How high will it fly?

With the Fed coming out with its statement this week, markets will probably nervous through to Wednesday in anticipation. Regular readers will recall that I have been espousing the probability of the Fed (along with the BOC) at some point acknowledging the reality of recessionary potential. You might want to review this blog for my view on the Fed/BOC playbook.

This week offers the first chance for the Fed to soften its language towards its tightening posture. Stocks may tread water or sell off into Wednesday´s Fed meeting, then rally after the meeting on language implying a softer path going forward.

We may well see the markets rally after the meeting because –

  1. 100bps may be off the table at this meeting. We are thinking 75 bps as an “educated guess”. We shall see.
  2.  Future 75-100bp hikes are NOT likely happening. We are thinking that the Fed will guide towards lower rate increments  – one might read into the language coming from the Fed this week hints of that potential.

So, in a nutshell: Craig and I believe 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

That rally, should we get it, will not likely last. You might disagree and think we are off to the races. But, if you have taken my Online Course, then you know that the downtrend is in place until we get a higher high followed by a higher low. The last low was near 3500. The last high – which is also at a very key resistance level, is just below 4200 (4170 to be a bit more precise). So, a move above 4170 for a number of days, followed by a low that doesn’t break 3500, implies a base or end to the bear.

That 4170 level is a big hurdle. Note the purple horizontal line on the daily chart below – and the early 2022 support tests then resistance test in June. If the rally brings us to around 4170 … and fades….I will sell into it.  As Howard Marks says, you can’t predict. You can prepare. I won’t predict – although my opinion is that 4170 wont be breached materially.

Key point: We must assume the downtrend until 4170 + is overtaken at the very minimum.

The game plan

Lets say the market rallies after Wednesday on a kinder, gentler Fed announcement. At ValueTrend, we are near 1/3rd cash in our Equity Platform. We beleive that it will be prudent to raise more cash if we do not see 4170 broken by at least 3 days, particularly if we see the rally fade (decline) from that approximate point. Keep in mind that when I say 4170, that could mean anywhere from the mid 4100’s to 4200. Markets don’t hit precise technical targets. They can overshoot or undershoot a bit. The key thing is to watch price action. If it keeps moving up – all is good. But if we don’t … well, you know what I am doing.

A significant research paper

Craig and I are are working on a research paper that will be sent to all subscribers to our ValueTrend Update newsletter shortly. This paper is a macro review of 100 years on the stock markets, and the patterns we anticipate playing out over the coming years. It will contain technical and fundamental observations. Its way too big for a blog, so I am sending it out by the newsletter. If you don’t subscribe, you should. We often cover subjects that are not covered on this blog, such as this in-depth paper. Click here for more info.

 

Final thought

When the markets turn as volatile and confusing as they have this year, even the most patient investors may come to question the wisdom of the investment plan they’ve been following.

 At ValueTrend, we’ve seen a lot of different markets come and go. And we certainly emphasize with people who find the current environment troublesome and disturbing. We’d like to help, if we can, and to that end, here’s what we offer:

By appointment, you’re welcome to come in and sit with us for a while. Or, we can arrange a phone conversation or Zoom meeting. We’ll ask you to briefly outline your financial goals – what your investment portfolio is intended to do for you. Then we’ll review the portfolio for and with you.

 If we think your investments continue to be well suited to your long-term goals – despite all the market turmoil – we’ll gladly tell you so, and send you on your way. If, on the other hand, we think your strategy will no longer fit with your goals, we’ll explain why, in plain English. And, if you like, we’ll recommend some alternatives.

Here is the contact page of the ValueTrend website. You can call or email to contact us, and we will get back to you to arrange an appropriate time and date to have a conversation. Contact Us | ValueTrend

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6 Comments

  • Thanks for doing the blog. always an interesting read. I will be surprised if we see 4170 but it would be a good place to add short QQQ and Russel positions.

    Reply
    • Yes Harry, the 4170 is not a prediction, it is a significant point of tech. resistance. It could easily NOT rally at all, or if it does, then not get near the 4170…or…who knows… it could go through that 4170 level (not my bet!). The main thing is to keep the trigger finger ready! Don’t predict. Do prepare.

      Reply
  • Great post Keith. It recently occurred to me that what if we have already put in a low on June 16th. I know you expect a washout, and so do I, but then I thought markets are forward looking and given how quickly they recovered during Covid what if high inflation and a possible recession are priced in already and any good news might send it higher. What’s your thought on trends within a trend? It looks like we have set a higher low and a higher high since the “bottom”. If good news propels markets higher, that 4170 won’t take long.

    Was this bit sarcasm/freudian slip or just a typo 🙂
    “They can undershoot or undershoot a bit.”

    Reply
    • Thanks for catching me on the overshoot/undershoot–its been fixed. I type my blogs fairly quickly as with the videos – I am trying to get a number of projects done within a timeframe and, well, I often go back and notice things like this when its too late! My most recent video I did my usual quote of Howard Marks, but called him “Howard Stern”! Doh! Classic word-association brain fart.
      Anyhow, I am certainly open to a market base starting now. True, I give the odds for downside, but that may be totally offset by a move over 4170. I am (as Howard Marks would say) prepared no matter what. I will sell if 4170 doesnt break, I will buy if it does. But either way, I move in steps, one leg at a time. Becasue things can change even if we get a breakout.
      “Slowly, slowly, catchy monkey…”

      Reply
  • Hi Keith, any thoughts on todays Fed meeting and the market reaction? Anything that changes your thinking on the energy trade?

    Reply
    • I will cover the market on a blog I hope to post today July 28

      Reply

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