Discussion
Someone asked me over Twitter what my thoughts were on the prospect of a market correction into September, and it forced me to clarify the path ahead in my mind. Nothing all that new to these pages, but just clarifying to spell it out:
Since you asked, here is what I think the set-up is. All sorts of developments could and likely will knock the market off this path, but here’s what I think right now:
1. There hasn’t been enough risky asset weakness (barring Mon-Wed) for Powell to be as dovish as the market would like on Wednesday (but I agree with you, market probably interprets as dovish for a 2% spike)
2. Market sentiment measures are already way extended
3. TSLA/NFLX reactions to earnings tell me the market is fully priced
1+2+3 = market corrects into August. Probably not more than 5%, since hedges likely get rinsed into any weakness beyond 3%.
Any SPX weakness more than 3% the market will be begging Powell to coo at Jackson Hole. He will. And SPX rips back to 4600/4700.
Then larger correction into September/October.
Obviously, my opinion could change by noon today if certain indicators start exhibiting certain signs. But as of right now that’s my thought.
Futures are modestly green this morning, but I find it curious that VIX is solidly bid, Bitcoin is down, and European CDX is green. Solid negative divergences worth highlighting.
Lastly, I’m still waiting on Nick Timiraos’s FOMC outlook piece to finalize my thoughts on Powell’s likely message on Wednesday. The default is Waller’s pre-blackout message of a tightening bias with extreme data dependence, but there’s still a chance Powell could be quite dovish if the path of 2s is any guide. His outlook should be out by noon today, as he didn’t produce anything this weekend.