I woke up these headlines on my Twitter feed Friday morning: "POWELL: US HAS A VERY STRONG, WELL RECOVERED ECONOMY."
Jerome Powell said a soft landing is still "possible," but conceded recession was also a possibility in his congressional testimony last week. He noted that it is difficult for anyone to forecast a recession. He also testified the Fed is hitting the appropriate balance between combating inflation and slowing the economy. Some stock pundits agree that inflation will be under control in a few months and the Fed's approach is working, pointing to oil retreating and copper prices declining.
As I've previously mentioned, there are several domestic and international causes of inflation, most notably food and energy prices with geopolitical and environmental influences. The prospect of a global recession caused the commodity markets to shake, with wheat, for example, falling about 20%-25% from its peak. Meanwhile, equities rallied 6% or so off the lows. Most of the gains were seen in biotechnology and mega-cap tech, more defensive than risk.
So the new sense of hope saw liquidation in the commodities market and a move for retail investors to buy in the equities market. Does that make this rally a technical bounce or a new bullish breakout?
Let Price Guide Our Trading
First off, the quarter ends this week. Last quarter, the market rallied 13% in 6 days before falling back to new yearly lows. Second, if we are repeating history, we could rally another 7% or so in the coming week for quarterly rebalancing.
Looking at the Economic Modern Family, this whole rally (as we wrote about) began with Granny Retail, followed by Big Brother Biotechnology. Then, after perceived dovish comments by Powell and decent earnings in FedEx, Transportation took off, followed by Regional Banks and Semiconductors. Although we should note that SMH had an inside week (traded within the range of the week before).
IWM is the key to watch and is the only one in the economic family that remains under its 200-WMA. That will resolve one way or another and provide important clues.
Junk bonds rallied, which is risk-on, having an inside week and trading within the range, so lots of uncertainty and follow through still needed.
Things I am Watching
The Fed's balance sheet increased this week, which likely surprised many people, including me.
The University of Michigan Consumer Sentiment index plunged to 50 Friday. Consumer sentiment has not been this bad since the early 1980s. Since the Supreme Court just overturned Roe v. Wade, political differences, worries about inflation, growing income division all remain front-of-mind.
As mentioned, I am keeping my eyes on the modern economic family, most notably the Russell 2000 (IWM), the Transportation sector (IYT) and Granny Retail (XRT).
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ETF Summary
- S&P 500 (SPY): Filled a gap from June 9th making 380-383 viable support. Next resistance 50-DMA 406.90.
- Russell 2000 (IWM): Needs to clear the 200-WMA at 176.47 to see more rally. Support is 170.
- Dow (DIA): 50-DMA above at 325.25 and support now at 309-310.
- Nasdaq (QQQ): 50-DMA at 305.40, support 295.
- KRE (Regional Banks): Inside week 56 the 200-WMA, 60 resistance.
- SMH (Semiconductors): Inside week. 230.76 50-DMA and support at 212.
- IYT (Transportation): Big reversal, now needs to hold 211.90 with resistance at the 50-DMA of 231.70.
- IBB (Biotechnology): Thanks this for helping this week - Above the 50-DMA with resistance on weekly chart at 121.15.
- XRT (Retail): Started the party holding the 200-WMA. Now, 50-DMA resistance at 67.00.
Mish Schneider
MarketGauge.com
Director of Trading Research and Education
