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I think fading rallies will more likely than not the way going forward.
- The S&P 500 rallied a bit heading into the month of August, as we have pierced the 4000 level.
- This is a bullish sign but at this point, it’s probably a bit much to assume that we are going to turn around. In fact, the market has been in a relatively stable channel for the last several months and has not broken out above it.
- It is probably only a matter of time before we see sellers come back into this market.
- This is a situation where the market probably got overdone to the downside, and I think what you are looking at is a situation where signs of exhaustion will occur.
Watching the Fed
Once we get the signs of exhaustion in this chart, then I believe that the sellers will push this market back down to the lows. While the Federal Reserve raised interest rates by 75 basis points on the 27th, the reality is that the market is starting to look at the idea that perhaps the Fed is closer to slowing down hikes than raising them. The market tried to get ahead of the Federal Reserve, but ultimately, I think this is a scenario where we still have plenty of concerns on there and judging from what Jerome Powell had to say during the day, the Federal Reserve will more likely than not be highly sensitive to inflation numbers coming out over the next several weeks. As that is the case, this market will literally go up or down with inflationary figures.
Personally, the market is probably going to go back into the “bad is good” phase again. If economic numbers continue to slow down in the United States, the idea is that the Federal Reserve will be paying close attention to the idea of inflation dropping. If economic numbers are getting worse, the idea is that inflation will eventually stall. In other words, they will try to “front run” the Fed. This will make volatility worse, not better. Nonetheless, it’s not until we break above the 4200 level that I would be looking at this as a longer-term uptrend just waiting to happen. Because of this, I think fading rallies will more likely than not the way going forward.
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