Market Journal: SPX Squeeze On Deck
Bullish market internals, continued VOL pinning, FED soft landing talk, and likely soft Core CPI next week position the SPX to squeeze to new highs in the coming days and weeks.
Discussion
The set-up was there this morning for the bond market to take control and for the SPX correction that appeared to kick off yesterday to resume. But since this morning, rates have backed off, HY CDX has dropped, and VOL has come in; in addition, XLU has hung in after getting hit early, but XLP and XLV are lagging badly, and breadth overall is much more bullish than flat indices would lead you to believe. On the FED front, Fed Funds futures are pricing in just one additional hike despite sticky AHE data in today’s NFP, and it’s clear from Nick Timiraos’s Twitter commentary (confirmed by my own private communication with him) and the fact the Fed sent Goolsbee out to talk soft landing that the Fed is going to be dragged kicking and screaming into more hikes beyond July.
Adding it all up, I believe SPX is setting up for a squeeze starting either this afternoon or early next week ahead of what is likely to be better-than-expected Core CPI data. Three things give me confidence in this view beyond my own analysis of market conditions and the Fed as outlined above:
Goldman’s analysis of seasonal adjustments flattering Core CPI data in June and July
Darius Dale’s analysis of inflation continuing its “immaculate” descent through June and July (before becoming a problem later this summer)
And Cem Karsan’s commentary on the relentless VOL pinning by structured product flow
This is why the team approach is so critical for putting together all the key pieces of evidence.