Multiple interesting developments took place in the U.S. market yesterday. First, CPI and inflation rate came in better than expected (although the core inflation accelerated by 0.1% year over year), sparking a short-lived bounce in U.S. indices, followed by relative stabilization in the market ahead of the FOMC minutes. Then, once the report came in, the market started to decline amid a sudden change in the tone of the FED officials, which now foresee a “mild recession” later this year.
This comes to us as no surprise since, already last fall, we noted that the FED projections were implicitly pointing to the recession in 2023 and 2024. However, this shift from an implicit tone to an explicit one is a major development that should not be overlooked, especially as the FED continues to indicate higher interest rates from the current levels. While hiking interest rates is very effective at fighting inflation, which will continue to decline toward the end of 2023, it is hardly bullish for the equity market.
Due to that, we maintain a bearish stance on the U.S. market and the price target for SPX at HKEX:3 400. We will pay a lot of attention to banking earnings (starting tomorrow with Citigroup, JPMorgan Chase & Co., and Wells Fargo and continuing with other major and regional banks in the following weeks). In general, we do not expect the current earnings season for stocks to be any better than the previous one. To confirm our bearish thesis, we will seek more downgrades in the outlook and decline in corporate profits. Furthermore, we will monitor the labor market, bank deposits, loan delinquencies, consumer spending, and rate of consumer savings (among other important metrics).
Illustration 1.01 The picture above shows the 1-minute chart of SPX. The yellow arrow indicates the time when inflation and CPI data were released.
Illustration 1.02 Illustration 1.02 displays the 1-minute chart of SPX and the subsequent price action following the release of FOMC minutes.
Technical analysis gauge Daily time frame = Slightly bullish Weekly time frame = Neutral *The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Illustration 1.03 The illustration above portrays the daily chart of SPX and fan lines acting as resistance and support levels.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
Comment
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Illustration 1.01 and Illustration 1.02 show charts of ES1!, not SPX; it is a typo.
Trade active
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Today's earnings of three major banks showed a mixed trend with some positive and negative indicators. Generally, net interest income and total revenue have increased significantly, but the increase in net charge-offs and provision for credit losses indicates a higher level of credit risk. At the same time, the decrease in assets and deposits is negative. Our stance is that more monitoring of the bank's financial performance is necessary to assess the situation accurately. We will provide more thoughts on this matter on Monday.
Trade active
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The Federal Reserve is set to hike interest rates by 25 basis points tomorrow, taking us a step closer to recession.
Great level-headed & fair analysis. I noticed JPM went up from earnings, yet SPX went sideways. Bulls need to prove this is their market now
Tradersweekly
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@roelds, Thank you very much for the comment and coins. Yes, they did not have bad results. But I think the theme of banking earnings will be "big banks with a lot of cash and strong positioning that will allow them to be profitable even in the current environment vs. small banks that are less competitive."
Free_Loader
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Well, with higher interest rates the banks loaned less and made less in profits, so a bearish bias is very likely to materialize.
Tradersweekly
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@Free_Loader, Delinquencies are also slowly rising.
Vestige
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You ever thought that u are somehow trapped in a bearish bias? Not sarcasm nor insult, just food for thought as most of your revolve in hoping the bear to claw in even after much false assumptions
Tradersweekly
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@Vestige, I stated during the summer of 2022 that earnings in 3Q and 4Q would show underperformance and outlook downgrades, confirming the thesis about the market progressing into the second stage of the primary bear market (which turned out to be the correct call). Then, when all people talked about FED’s pivot last year, I said there would be none, and the central bank will continue hiking (which was also the correct call). After that, I said we would see an uptick in unemployment (while hinting at FED’s projection already in fall 2022) when people were forecasting that it would go down from already record-low levels (it turns out that unemployment started to rise slightly from that level). Even in regard to the recent banking crisis among regional banks, I said it would likely get resolved quickly. Overall, I warned against recession months ahead (and it just happened that the FED warned about it last week). These are just some of the assumptions I mentioned, so which of them do you consider “much” false? Is it the price action you are talking about? Because then we can argue, it might be too soon to tell if I am wrong or right. But the fact is that we continue to get a lot of mixed data about the U.S. economy that suggests recession ahead.
Vestige
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@Tradersweekly honestly im on your side as well and I am in agreement to basically all of what u wrote. In fact I been far longer in predicting the recession.
I am writing the bearish bias based% merely on your technical analysis in which u been basically writing short if u look at past charts with all of them being broken up.
I agree that we shoulve seen more correction back in 27-28k and now even here but is it possible that u and i are in the wrong?
Again not critizing more like pondering our own perspective
Tradersweekly
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@Vestige, The technical gauge has been either neutral or slightly bullish for most of the past few months, especially on the daily time frame (but the direction in the title stayed short since I believe it is still a bear market). Yes, of course, I think about being wrong every day. There are certainly some developments that I expected to occur sooner. For example, I thought markets would start declining in 1Q23, but then, we got fallout with regional banks that caused initial selling until the regulator injected more liquidity in the market (arguably postponing it further away). Also, I did not expect bullish sentiment to get so irrational; I definitely underestimated that. But perhaps we can explain that by the fact that in 2020 we had a massive influx of new traders who know only how to buy a dip and dollar-cost-average their positions (plus expecting the FED to step in like in the March 2020 crash). I think this plays a significant role in the markets staying above water. But I do not think it is sustainable. In addition to that, I thought we would start getting less mixed data and more clear picture (which we are still not getting, the data contradicts each other on many fronts). No problem at all; thank you for asking.
Techbest
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@Tradersweekly, Very well said "Massive influx of new traders & Money". This event had an underestimated impact by all and largely skewed markets. I would have thought this money would have dried up by now, but I guess 9T goes a lot further than I thought. But also, world wide panic (flight for safety) in US markets and strength in US dollar must have been a factor. Talk about a incredible mind f%k. You try to stay vigilant, attentive and observant of your surroundings. You notice during the outbreak, no traffic and businesses closing even in Florida. Conventional wisdom says that the economy is slamming on the breaks, but how wrong was I?? Economics didn't teach me that there is a 20% premium on US Money & Markets. History shows me on bad decisions that I'm usually right on strategy, but early on timing. I can't help but think that this thing is going to slam down 40% much like 2000 or 2008. Market Movers absolutely love this long term setup.