As the recession countdown begins, the market finally took notice of rising yields and the continued talk of higher rates. In last week's message, we discussed that while the bulls were betting on a "no recession" scenario, the market was beginning to question that bet, and a deeper sell-off was coming.
In last week's message, we discussed the bulls were ignoring the Fed's continued hawkish stance on monetary policy. We were also concerned that the correction had likely started in the short term as our MACD sell signal had triggered.
In last week's message, we discussed the bullish signals the market was giving despite the Fed's continued hawkish stance on monetary policy. The commentary remains vital to this week's analysis as our primary short-term "sell" indicator has been triggered for the first time since early December. While that sell signal does NOT mean the market is about to crash, it does suggest that over the next couple of weeks to months, the market will likely consolidate or trade lower. Such is why we reduced our equity risk last week ahead of the Fed meeting.
Last week's message asked the question of whether the market's break above the long-running downtrend line was a "head fake?" The market surge continued last week but ran into resistance on Friday as markets are pushing well into 3-standard deviations above the 50-DMA. However, while the weakness on Friday was not unexpected, it is also necessary to determine whether the current breakout is legitimate.
The upcoming FOMC meeting will likely determine the market's direction over the next few weeks. While many market participants are hoping for a "kinder, gentler Fed," As noted previously, the recent commentary suggests such may not be the case.
This week's report will cover several tidbits of data impacting the market over the last week. The most critical tidbit came from St Louis Fed president Jim Bullard (a non-voter this year), who spoke to the WSJ's Fed Mouthpiece Nick Timiraos. He stated that while US interest rates have to rise further to ensure that inflationary pressures recede, "the US is now 'almost' in the restrictive territory."
Interestingly, despite the Fed continuing to send warnings, "Fighting the Fed" has become the bull's new mantra. From one economic report to the next, bullish investors continue to look for any reason to buy stocks in hopes the Fed will pivot soon. Such was the case this past week as the markets rallied again, heading into the much-anticipated inflation report.
The recent release of the FOMC minutes and stronger-than-expected ADP employment data led to a sell-off early in the week. However, Friday's more robust employment report led to a massive surge in stocks as wages showed some initial weakness. Once again, and having failed to learn their lesson, the bulls piled into stocks hoping for a "Fed pivot."