4 reasons I don’t trust this rally

I usually like to quote other analysts and sources for a backdrop in these blogs, but today I am going to quote myself from my last blog, here. So far, my market call for the probability of a weak/flat market into the July 27th meeting followed by a nice pop on the Wednesday and on has been 100% accurate. Here is my quote:

“..stocks could be flat or sell off into Wednesday´s Fed meeting. Then, they have a decent potential to rally, especially assuming we get less than 100 bps of tightening.  Not a prediction. But a very decent potential of happening.” SPX target of 4170-ish.”

I also went on to say: “That rally, should we get it, will not likely last….If the rally brings us to around 4170 … and fades….I will sell into it. “

Today I would like to carry on that thought with some neartermed market views. One reader commented that he felt 4170 wouldnt be hit. I cannot disagree. My stance is that 4170 is a max target (unless a miracle happens and it is blow through). I will sell on the first sign of my predicted mini-rally fading. I dont really care if that happens at 4170 or…now.

In a nutshell, I trust this rally as much as I trust:

  • Gas station Sushi
  • Big Foot & UFO sightings
  • Anything Justin Trudeau says or does
  • Taking pills from Bill Cosby
  • My weather app’s 10 day forecast

Below are some thoughts regarding why this rally may fade:


Reason 1: Seasonality combined with mid-term patterns and the 200 day SMA

SentimenTrader published a performance summary of the SPX during August and September (the seasonally weak/volatile period of the year) during years with mid term elections. That’s this year, FYI.

As you can see on their summary chart below, there have been 14 up August-September periods, and 11 down periods in such mid-term election years. The average return during the down years was a loss of 9%, vs a gain of 4.7% during the up years.

Lets take that further. This is not your average mid-term election year for the markets. In case some of you just woke up from a 7 month slumber: We are in a bear market. Shocking, I know. A bear market is characterized by lower peaks and troughs on a weekly chart and a price level below the 200 day/ 40 week SMA. That’s where we are now. Here’s the next set of data from SentimenTrader – assuming the market remained above or below its 200 day SMA for those two months:

  • Cumulative gain when $SPX > 200-day EMA = +10%
  • Cumulative loss when $SPX < 200-day EMA = (-41%)

Yikes! If history repeats, we could be in for a serious spanking on the markets in the coming two months.

Reason 2: Neartermed chart is looking precarious

The daily SPX chart below contains the indicators that can help guide us to very neartermed movements. Not a trend. It only helps predict a neartermed blip. When we have a Bollinger Band test (high or low) and a hook from an oversold OR overbought RSI and stochastics, you often have a neartermed price move. Right now, we have a very definitive upper BB test, a probable hook down on stochastics, and an RSI signal that is over the median but is NOT hooking down yet.

Any sign of weakness in the coming few days will complete the picture for a reversal. This, whether we reach my potential target of 4170, or not. Its all about what IS happening, not what SHOULD happen!

Reason 3: Fed policy

Craig and I were not the only ones who suspected a 75 bps rate hike on July 27th. So our predicting that was not a stretch.

However…Our predicting the market weakness into the meeting … and the strength after was somewhat unique to us.  Nobody else I know of was talking of that potential- not to say nobody else did. We viewed the 75 bps as a sign that – as I have described in other blogs — the Fed is aware of the potential of stagflation.  The 75 bps (vs 1.0%) is an admittance that they wont be hiking much more. The Fed just admitted – they cannot forcefully commit to future aggressive accommodation withdrawal – aka – you have seen the last 75bp hike this cycle, maybe for decades.

For most of this year – the Fed talked accommodation withdrawal – endless rate hikes out to Q1 2024. The Fed had been using “forward guidance” and its media pawns to tighten financial conditions hoping to suppress inflation. But, they over-cooked the goose. Both the Canadian liberals and the US liberals started far, far too late in:

1. Admitting inflation wasn’t transitory


2. Raising rates.


3. Kyboshing the spending, money printing and deficit expansion

Both governments played catchup on inflation.  In a panic, after denying inflation for too long. Then, they went too hard & too fast on tightening. This – while wastefully spending like a drunken sailors on frivolous left-wing appeasing expenditures. Canadian gender studies – really? Now, they recognize they are well  into the danger zone- too much money supply, too little action when it should have happened. So now, we/they are dealing with their own incompetence. Nearly certain recession risk or stagflation is forcing them to now open the door to easing soon!!!

Furthermore, we know the Fed doesn’t like hiking just before an election. And they sure want to reduce the unpleasant task of announcing an economic slowdown/ recession coming into the midterm elections. See my comments above, quoting research from SentimenTrader regarding the mid-terms. So they will be forced to live with something closer to long termed 3% or perhaps a bit higher , such as 4% inflation. This, while the economy slows. Stagflation!!

So- My next Fed/ BOC “prediction”: You’ll probably get a small-ish final hike in September (50 bps?), and the worry of more than that will casue some market volatility in the coming weeks. But, that rate hike may well be followed by easing possibly by the end of the year – or early 2023! This as I suggested in my very important “3-step” blog back in June. So far, that blog has been quite predictive. That policy reversal will likely be the signal for the end of the bear market. But it could start a sideways market… and that’s the subject of our upcoming research report.

