The January CPI data was hotter than expected, even though the previously released CPI data have established a trend line of decelerating inflation since June 2022. Numerous hawkish Fed officials have come out to voice the need of further rate hikes to ensure inflation doesn’t come back bite us. The market, however, took it on the chin last week. The NASDAQ even eked out a small gain on the weekly basis. Investors are in a bind as risk appetite slams into a resolute Fed that is determined to do whatever to keep fighting inflation.
The main questions baffle everyone now are: How long can the market fight the Fed? Who is in control? Can the Fed keep a lid on the markets at will?
The bulls argue that all is priced in. As long as the Fed is getting closer to the end of the rate hiking cycle, all is well because of the stability coming from a rate hike pause and the Q1 earnings were not as terrible as the bears feared.
The bears argue that all is not priced in yet. The lagging effects of the Fed rate hiking actions have not been priced in and the economy is in worse shape than what the current econ data reveals.
From seasonal cycle point of view, we know the mid October 2022 low is a seasonal low. So far the market has rallied 4 months from the mid October 2022 seasonal low. If the move from the mid October 2022 low is a bull move, the rally has to last more than 5 months, which leads us to March 2023. Based on our work on past seasonal cycle statistics, the 5-month length of time is a dividing line between a bear and bull. In a bull market, the market spends more time going up. In a bear market, the market spends more time going down. So we need to know if the market rally can survive the March Fed meeting. In other words, the current rally must go beyond March in order for it to be called bullish.
If the rally falters in March, the mid October 2022 low then is not secure and it maybe taken out in the next selloff.
But if we look from the four-year cycle perspective, the mid October 2022 low could well be a four-year cycle low. The reasons are below:
1. It’s 31 months from the March 2020 low to October 2022 low. The average four-year cycle is about 48 months, but there were short four-year cycles like 31 months in length in the past.
2. The early cyclical sectors such as semi-conductor and small cap have been out performing the market, which in itself is an indicator of a early bull cycle. The market is seeing the turnaround in the near future.
In our private emails to our subscribers last week, we stated that the market could be in sideways to down trading until the next CPI reading and the next Fed meeting in March. The earnings season is almost over, and the Q1 earnings are not as terrible as feared.
In the NASDAQ weekly chart below, we marked s on the 11/26/21 seasonal high, 03/18/22 seasonal low, 08/19/22 seasonal high and 10/14/22 seasonal low.
The NASDAQ must take out 08/19/22 seasonal high to qualify the 10/14/22 low as the four-year cycle bottom. The DOW has already taken out the August 2022 seasonal high. So if the Fed indeed raises only 25-50 basis point during the March meeting and makes some kind of statements about waiting for the policy to work through the economy. The market will continue to rally and we can count on the rally to last into Q3.
Let’s see what happens in the next Fed meeting.