The U.S. inflation reached 9.1% in June, its highest rate in nearly 41 years, but the market didn’t react negatively. The Q2 bank earnings was bad, the market as a whole didn’t react negatively either. When two consecutive negative news releases failed to move the market down, we call this divergence as one of the signs of a bottom.
Because of this high June CPI reading, it is expected that the Fed will hike 75-basis point in July meeting. There was some speculation about 100-basis point rate hike in July last week, but one Fed official immediately spoke up against it. So the odds of a 75-basis point rate hike in July is pretty much expected. There is no Fed meeting in August.
The commodity crash since early June perhaps helped setting the June CPI data as the highest high for now. The raging strength in U.S. dollar is also crushing inflation behind the curtain. The July CPI data probably will be lower, not sure how much lower, but the market is foreseeing that it will be lower.
The earnings season is underway. At this point the market is fixated with the macro inflation/monetary conditions. It would be hard for the earnings to move the needle one way or the other. Overall, the balance sheets are very strong for the corporate and consumers. This slowdown/recession will be a shallow one because none of those dotcom or 2008 styled punishing debt problems are present in the current environment with the corporate and consumers. Cryptocurrency is a totally different story though. The bankruptcies in cryptocurrency will cause permanent damage for the cryptocurrency holders. We have never touched cryptocurrencies because we view cryptocurrency as the riskiest asset class. One decree from the government can make all cryptocurrency worthless. Cryptocurrency has no store of value in every single aspect of a stable financial instrument.
Below is the S&P 500 daily chart.
From this chart, you can see that:
- The first daily cycle within the weekly cycle that started on 06/17/22 has finished. We count the cycles trough to trough.
- Even though the daily cycle had a lower beta high, which gave a bearish indication of the weekly cycle, but it was able to quickly finish the daily cycle. That is a bullish sign for the weekly cycle.
- In order for the weekly cycle to continue the bullish posture, it has to take out 3946 in the 2nd daily cycle that started on 07/15/22.
- The 10-year treasury yield has come down and is in the process of a correction, which gives room for the equities to heal.
Again, we see this June 17 low as a short term low, the eventual 4-year cycle will be in 2023. Coast is not all clear yet.