The market rallied mindlessly post the July Fed meeting, which didn’t sit well with the Fed.  The Fed would like the equities to stay at lower valuation to diminish the wealth effect associated with a richly valued stock market.  The stock market is one of the major parts of the broad financial condition which the Fed is trying very hard to tighten.  Quite a few Fed officials came out one after another to talk loudly about their revolve to raise rates to fight inflation.  This time the tough talk didn’t work at all.  The stock market was due for a daily beta cycle high to low phase last week.  Instead of following the daily cycle schedule, it extended the daily cycle.  We thought the super good jobs data (strong jobs data would keep the Fed in hiking mode) on last Friday would cause the market to fulfill the daily cycle high to low phase.  It did reacted negatively at open last Friday, but the effects of the negative reaction was completely wiped off at the end of day.

The emboldened stock market reaction to the Fed’s repeated threats about rate hiking underlines two things in our mind:

1. There are still a lot of money left with the corporations and consumers.  The recent rate hikes have not been felt throughout the economy therefore there are no rate hike casualties yet.  In other words, the economy right now can handle the normalization of higher interest rates.

2.  The strong jobs data shows the economy is really strong and is not in recession.  There is no precedent that the US economy could add more than half million jobs while in recession.

These two above factors will cause the Fed rate hiking cycle to prolong, meanings there is on end in sight when the Fed would stop raising rates.

In the 4-year cycle point of view, we could call this June 17 low as the half of the 4-year cycle low.  This June 17 low is only 27 months from the March 2020 4-year cycle low.  There is no way that this June 17 low can be a 4-year cycle low.  When we talk about the stock market 4-year cycle, it can range from 32 months to 68 months.  48-month is the average length of a 4-year cycle. Because the March 2020 4-year cycle low was powered by unprecedented amount of money, the cycle will not end until the money is spent.  Perhaps when the Fed stops rate hiking, that’s when the economy is injured and can no longer afford the higher rates, at which time we can see that the stock market becomes the Fed’s real casualty through action, not through rhetoric.

Out of the maximum confusion about the fundamental picture concerning rate hiking and jobs data, we should follow the stock market price action.  The price action leads fundamentals.

The earnings season is not as bad as feared.  The Fed has done all they can to fight inflation through action and words.  The market is fighting the Fed, so we have to go with the flow.  We will stay long with our positions until late August.  The summer rally will last at least until late August.  If you don’t want to trade the summer rally, it’s fine. There maybe an opportunity in the fall to add your positions.

In this current 4-year cycle, March 2020 to June 2022 is the period shaped by the Fed policies changing from super easy money to tough money.  The second half of the 4-year cycle will be shaped by the toggle of war between the Fed and economy for the purpose of fighting inflation.  The second half of the 4-year cycle will be laborious because the Fed boogeyman is lurking in the background.  The Fed purposefully doesn’t like the stock market to rally.

Below is the S&P 500 daily chart.  It is sitting at a known 50% retracement and not backing down with the Fed talking tough and a super strong jobs data.  The fundamental events can’t move the market at a well defined retracement level, then we have to respect what the market is intended to do.

Perhaps the market could have another 1-2 fast down (dips in the morning get bought to close strong) days next week to finish the daily cycle.  We would add QQQ ETF if that happens.

We will not publish our next Sunday blog on August 14 as we will be on the road traveling.  We will send out short emails if we can.  Thank you for your understanding.  Good luck with your short term trading.