After suffering the worse week since the Pandemic infused market collapse, the stock market has rebounded this week. The price action currently rests solidly inside last weeks range and can be viewed as nothing short of a relief move.
Absent a massive collapse today, which isnt entirely out of the question (FRIDAYS have seen some massive downside in 2022) the S&P500 is set to post only its 2nd positive week out of the last 12.
A stunning turn of events for this market that has been so accustomed to upside the last 13+ years. I recall as recently at 2017 where the market had trouble falling two consecutive sessions, let alone two consecutive weeks.
But lets face it, the FED has done a great job choreographing this. The Bullards were talking down asset prices many moons ago. He is out again this morning talking up interest rates.
The pause button on downside remains on. At least for now. The pressure cooker is letting off some steam. The heavily shorted names are seeing perhaps some profit taking and covering.
What has my attention is... bonds are creeping back up - yields moving lower.
Crude oil has pulled back, along with a massive move lower in energy stocks.
and...
Commodities are coming down. Just look at the likes of US Steel and Alcoa.
and those grains?
All have tapped and retreated from long term, all time, resistance.
In each case, previous tests have seen the grains plummet from current levels. Will we see that again?
WHEAT
CORN
SOYBEANS
Fertilizer stocks have plummeted
From an inflation perspective. This is encouraging.
Oh yeah. And how about that long talked about inflation hedge. The one that's going to soar when inflation hits because everyone needs inflation protection in their portfolio.
We have the highest inflation in 40+ years in 2022 and that inflation hedge gold is...
drumroll....
It's flat!
Wow... imagine waiting 40 years for your gold to rocket higher on massive, historic inflation... and when that inflation finally comes, gold does nothing.
Anyway....
We are still in the midst of an interest rate hike cycle. The only thing that will stop it... a rapid decline in prices. We are starting to see that with the fertilizer, commodities, and yesterday even copper tumbling.
The FED has done a lot of talking. The market has already done a lot of pricing.
My thought is that the FED will not have to hike all the way to 3.5%. With mortgage rates already doubling, and the cost of capital already on the rise.... the FEDs hawkish talk is already doing some of the hard work.
The real wildcard remains crude oil and the price of gas at the pumps. Those prices need to fall and fall quickly. The consumer remains strong, but clearly disposable income is flowing more toward pumping gas than it ever has. Which means less disposable income heading to services, food, and entertainment. Which isnt bullish for the economy.
From here lets continue to watch commodities, grains, gold, copper, steel, and see if the move lower continues. Lets see if bonds have bottomed and continue to catch a bid.
And lets watch the VIX for a sustained move back to 20 and below. All would be a nice bullish sign for the market.
After seeing 10 of the last 12 weeks get some nasty selling pressure, this week could just be a little rest stop. A break. A pause before the selling picks up.
Clearly there are going to be a lot of companies struggling to refinance their debt in the weeks and months ahead. We could be at the very tip of a giant default iceburg. And with it perhaps a big row of dominos ready to fall.
While we are by no means out of the woods yet, the pruning of this stock market the last 12 months will create stronger companies down the road. And that... long term will be a great thing for investors and the economy.