Looks Like Momentum Could Shift

Despite eking out new all-time highs for the major indexes last week, it looks like momentum may be starting to wane.

The SPX managed new highs last Thursday. This may signal further upside. A look at the daily charts isn’t where the problem shows up. It’s in the weekly chart, where the trading range was narrow and finished overall lower for the week.

This type of weekly pricing pattern often shows up near the peak of trends and often identifies a point of capitulation.

Analysts have been arguing for some time about whether or not Fed policy will be shifting in response to inflation. Thus far, the Fed has been steadfast in keeping rates low. However, there was yet another large reverse repo last week that largely went unnoticed. This short-term tool is used by the Fed to pull liquidity out of the markets. Read another way, they were reducing liquidity… aka higher rates.

Granted, a repo is a super-short-term event. So by no means does this indicate the Fed has changed course. But it makes this analyst pay attention. What if inflation is less transitory than believed? What if the recent spike in Covid cases leads to a new wave of policy response (as it has in Oregon, where masks are being required again in most public buildings and schools)?

If the Fed does change course, the underlying assumptions for pricing models will change. If the Fed doesn’t change course, that does not mean the markets cannot change course on their own. So last week’s weak pricing is a sign to pay attention to.

The near-term low would be around 4365. This is a likely figure to test this week. On the up-side, it looks like 4450 is the first level of resistance.

This is the beginning of August, and earnings season is well underway. By the end of the month, the bulk of earnings season will be over. It seems the theme is increased caution in future guidance. Last week’s pricing behavior certainly appeared to agree.

The real question is whether or not the Fed still has a handle on this thing. Their track record has been pretty good the past few years. But the historical track record has often ended with an inflationary run-up, ramping interest rates, and a recession. And the markets historically drop when it happens.

The good news… it hasn’t happened… so far…


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