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July 29, 2022

Don't Be Fooled By This Rally

Frank Cabibi

As global equities rise as central banks continue to stay hawkish on curbing inflation numbers. However, some things have led to risk appetite which we will discuss as well as what could happen due to this rally in stocks. Here is what we think might happen and why you should not be fooled by an event like this.

Fed's Tone

The Fed decided to raise rates by another 0.75% which has brought interest rates from 1.75% to 2.50%. However, investors took the FOMC statements as less hawkish than expected. This was due to the fact that Powell mentioned the possibility of loosening up on quantitative tightening.

As output slows, economists can argue that a recession is already happening. And with each contractionary month, we can start to see a pattern here. This is probably why Powell talks about getting more dovish. Although these hikes won't stop, the Fed still plans on increasing rates but with less aggression.

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US inflation index

For example, the 75 basis point hikes might shift to 25-50 over time. But this would have to depend on where inflation goes. So far, there is no sign of stopping as the inflation index reached 9.1% from 8.6%. That marked the hardest move since February.

Market Drivers

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GDP growth rate in the US

This table shows us the GDP growth rate in the US each quarter. Since January, output has slowed and even showed decline. We are seeing minor improvements in the growth rate, but there is still quarterly declines.

Output and inflation are some of the market's biggest movers. Investors need to see that things are improving so that they can start investing again. Fears of another sell off coming still loom, but people who have been cash heavy are also worried that they could be missing out of the next bull market.

Analysts are arguing two sides of the coin, so it's unclear where to turn to. By looking solely at the fundamental metrics of the US economy, it's pretty clear that they are very much not out of the woods yet.

With that said, here are some setups to upside and downside and which levels are going to be deciders in market direction.

Trade Setups

SPX500

On the 1D timeframe, price has already broken above resistance at $4070 and is working its way up towards the $4200s. A key bullish flag would be if we saw another higher low and high on this timeframe as well as a break in the $4200s level. A bearish indicator would be if we saw rejection on either level of resistance and a test at support around $3920.

There is also resistance in the 61.8% fib zone that could pair with the previous top to push price lower. Several supply levels wait above the current price, so the index will probably struggle to move higher should the rally continue.

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