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Discussion
Building on Sunday’s Market Journal note, I’m starting to see the shift in cross-asset market evidence toward a period of tactical risk-off for SPX. It’s not shortable in any way, shape, or form, but it’s notable enough to stay neutral and wait for opportunities at lower levels.
Notes to myself from 10:32am EST this morning.
The cross-asset market evidence is beginning to shift, led by on-going hideous breadth, and now today sticky IG CDX despite green indices.
As I type I’m listening to Powell in front of Congress, and frankly I’m surprised he’s not more dovish. He very much maintained the position of the June SEP, noting there has been “modest” further progress on inflation; he specifically noted that June’s 4.1% unemployment rate is low; and he actually mentioned the possibility of hikes, though said it is unlikely.
Perhaps Powell is just trying to keep September 50-50, and if Thursday’s CPI comes in cool they’ll immediately shift to guiding to a September cut. But I don’t think that’s correct. I think he is d/b/a Burns, but he’s also well aware that a rate cut cycle will unleash an economic growth-friendly round of financial conditions easing.
In no way, shape, or form will I consider even the smallest of shorts here with Yellen’s liquidity bazooka sitting beneath the market. But the set-up for a pullback to the 20dma is starting to come quite nicely into view, and if Thursday’s core CPI print comes in above 25 MoM with no downward revisions to past prints, SPY might even find its way down to the 50dma before resuming the uptrend.
Lastly, in the wake of the French election shock I’m growing concerned that a Trump victory is not the lock currently implied by betting markets pricing a Trump win at 60%. Biden gave a forceful defense of his candidacy on Morning Joe yesterday that did not AT ALL sound like pre-canned remarks from Jill Biden. He’s not going anywhere, and if Democrats around the country view this post-debate debacle as an existential crisis staring down Trump 47, there’s a chance support for Biden over Trump comes back in a sizeable wave. I’m closely watching Biden’s odds for a second term for signs this wave is in process. Given Trump’s bullish economic policy platform, a falling chance of Trump 47 could be tactically market-negative.