So far, my thoughts presented on that blog have been pretty much 100% accurate. Now, the case for a pause in tightening after this hike is now stronger than ever, in our view.

Reason 4: Inflation – how it impacts macro market trends

So – The Fed and BOC can’t hike aggressively – per my thoughts above. That means persistent inflation with no likely return to 2% (their misguided target). I’m thinking double that (4%?). What happened last time the market witnessed persistent inflation? Well, that was between 1965- 1980. Albeit, CPI growth was much more aggressive than what we might see this time, its a good historical reference. Here’s the Bloomberg chart of CPI in that era

Here’s the DJIA with that era highlighted in a box. Notice the go-nowhere sideways market? This will be discussed in more detail in our upcoming research paper. If you subscribe to the VT update newsletter, you will get a copy soon. If you don’t subscribe, you should Click here to do so.

It might be noted that in the 1965-1980 sideways era, the 3 best sectors were Energy (by and far the best performer) followed by Industrials, and Materials. I’ve been talking a lot about the longer termed outlook for energy lately. See my upcoming video on the commodities space.

Also–I just published a video with some of the charts for the upcoming research paper. Click here to view it. If you don’t subscribe to the videos, you should. I have some very interesting interviews coming up in August with uber-smart guests. Click here to do so.

That’s it for today–prepare to receive our macro market research report next week if you are a newsletter subscriber. I’m looking forward to your input. As always, any questions on todays blog – post them below


  • Hey Keith
    I normally agree with you … and your reasoning is sound…. But SPX and most markets will be higher at the end of August

    • Thanks Chris–Anything can happen and, per my comment to Wendy – I will play it by what happens. I am systematic when it comes to trading. My prognosis is based on a projection, but ultimately I aim to trade based on what is ACTUALLY happening at the time. I am curious as to your reasoning behind a rally through August? Always like to hear another persons analysis. Thanks

  • Hi Keith,
    I know that you wrote this blog before Yellen’s commentary today. In the question period, she stated that we are not in a recession because the labour market is tight. You can’t have a recession with full employment.

    The question I would have asked is where did all the workers go? Everyone I talk to asks that very question. From all that I can gather, during the pandemic a couple of things happened.
    1) The exodus of the Baby Boomers from the work force was accelerated leaving a huge deficit of workers.
    2) Some of the people who got covid either died, developed long covid, or developed some other disabling problem as a result of getting covid, and they are gone from the work force.
    3) Immigration had been suspended.

    So why do we have a tight labour force? It’s because the Labour Force SHRANK during the pandemic! There aren’t enough workers to fill demand. Can you say Wage inflation? As you have said, wage inflation is sticky!

    If the FED is going to base their definition of a recession on the condition of the Labour Force and not based on the technical signal of 2 quarters of contraction of the GDP, then we have a long way down to go. Minus 41%? I would not at all be surprised based on their rational of what defines a recession! There will be a big re-rating of valuations.

    Will they ease raising rates or slow down based on what Yellen just said? If they let it play out, the question would be how far does GDP have to fall before there were mass lay-offs that Yellen referred to as an indicator of a recession in the Labour Force?
    I think that you are likely right though that they will ease off because of political pressure, but not because they have reached their inflationary target. I agree that there will likely be persistent inflation of somewhere around 4%. Not a chance it will be 2% if they ease in the Fall. Stagflation.

    So why are markets continuing to rally? They heard that we are not in a recession, and the Labour Market is strong. 🤦‍♀️

    From your blog, I assume that you are using this rally to raise more cash? What percentage of cash will you likely raise?

    I look forward to reading your research article “No Where Side Ways Market”.


    • Wendy–you just wrote a great synopsis of my blogs–thanks for that!!
      We are about 32-33% cash in the Equity Platform, and somewhere close to that in the Aggressive Platform. I expect to get closer to 40% cash if the SPX does not break 4170 (which I suspect it will not ). I have to play it by the discipline, and not guess –if markets roll over in the next few days (could even happen today…who knows), I am out. If it goes through 4170, I stay. Binary, unemotional process!
      Re employment being high–that is changing:

      38% of small restaurants are implementing hiring freezes because of inflationary pressures, and 4% are cutting staff to stay in business, according to Alignable, which polled 5,350 small business employers from May 10 to July 19. Overall, 60% of small business owners say their labor costs have increased, and 18% say wages are now 25% higher than they were pre-pandemic. Some small business owners told Alignable they are working longer hours themselves to fill the void

  • Hi Keith, if the Fed/BOC is opening the door to easing soon as stated under Reason 3 above, is there anything holding you back from legging into the energy trade early? Or, are you still looking for a break of resistance levels for WTI and iShares XEG ETF (outlined in your “Opportunity” blog), a break of 4170 on the S&P AND a favorable Bear-o-meter reading? The chart looks constructive for iShares XEG ETF at the moment.

