Fed Chair Powell made statements last Thursday about two more 50-basis point rate hikes, one in June and one in July with the possibility of a hard landing, meaning the economy might tip into recession later on. The S&P 500 fell to 3858 as Chair Powell was speaking. 3858 was just above our target of 3815, 0.08% short of a 20% correction peak to trough. After absorbing the statements overnight, the market gap opened up with more than 90% of NYSE volume was advancing. The unrelenting selloff finally exhausted and resolved to the upside last Friday.
We have had a few reversals since the correction began in January 2022. But last Friday was the first 90% upside volume day since June 2020. This kind of price behavior made this May 12 low more durable, meaning it will take some time before this low is tested, either violating on the downside or reversing quickly at this price level in the future. This May 12 low is by no means a finally low in the current 4-year cycle. We are still in the second leg of this 4-year cycle, unfortunately this second leg is a bearish one.
If history is any guide, we can expect the market to trade up against this May 12 low in the next 7-10 weeks purely based on how the weekly cycle functions in this stage of the 4-year cycle.
The fundamentals and media will continue to be bearish about the relief rally, but this rally may last longer than the shorts might want, meaning the shorts will try to short the market too soon without the knowledge of how the cycles work. Not giving enough time for a relief rally can be costly for the shorts.
The most oversold NASDAQ and ARKK type of stocks will bounce the most. The cyclical/value stocks will lag behind because they have not been so oversold, which will baffle a lot of fundamental investors. This correction cleansed quite a lot of bubbles. The market now is priced for the fed funds rate at 1.75-2.00% by the end of July. The economy however will take some time to feel the impact of higher rates and that is why this May 12 low is not the final low of this 4-year cycle. This 4-year cycle price low could be this May 12 low, but the time target is either October 2022 or Q1 2023.
We are holding meterverse stocks like RBLX and MTTR. We have been trading long and short in these names against our core holding all the time. We believe meterverse is for real, but we have zero holdings in cyptocurrencies. We believe blockchain technology, but not the crypto coins simply because the crypto currencies are in direct competition with the governments. Without a clear framework of crpto regulation setting forth by the worldwide governments, all crytocurencies are at risk.
Based on the seasonal patterns, we can expect the market to have a sloppy rally to make a summer high in July/August, then it will start a selling wave to last until October/November.
Against this is only a forecast and we need to be flexible.
Below is the S&P 500 daily chart. There are three upside price targets listed in the chart. 4200 is an important resistance. If 4200 is overtaken, then it has potential to go to the next two levels at 4330 or 4451. We have to see how it progresses.