Ever since the Fed realized the mistake of calling 2021 inflation as transitory, they turned the Fed into a weapon of mass destruction in the worldwide financial systems by shocking the markets with the fastest rising interest rates in history in 2022. They are using lagging data such as the CPI report as a guild and totally disregard the state of the financial systems. The Bank of England had to step in to rescue the UK gilt market twice recently. Who knows how many hidden risks are about to blow up due to the tight liquidity in the financial systems?
The extreme oversold conditions in the equities and bonds are due for a relief rally. The rally will not come until the Fed makes a statement of a changing attitude.
Without a statement from the Fed, the rallies in the stock market will be sold immediately, just like last Friday. No one wants to take any risk when the Fed is this mad about face. The Fed is trying to over tighten to compensate for their mistake of acting too slow to tighten the extreme loose monetary policy.
Technically, it is 17 weeks into the current weekly cycle. The average length of a weekly cycle is about 18. If the weekly cycle doesn’t turn by the 18th week, then it could potentially turn on the 20th week, which is the week of the November Fed meeting and the mid-term election. The continued volatility in the stock market and the disappearing liquidity will cause some hidden risk to blow up and the Fed will be forced into a corner, therefore a changing attitude about the rate hiking and QT.
The time is ripe for the Fed to pause from now to early November. So sit tight, wait until the Fed makes a clear statement about the pause before opening a long trade. It doesn’t pay to short at this point. Just sit in cash and wait.
If indeed we get a rally from here in Q4, it is still a bear market rally. The true bull market will not come until Q3 2023. It just takes that much time to absorb the Covid boom.
Below is the S&P 500 weekly chart.
You can see the S&P 500 is hesitating around its 200-week moving average around 3599. It touched the 200-week moving average in the last three weeks. Our guess is that the S&P 500 will continue to fall below its 200-week moving average a little bit and reverse from here to reach 3900 for the year end rally. Let’s see.