Since the exceedingly hawkish December Fed meeting, the market is still in sour mood even though the DOW remained above its 200-day moving average during the last week’s selloff. The NASDAQ is under attack by trading very close to its mid October low. The S&P 500 has retraced 50% of the mid October low to December 1 high. It is only 10 weeks into the weekly cycle, and the weekly oscillators have all turned down, as if it is entering the weekly cycle high to low phase.
But on the daily cycle level, it looks like it would enter a new daily cycle while the weekly cycle is in down trend. We believe the market perhaps would be trading sideways with upside bias to finish the remainder of 2022 in the next 4 trading days. The lower channel line has been violated and perhaps it will try to climb above the lower channel line in the next four trading sessions. This is only possible because of the seasonal effects. A little bit of winder dressing by the institutions.
The next Fed meeting is to be held on February 1, 2023. It would not surprise us that the market throws a tantrum and crashes hard in January 2023 to force the Fed to pause. At this point, only a Fed rate hike pause can turn the market around. It was the Fed causing the market selloff, it has to come from the Fed to cause the market to reverse.
The simplest market signal is to just follow the Fed, not fighting the Fed. No amount of technical analysis can change the fundamental cause of the market demise.
It is 10 weeks into the current weekly cycle. It would be 16 weeks into the current weekly cycle when the Fed makes decision on February 1, 2023. That is an ideal location for a weekly cycle bottom. If the mid October bottom is not violated in February 2023, then it is a good sign for the market to trade up for the next 4-6 months.
Historically a Fed rate hike pause is bullish for the market for the next 4-6 months. The first rate cut is when the Fed admits that enough damage has been done. Between the rate hike pause to the first rate cut, we would have a true relief rally.
Fundamentally, debt service burdens have never been lower, households have a boatload of cash, corporates have good balance sheets, profit margins rolled over, but they’re close to record highs. The banking system has never been as well capitalized or as liquid. Every state has a rainy day fund. The housing market is under built. It is usually overbuilt going into a recession…The foundations of the economy look strong.
Because of the sound fundamentals, we remain confident that the current bear market is not the same kind of bear market in 2007-2009. It is going to take some time for the Fed to finish the rate hiking cycle, but once the rate hiking decision is finished, the market finds some degree of certainty related to the cost of money, the bull market can resume.
Below is the S&P 500 daily chart. The market may trade along the lower channel line for the next 4 trading days to finish 2022. The cease of selloff in the next 4 trading days is seasonal effects. If it’s in a different season, the S&P 500 could be trading below this lower channel line and proceed to make the weekly cycle bottom.
