The market survived a few major challenges to its upward momentum last week. The market reacted positively to the Fed July meeting rate hike decision and all the mega tech earnings reports! This market reaction didn’t sit well with the Fed. On Sunday, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” that inflation poses a larger threat than a potential recession. Kashkari reiterated that they are going to do everything they can to avoid a recession, but they are committed to bringing inflation down, and they are going to do what they need to do. In other words, the Fed is determined to fight inflation, even though it might cause a slow down or a recession. Inflation is the public enemy number one.
With this kind of hawkish rhetoric, the market will not be able to rally to no man’s land like before. It will be choppy until the Fed is done with rate hiking cycle. That’s why we have been very consistent that the June 17 bottom is not the finally low of the current 4-year cycle. This rally out of the June 17 low will be met with selloffs along the way into late August.
On the S&P 500 daily chart below, you can see that the S&P 500 is pressing against the upper channel line and it is in short term overbought condition. It is 11 days into the current daily cycle, which is in the top timing band. It could make a little higher high next week to break the upper channel line to create a bull trap before it falls down to finish the high to low daily cycle phase. Or it could go straight down from here. It doesn’t matter if the S&P 50o makes another high or not, we are expecting the market to retreat a little next week to work off the overbought condition.
It appears that XLE (energy ETF) has made a daily and weekly cycle bottom on July 14 at its 50-week moving average. It has resumed its up trend. The continued XLE uptrend means inflation will remain high, which will put pressure on the Fed to hike aggressively, therefore it will further put equities under pressure.
The best cure for inflation is recession. A recession is inevitable in this cycle. So the coast is not clear. Please take your profits quickly. You are not missing anything if you are sitting on cash right now.
We are still holding PLTR, even though we have been trading it back and forth as well. PLTR is a defense play, but the market hasn’t priced in the defense premium for PLTR. It will report earnings on August 8th before the market open. With the beneficial macro conditions for PLTR, it should report surprisingly good earnings this season. We are planning to add more shares next week betting on a good earnings report. We will take profits if it rallies after the earnings report. If it crashes after earnings report, it would be fine. We’ll just hold it. PLTR is closer to a bottom than a top.