The Market: Short-Term Pullback Thesis Stop Loss
Despite its irrationality, don't fight the "soft landing" narrative until FOMC.
Discussion
Yesterday on the Fed Watch channel I said that the Fed’s change in tone toward publicly contemplating rate cuts starting next March needed to be taken seriously in the context of a “weight of the evidence” stop loss on short exposure. I was dialed into the Fed “going for” a soft landing over the last couple of weeks, but where I erred was in immediately looking for a pullback from blown out equity sentiment once the market ripped on the soft inflation print last week. I underestimated the steam the soft landing narrative would gain in the wake of CPI despite FED Governor Waller pushing back on Friday. As I said in the Fed Watch write-up below, until the labor market starts to obviously deteriorate the soft landing narrative is going to be very difficult to fight from the short side.
Perhaps I am stopping myself out of the short-term pullback thesis just ahead of Jobless Claims ripping on Thursday, but barring a surprise there I believe SPX is well supported into FOMC next week as market participants anticipate FED Chair Powell blessing the soft landing path and hinting at rate cuts starting in March. However…
Waller regularly speaks on behalf of Powell just ahead of blackout, so I suspect Powell’s press conference commentary will be in line with Waller, pushing back against the reflation likely to undermine the very soft landing they are looking to engineer. As such, with sentiment blown out to the upside heading into a more-hawkish-than-anticipated Powell I could see a pullback commencing during or soon after he speaks next Wednesday. Whether that pullback is THE pullback into September/October depends on the level SPX rallies to into FOMC.
As discussed on July 1, SPX 4600/4700 is the level Cem Karsan outlined as the next zone to take a shot on the short side. Whether we get there into FOMC is up for debate, but 4650 is only 2.65% away from 4530 so it’s not out of the question. If it gets into that zone there is a very good chance that’s it before THE decline commences into September/October. However, it frankly feels inevitable that SPX needs to move to its ATH of 4818.62 before all is said and done with this squeeze. So, the most likely scenario, IMO, is SPX rallies to 4550-4600 into FOMC, pulls back 5-10% as a gut check for new bulls, then rips to the ATH sometime in August before crashing (yes, crashing) to 3000-3500 into September/October.