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There might be a video later today, but I’m late this weekend, so the video might not come until tomorrow.
It’s going to be an eventful week for stocks, with an FOMC meeting and all mega-cap stocks reporting results. The market looks too complacent at this point, with a VIX index trading at 23 and a VVIX index at 84.5. With the VIX at 23, it is currently at its lowest level this year, ahead of an FOMC meeting, which I find bizarre.
The Fed is expected to raise rates by 75 basis points, and the Fed’s CME monitoring tool even suggests a 20% chance that the Fed will raise rates by 100 basis points. (Should be free to read – The Fed may inflict a gigantic shock on the stock market this week)
Yields fell sharply on Friday, but much of that drop was due to a sharp drop in European rates, with the German 2-year falling 23.5 basis points to 41 basis points. Yes, the German 2-year yield fell 36% on Friday. The German 10-year yield fell 18 basis points to 1.04%. The drop in European rates is mainly due to the non-approach of the ECB’s monetary policy. The ECB raised rates by 50 basis points last Thursday, but gave no guidance for the September meeting and also noted that the 50 basis point increase last week would not change the expected terminal rate.
Despite the drop in the US 10-year rate by 12 basis points on Friday, the spread between the US and German 10s widened by 5 basis points. This gap is likely to widen further, especially if the Fed keeps its promises and indicates further rate hikes in the future.
Meanwhile, last Thursday, the BOJ left monetary policy unchanged, meaning that the Japanese bond market’s peg will continue to help suppress global rates. Currently, the gap between an American and Japanese 10-year-old is extremely wide. With the BOJ maintaining its control over the yield curve, it will be harder for US rates to extend much higher at this time as the spread is already at record highs.
This tells us that Friday’s drop in yields is less a reflection of the current economic situation here in the US and more a reflection of central bank policy action late last week. Understanding this topic is critical as inflation expectations did not fall at all on Friday, despite the sharp drop in rates. This means that real yields have fallen to keep pace with falling nominal yields to keep inflation breakevens stable. As a result, the TIP ETF rose sharply. This narrowed the gap between the QQQ and the TIP a bit.
NASDAQ futures have been in an ascending channel, and so far the move from the July 13 lows to the July 22 highs has matched the June 17 lows to the June 27 highs, which could suggest that we have completed the ABC retracement wave. out of the June lows. This may very well indicate that the NASDAQ futures QQQ is moving back to the lower end of the trading channel.
S&P 500 (SPY)
Meanwhile, the S&P 500 completed a 38.2% retracement of its decline from its March 30 high to June 17 low.
The S&P%500 also saw a 100% extension from its June 17 low to June 27 high…
And a 161.8% extension from its June 30 low to its July 8 high.
It would seem that the highs seen on Friday would be the perfect place for the S&P 500 to have at least hit a short-term top. This is an even better place to see a steep decline, and given the weakness in the VIX, it wouldn’t take much to push this market down with a gap at 3,830, the most reasonable first target level.
Visa will release its results this week, with inflation nearing 9% and strong nominal GDP growth. I think Visa would be a big beneficiary of this environment since the payments are nominal and not adjusted for inflation. To me, Visa and Mastercard seem like good inflation hedges but get little attention. Maybe this quarter changes things for both.
Visa is in a significant downtrend, which has presented resistance twice now. This seems like a good technical setup for the stock to break out if the company delivers better than expected results. (As of April for subscribers of Reading The Markets – Visa And Mastercard Inflation Hedges? [Video])
Mastercard will also report results this week and has a technically similar setup to Visa.
Apple is also reporting this week, and I saw expectations for some slowdown in services revenue growth. But consider the terrible results from Verizon and AT&T; I can only wonder about the health of Apple’s handset market and the potential outlook. Also, Apple is expected to see a big hit to its revenue and earnings due to the strong dollar, but the stock hasn’t acted like anything bad is going on.
That’s all there will be for now.
Charts used with permission from Bloomberg Finance LP This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a Fellow and Investment Advisor with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of directors of any related company that issued these shares. All opinions and analyzes presented by Michael Kramer in this analysis or market report are solely the opinions of Michael Kramer. Readers should not treat any opinions, views or predictions expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell any particular security or follow any particular strategy. Michael Kramer’s analyzes are based on independent information and research which he believes to be reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and should not be relied upon as such. . Michael Kramer has no obligation to update or correct the information presented in his analyses. Mr. Kramer’s statements, advice and opinions are subject to change without notice. Past performance does not represent future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss by following any investment strategy or commentary presented in this analysis. The strategies or investments discussed may fluctuate in price or value. The investments or strategies mentioned in this review may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as an appropriate recommendation for you. You must make an independent decision regarding the investments or strategies in this analysis. Before acting on the information contained in this analysis, you should consider whether it is appropriate for your situation and strongly consider seeking advice from your own financial or investment adviser in determining the suitability of any investment.