The much anticipated Fed June meeting came and the market brushed off the Fed’s hawkish stands of two more potential rate hikes down the road.  The bullish momentum just kept going as if the Fed was irrelevant.  The Fed spoke clearly that there is no rate cut in 2023 and quantitative tightening is ongoing.  Despite the market momentum, we still firmly believe that this is NOT the beginning of a new bull market.  It is a momentum driven rally against the backdrop of a de-accelerating economy and tighter monetary policy. The Fed’s goal is to bring down the economy to fight inflation.  The economy is not in recession now, but it doesn’t mean that a recession will not pop up when the majority of the market participants are not expecting one.  The market is designed to fool the maximum number of people.

The current market condition is very similar to the period of June 2006 to October 2007.  The Fed lowered interest rates after the DOTCOM bubble burst to save the economy.  The Wall Street conjured a bull market in real estate and the entire country went into the lure of an ever increasing residential real estate market because of the easy mortgages.  The residential housing market peaked in 2006 but the collateral damage was not felt until 2008.  The money in the system popped up the stock market.  The S&P 500 rallied 30% from June 2006 to October 2007 against the backdrop of an inverted yield curve.  The market is perverse.  It always behaves against common sense.  A weak economy and tighter monetary policy should result a lousy stock market, but it is not always the case.

Apparently the vast money released into economy during the pandemic is still available in the system.  This explained that why the economy and stock market handled the fastest rate hike in history without too much stress yet.  But the day will come, the Fed is relevant in every corner of the economy and stock market in due time.

Technically, the S&P 500 is 13 weeks into the current weekly cycle.  A seasonal high location starts from August thru October.  So this weekly cycle has the potential to stretch into August to make the weekly cycle high.

The S&P 500 April 2022 high is 4637 and the 78.6% retracement is 4534.  So we could see the S&P 500 to reach 4530 area by mid August, which will give us a 30% rally from the mid October 2022 low.

The important question is what will the S&P 500 do after it reaches the 30% rally from the mid October 2022 low.  Will the counter economic trend rally be over by August? Or it has another leg to go.  We don’t know that answer.  A lot of bearish investors who missed this rally will try to get in after the first meaningful correction.  The answer probably could be in the leadership rotation.  If we see defensive sectors such as consumer staples and healthcare take over leadership, then we know that trouble is coming.  Right now the consumer staples (XLP) and healthcare (XLV) ratio charts against SPY are in down trend, that means risk-on rally is well and alive.

Below is the S&P 500 weekly chart.

We are looking for the S&P 500 to reach 4530 area sometime in August.