Both Sides

I can see both sides, the short-term bull and bear case. The bears can say the rally is already 10 percent. That's a good spot for termination if this isn't a more substantial bull run. The bull case is that stocks like Netflix didn't make new lows in June and in this case, is only up about 20 percent. The bear case is "that's because this wave isn't done yet."

I'm looking for a reversal here if it is coming, otherwise I think a stock like Netflix and Meta are going up enough to test their big gaps.

Hope You Like WWIII

Gory to Ukraine

The ending is that Washington, not liking to lose, doubles down by picking a direct fight with Russia—for example, by doing exactly what it is doing now with Lithuania. And Putin, foolishly, takes the bait. Folks, I hate to exaggerate, but this is actually kind of a realistic pathway to World War III.

I don't know how people cannot see that Western governments are leading their nations into a genocidal war. I don't get it. Many of the same people who were screaming about masks and lockdowns are cheering on nuclear annihilation. Being clown world, the same people who think Putin is Hitler seem to not think a nuclear strike on New York or DC is possible, despite Russia's military doctrine allowing for first strike and asymmetrical use of nuclear weapons. People who were hiding under their beds from covid, crying themselves to sleep because of Trump, mostly live in what are prime targets for a limited Russian nuclear strike. Many of the same people who irrationally fear CO2 emissions will heat the planet a few degrees over a century aer risking heating many of its cities to the temperature of the Sun instantaneously.

Jingoism, xenophobia and irrational nationalism don't surprise me. That the people who scream loudest about tolerance, fighting hate, anti-racism and so on are the most demonic haters in society no longer shocks me. But the fact that so many people saw the true face of this regime over the past two years and fought mask mandates, closed schools, lockdowns and mandatory vaccines, and then flipped on a dime to supporting a foreign policy that is destroying the economy (almost all of the "inflation" is the leftover price premium caused by Russia sanctions) and risks nuclear war shocks me. During the Cold War, Americans and Soviets worked on avoiding nuclear conflict despite their vast ideological differences. Today, there's borderline bloodlust from the American ruling class (and Putin too if you think he's Hitler 2.0). They will destroy the American economy, the currency, and risk getting nuked in their pursuit of Russia. They've also baited the hook for Putin. I can only hope Russia can do what Allies did in 1948 and break the blockade:

With their blockade, the Soviets cut some 2.5 million civilians in the three western sectors of Berlin off from access to electricity, as well as food, coal and other crucial supplies. Though the Red Army far outnumbered Allied military forces in and around Berlin, the United States and Britain retained control of three 20-mile-wide air corridors from West Germany into West Berlin, according to written agreements with the Soviet Union from 1945.

Beginning June 26, 1948, two days after the blockade was announced, U.S. and British planes carried out the largest air relief operation in history, transporting some 2.3 million tons of supplies into West Berlin on more than 270,000 flights over 11 months.

U.S. and Canada Are At War With Russia

VD: Canada is at War with Russia

Troops are on the ground, but not a signficant amount.

My take: Russia was at war with the United States in North Korea and Vietnam, but it never escalated into a hot war. Iran was supporting Iraqi forces during the occupation and helped kill American soldiers, but it was not at war with the United States. The U.S. armed the Mujahadeen in Afghanistan. Nothing new here. Enemies will often help an enemy of their enemy. The problem I see is, are we back to a Cold War mentality with defined economic blocs and expectation that enemies will intervene in wars? Or is there greater risk of WWIII because these lines aren't clearly defined? It seems more like the latter than the former here.

China Financials

China financials look cheap or with potential bullish patterns. The wildcard here is like with Japan: is there a nomainal breakout coming that will be fueled by currency depreciation?

Here is the U.S. China Financials ETF, CHIX, sucking wind. It could have a long way to rally if China's markets rise and the currency rises.

At this stage I'd prefer nominal exposure with a currency hedge. I think the current bear market rally around the world would have to transform into an actual bull market, complete with weaker USD and emerging market outperformance, for a pure long China trade to pay off with low risk. That said, looking at something like Shenwan (a stock I liked way back in the 2014 time frame), my sense is a nominal bull market will deliver enough gains to offset currency devaluation. Financials usually get destroyed in currency devaluation/high inflation scenarios, but maybe Chinese banks are so weak and priced cheap for their risk, that high inflation/currency deval would lift that risk.

Current Market Cheat Sheet

Top yellow horizontal is the 2018 low, bottom is the 2022 low. The bull/bear refers to both ZB and stocks right here.

Rallying Up the Wall of Worry: I Don't Expect 10pc CPI in June

The Cleveland Fed does a Nowcast of inflation similar to the Atlanta Fed's GDP Now model. It takes incoming data and projects the CPI that the government will release. (Both are linked on the left sidebar.) The Cleveland Fed is projecting a CPI above 10 percent for June. Is this possible, even though inflation has almost certainly peaked? Here's crude oil:

Those boxes are one-month each, showing April, May and June. It's clear to see crude oil hasn't started reversing CPI yet. It is stabilizing, but unless it craters this week, it won't do much to slow inflation. Some else has to be spiking if the Cleveland Fed projects such a high CPI reading.

