on the Road” after recession forecast

Right here is one other headline from July eleventh: BlackRock cuts developed market shares to underweight as financial outlook worsens

These S&P 500 (NYSEARCA:SPY) downgrades by main US monetary establishments occurred throughout the week when the headline CPI inflation reached 9.1% – Client value index surges 9.1% in June, hottest price in over 40 years.

And but, the S&P 500 is up over the past month by practically 2%, with all SPY sectors increased anticipate power (XLE), industrial (XLI) and supplies (XLB).

SPY sector performance


Actually, SPY bottomed on June seventeenth close to the 360 degree, or the 3650 degree of S&P 500 futures (SPX), and it is up by practically 7% since then, and out of the bear market territory with the entire drawdown of 18% YTD.

SPY price and simple moving average
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So, face it, with all of the negativity final week, the inventory market will not be taking place anymore.

The liquidity selloff danger is receding

Actually, I issued the purchase ranking on SPY on June twenty seventh with the clear bullish case:

The carnage in commodities final week makes it very doubtless that the height Fed hawkishness in behind us. The headline CPI inflation knowledge over the subsequent few months must mirror the falling commodity costs and thus, permit the Fed to make the dovish flip. Because of this, the SPY rally final week will doubtless be sustained over the summer time, into the autumn. The liquidity danger will proceed to ease because the financial coverage tightening expectations ease.

On the time crude oil fell from round $120/barrel to round $110/barrel. However now, crude oil is round $95/barrel. So, the case of falling inflation is getting even stronger. Sure, the June CPI was very excessive, however that is as a result of it was measured when oil was at $120/barrel in mid June – so, now that is outdated info.

The value of crude oil is necessary as a result of it straight impacts the anticipated financial coverage tightening, which straight causes the liquidity shock danger. Actually, my bullish name was conditional to the power that S&P 500 holds the 3840 degree – which is the border between the correction and the bear market.

The important thing danger to the summer time rally is the resurfaced liquidity shock for any random cause. So long as the S&P 500 is above the 20% drawdown degree (the 1940 degree of the S&P500), the liquidity danger will stay low. The drop beneath this threshold to bear market territory will trigger extra promoting – so that is the stop-loss degree for leveraged merchants.

I need to make it clear, this isn’t a timing technique – timing inventory market over the quick time period is a silly recreation. That was the technique to keep away from a really massive potential drawdown ought to the liquidity selloff re-emerges.

Nevertheless, it seems that the liquidity danger is easing. Even because the S&P 500 dropped beneath the 3400 degree, with the very detrimental basic info, and vital downgrades from main US monetary establishments, the S&P 500 remained resilient and grinded increased.

Why is S&P 500 grinding increased?

The liquidity danger receded as a result of we’re previous the height Fed hawkishness – the financial coverage tightening worst-case situation is behind us. Actually, the Federal Funds futures are beginning to value the tip of the Fed’s mountain climbing cycle in Feb 2023 and the primary lower in Aug 2023.

Monetary policy expectations

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The market understands that the Breakeven inflation expectations are falling rapidly and that the CPI inflation will show to be transitory in spite of everything – probably stay at an elevated degree for a while, however method beneath the present ranges. I might not be stunned that the market begins pricing disinflationary forces as the provision chains ease (finally).

Thus, the S&P 500 (SP500) is wanting previous the CPI report and specializing in an anticipated dovish flip by the Fed, as early as September. It is rather doubtless that the Fed will get the two constructive CPI stories by September (July and Aug), which can justify the signaled dovish flip.

What concerning the recession situation?

The financial system might enter a technical recession, and we may very well be in a single already. But, with the 24% peak-to-though correction, the S&P 500 already priced in a gentle recession.

Actually, a slowing financial system would help the Fed’s dovish flip, and really increase the inventory market.

The subsequent leg down in S&P 500 might occur if the recession is deep, with vital improve in unemployment and vital downgrade in company earnings – that will trigger the Section 2 bearish selloff. At this level, it tough to see a big improve in unemployment over the close to time period given the scarcity of labor.

However extra importantly, the subsequent leg down in S&P 500 must be pushed by the spike in credit score spreads (Section 3 selloff), brought on by the numerous correction in housing costs. This situation is feasible if the unemployment price sharply rises, which isn’t my forecast over the close to time period. The credit score unfold BBB-10Y remains to be low at 2.31%.


Traders ought to intently monitor the yields on 10Y Treasury Bonds (at present at 2.92%), and the yields on 3-month Payments (at present at 2.29%). The worst case situation is that if the 10Y yields hold falling in direction of the two.5% (signaling a slowdown), whereas the Fed retains mountain climbing regardless with the 3mo yields reaching 3%. On this case, the 10-3mo unfold would invert to -0.50%, which might sign a deeper recession – and the subsequent leg down on SPY.

Nevertheless, I anticipate the Fed is not going to invert the 10y-3mo considerably, and it’ll make the dovish flip if the 10Y yields hold falling, which might in-fact case the widening of the yield curve and increase the inventory costs – that is the bullish situation.

Thus, I’m within the bullish camp – and nonetheless suggest a tactical purchase on SPY.

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