    • I agree and yes we will be legging in soon. September can be ok for the sector seasonally -although the big performance period is in the winter. Macro factors and the chart encourage us to get back into the sector very soon (we do have 6-7% exposure now).

  • In the sideways market of 1965 to 1980 the best 3 sectors were Energy, Industrials, and Materials. That was before big Technology. A lot of people are recommending Technology now. How do you think Technology would have performed if it had been around.

    • Actually tech was around but to your point, not so prevalent. I do indeed think tech is going to be a leading sector–read my recent blogs, and my most recent videos and you will see my strong argument for that

  • It’s always good to get a different perspective, so I thought I would share what I am seeing and hearing from other top technical analysts as well as top strategists.

    The stock market has surged more than 10% from its mid-June low of about 3,600, and the gains can continue into the second half of the year.

    That’s because things, at least for now, aren’t as bad as they seem to an investor base that has been fixated on 40-year highs in inflation, swift interest rate hikes from the Federal Reserve, and growing fears of an imminent recession.

    Here are five reasons some strategists believe is behind what’s driving the impressive rally in the stock market over the past month, which adds to confidence that the bottom for the year is already in. Those reasons include:

    1. Inflation risks are abating as gasoline tanks, food prices ease.

    2. Second-quarter EPS results are better than feared with 70% beating on EPS.

    3. Many companies are reporting easing of supply chains meaning supply-chain inflationary pressures abating sharply, including semiconductor chip availability.

    4. Strategists capitulated last week with many seeing S&P 500 closing 3,800 or lower by year-end.

    5. Institutional investors are arguably near maximum pessimism given BofA gross exposure at 2008 levels.

    Those five factors help explain the strength in stock prices despite June’s horrific CPI report. Some technical analysts are calling the current rally the most healthy uptrend so far this year. The confidence stems from the fact that the current rally is viewed with a healthy dose of skepticism by market participants, who were burned on prior bear market rallies in March and May.

    The current rally puts the S&P 500 testing resistance at the 4,000 level, which is a key psychological level that is much closer to its all-time high of 4,800 than the 3,000 level which many investors are waiting for.

    And with inflationary trends beginning to ease, there is less urgency and incentive for the Fed to shock the markets with elevated interest rate hikes. That means a Fed pivot could occur sooner than later, which would likely further support stock prices into year-end.

    • Thankyou Carmine–this was a well put together comment. The factors you mention are indeed in my mind, and must be taken into account. My view remains, if the SPX can break its last peak in the declining peak/trough sequence we have seen since the beginning of the year, we are out of the bear. We must watch the charts first and foremost. There is a very reasonable chance that the market may have finished its bottom and begin a base. In that case, it would be expected to see a sideways consolidation – lid at or near the last peak (4170), support near 3700.

  • A very thoughtful & articulate post by Wendy

    From a TA perspective this recent rally of the S&P is the first one in 2022 that displays higher lows and higher highs off a bottom.
    The other 3 rallies were always preceded by multiple bottoms and sideways prices.

    It does seem the markets are pricing in a slowing of rate hikes to avoid a deep recession but that hasn’t stopped the Fed before.

    I think Powell made a few comments that suggest volatility.
    A data dependent FED from meeting to meeting & the potential for “unusually large rate hikes in future meetings” doesn’t sound market freindly.

    Finally I believe your key resistance level of 4170 makes sense and will be a key level to watch.

  • Hello Keith,
    I really appreciate your insight.
    What is the outlook for natural gas between now and the end of the year and the seasonal trend for UNG and UNL, in light of Germany’s supply problem?
    Thank you very much.

    • Adam–Nat gas recently hit a former resistance point, so there is a struggle for it to hit new highs in the nearterm. Seasonal trends are positive from early September to November–and it wouldn’t surprise me to see some strength in gas during that period and a breakaout

  • Hi Keith,

    Its interesting that you bring up this sideways period potentially. That has sort been my thought process too. Is that not Secular Bear Market? Like in 2000 and 2007 the SP500 basically double topped.

    Thank you,

    • Parm if you are newsletter (VT update emailed newsletter) subscriber you will have a full report coming to you this week on that very subject!

  • Hi Keith … I like simple ideas like this one you’ve mentioned: RE: “A bear market is characterized by lower peaks and troughs on a *weekly chart and a price level below the 200 day/ 40 week SMA. That’s where we are now.”

    Can I safely assume you meant –> A bear market is characterized by lower peaks and troughs on a weekly chart and a price level below the 200 day/ 40 week SMA on the *daily* chart.

    I am frequently found pulling foot from mouth but in case I am onto something here, your clarification on this is much appreciated.

    • Bob–40 week SMA is roughly equivalent to the 200 day SMA–and for major trends I always use weekly charts. So my rule is, falling peaks and troughs on weekly chart while remaining under the 40 week SMA = down trend
      Peaks and troughs on weekly chart that are rising while above the 40 week SMA = uptrend
      I recommend you take my online Technical Analysis Course. You will learn my complete system on it. Well worth your attention if you wish to form an investment discipline. I cover EVERYTHNG you need to know on it.


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