Second thoughts

S&P 500 had just one bullish ally, Russell 2000 – and that‘s not enough. The dust in financials hasn‘t yet settled, and Treasury yields are likely to decline today. Within the context of the trading range to be resolved to the downside, I‘m not looking for bearish fireworks just yet.

Keeping up with the big picture introduced in yesterday‘s extensive analysis:

(…) the common denominator being strong market pressure on Powell to give up further tightening and actually cut rates soon, perhaps strengthened by the Yellen behind closed doors banking meeting, which didn‘t bring about any deposits game changer. The reality of almost $400bn fresh liquidity thrown at the issues over the last two weeks, remains...

Deposits are still leaving smaller banks for bigger banks and money market funds – the KRE and XLF charts reflect the stress. This is a time of great uncertainty – financials can either stabilize through all the Fed actions and foreign swap lines (the same goes for Russell 2000), or decline considerably more. Either way, the dust hasn‘t settled yet.

The consumer continues burning through excess savings, the savings rate is at historically low levels, credit card usage is up, and bank lending standards are tightening. Mortgages, car loans, credit card balances… meanwhile LEIs continue declining, and it‘s also exactly one year since the Fed started the steep rate raising cycle, meaning that the real economy still has to feel most of the rate hikes already in (steepest rate raising cycle since mid 1990s, by the way).

Yet thanks to the banking troubles ushered in through the risk-free rate of return changes, markets have decided that it‘s time for Powell to officially pivot. Yes, they were thrown off whack by the 25bp hike, and chose to disregard the promise to hike once again (the bets on May being the pause month are 80%), and keep them restrictive. Likewise, it didn‘t listen to the remark that any tightening done through the lending standards of commercial banks, is actually equivalent to a hike.

The market is looking forward for a pivot soon, without appreciating what such a pivot actually means (as in heralds)– a recognition of troubles ahead. And these would arrive either through more banking news, through job market weakness, or through earnings disappointments. The Q1 earnings estimates would have to be yet downgraded I‘m afraid, and the same goes for Q2 as a minimum.

Stocks don‘t get that yet, and are focusing on easing already in Jun, without asking whether we have signs of proper market bottom such as rising LEIs, accomodative Fed and loose commercial banking standards. None of these apply.

Tech with semiconductors may catch up a bit after yesterday‘s woes while value would continue having second thoughts, and VIX is to returning back above 21.50. Today simply epitomizes caution to me, where risks to the downside should slowly keep building up. Likewise yesterday‘s odd gold decline (driven solely by the 25bp hike odds, not confirmed by miners or silver) would be reversed while silver‘s appeal would keep illustrating that inflation coupled with slowing growth (otherwise called stagflation seen in other commodity ratios) is and will be increasingly an issue if you consider that apart from services inflation and still high nominal wage growth, we would be increasingly talking about rising crude oil prices in the months ahead.

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Let‘s move right into the charts.

S&P 500 and Nasdaq outlook

4,015 shouldn‘t get challenged today again, but at the same time (failing a catalyst), I‘m not looking for a break of 3,945 - 3,958 zone either. Seeing bearish forces slowly build up, would be ideal here. 3,915 – 3,927 milestones are still too far away, and market breadth indicators need to get knocked down first.