As I predicted last week, the S&P 500 is on the verge of 4,300. The ongoing rally in the S&P 500 and its related ETF – the SPY – has stunned just about everyone in this market. The obvious reasons are clear. First, the economy sits in a technical recession.
The Federal Reserve projected that it would likely continue with aggressive interest rate hikes in September to cool structural inflation and concerns around rising wages. We just learned that the New York Fed’s Empire State Manufacturing Index experienced its second-worst month-over-month slump.
If you listened to Wall Street, you’ve missed this rally. This Merrill Lynch indicator – which measures institutional sentiment – has been at max negative for nine straight weeks. That time coincided with the absolute bottom of this market after a crash in the S&P 500 to about 3,600.
No one wants to sell right now. But investors are skittish about buying as well. This is why I only follow my momentum measurement of the S&P 500. When it goes positive, I purchase the SPY and other related assets. I’ll buy the ProShares Short S&P500 (SH) or related options when it goes negative. That’s been the cleanest strategy in such a sideways market.
The SPY will likely consolidate around 430 this week. From there, believe it, the next possible move higher is to the April 21 high around 447.
Consumer Sentiment During This Rally
This week, the Federal Reserve releases minutes from its July meeting. That has largely been a risk-off event this year, except for the most recent release in early July. The minutes will likely offer a bit of clarity into the central bank’s plans for the September rate hike. Currently, markets have priced in about a 60% probability of a 50-point hike. There’s a 40% chance that rates move by 75 points.
There is still a lot of time before we get to that meeting. We’ll have the August jobs report on September 2. This month’s Consumer Price Index (CPI) report will arrive on September 14. Then Quad Witching comes a few days later. I don’t think it’s worth speculating either way. I’d prefer to react to the market in real-time using the momentum indicator.
But I am very interested in tomorrow’s earnings report from Walmart (WMT) and the other retail reports that arrive this week. Walmart set the tone for the second quarter worries after questions about consumer spending and inventory levels. The health of the American consumer will be the end driver of this market – and the increasing likelihood of a recession.
As I’ve noted, Americans have hit new record levels for credit card accounts, real-savings rates are dropping, a credit bubble may form, and more Americans are trying to sell their homes.
That doesn’t add up. The problem – unfortunately – is that markets can and will rally on low volumes, short squeezing, and rampant speculation. There’s no sense trying to be the first over the wall, as this long-toothed rally could extend into early September… Maybe longer. Eventually, a reckoning will come, and I’ll tell you down to the day when it started. For now, be patient.
Emerging Markets Woes
Finally, I want to point out that the story about the strong dollar, emerging market debt, and rampant crisis is only a Flashpoint away. Sri Lanka and Bangladesh face remarkable challenges with their debt. The Fed’s ongoing efforts to contain interest rates at home impact dollar-denominated debt in other nations.
Historically, we’ve seen multiple crises after aggressive Fed rate hikes (1994 in Mexico, 1997 in Asia, and global woes in 2018). Today, we have dozens of nations that face challenges in the wake of the worldwide debt explosion dating back to the COVID crisis.
The list includes Bitcoin enthusiast El Salvador, nuclear power Pakistan, and famine-riddled Ethiopia. This should be a concern not just because of national security issues, but also because there are plenty of retirement accounts that own debt-linked to emerging markets. I’ll talk about the one emerging market that may create global havoc in the next 90 days… Tomorrow.