In early June I posted Vertical Home Price Move Ending. It discussed how the CPI measures housing and how that data lags:

If what I'm seeing online is correct, home prices won't peak until April. The Case-Shiller index might not peak until June or July. The final peak of the "real" CPI will be well into double-digits.

I am not surprised by the Cleveland Fed's forecast, but by the timing of it.

Also, timing is everything in the markets. The Federal Reserve meets on July 27. They will have almost a month of fresh data (they have access to raw economic data), while the June CPI will be in the past when it is report on July 13. The question I'm wrestling with is: when to go short again? Will the rally terminate on or around July 13 if the CPI comes in at 10 percent headline or will it keep rallying if the monthly change is low? What's driving headline? Will the Fed react to incoming data or to the headline news?

The simple answer is follow the charts. This is why charting can be useful: you ignore the noise. We have two viable scenarios. Let the chart tell us which will unfold.

We can also analyze the CPIAUCSL data set available at FRED. I plugged in the month-on-month change needed to reach 10 percent CPI in July.

When I look at all the charts I posted in Adios Inflation, I wonder how can the Cleveland Fed project a 2.3 percent increase in a single month when the commodities spike in March 2022 only produced a 1.2 percent monthly increase. My hunch is CPI is going to come in much lower than expected. "Way lower" if the 10 percent Nowcast spreads around. Inflationists will be caught out of position, providing fuel for the next (final?) leg up in stocks.

Nasdaq Clears March 2021 Horizontal

An extended rally will chew into some of the topping patterns.

The biggest rally I expect this time is 25 percent in the Nasdaq. That would set up a massive H&S top. It would target 7708 on the Nasdaq, or a test of the March 2020 lows.

Not that different from my RTY WAG from a few weeks back.

It also happens to line up with a 50 percent retrace of the decline from the top.

If my WAG was correct, that would be a 45 percent decline from this current rally's peak.

Haidilao Finally Turns

A lot of volume down at these levels. Looks like a solid base.

FOMC Statement for July 27, 2022

Overall economic activity appears to have moderated after edging up in April and May. Job gains have been robust in recent months, and the unemployment rate has remained low. The Brandon remains elevated, reflecting supply and demand imbalances related to the Brandon pushing up energy prices and broader prices.

The Brandon in Ukraine is causing tremendous human and economic hardship. The invasion of Ukraine by Russia and related events are creating additional upward pressure on the Brandon and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to Brandon risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent and anticipates that ongoing increases in the target range will be appropriate as long as the Brandon is in effect. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals or if the Brandon goes away. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, Brandon pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Lisa D. Cook; Patrick Harker; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller. Voting against this action was Esther L. George, who only wrote "Let's go Brandon" on a napkin.

Missed 10-Bagger: XLU

Tim Knight did a premium post on XLU two weeks ago. The price cratered early and bounced. A relatively high price after that was $64.50, so let's go with that. It closed at $69 per share on Friday. I skipped this one because I expected areas such as tech and biotech would lead the rally and because I thought XLU might not bounce much with rates stuggling to rise. I know, however, that XLU options can be extremely profitable in surprising moves because they are priced for low volatility. I remember checking the options, but didn't think XLU would pop enough for a trade. It did. Going out a few dollars on a monthly call expiring in July (like say $68) would be be more than a 10-bagger, as would many other strikes. Point being, big money can be made when the market is "mispricing" the options becuase it doesn't appreciate the risk of it blowing up or down. Whereas stocks like GME and TSLA have huge premiums baked in, many stocks and funds the market is sleeping on can deliver huge returns if you have the timing right.

Fertility Crash: Negative Mood, the Vaxx or Both?

Two tweets I saw passed around thsi weekend looked at Germany's and the Netherlands' drop in fertility.

Unless there is a vaxx and unvaxxed control group, the drop could be mainly driven by social mood. If mood is driving it, the drop will accelerate around August or September (mapping to the stock market peak rather than vaccinations) and continue sliding for at least six months.

Here are the Germany and Netherlands country ETFs. They peakedin May and August 2021, respectively.

Stretched Tops

This is a one-year top in copper overlaid with a roughly three-month top in crude oil. Two of the most sensitive industrial commodities, and I believe copper is showing the way.

Animal Spirits

I don't know if I've ever posted DOGE before. If so, I neglected to tag it.

The Other Rally Killer: Commodities, Or How the Bear Plays Out

The Federal Reserve cannot really ease until oil peaks. My current thinking is as follows.

1. Crude comes down

2. Fed turns dovish in July, possibly with 25 bps hike or puts pause on table for September

3. Stocks finish their rally if still going, or bounce again

4. Crude oil starts rising too

5. Federal Reserve is backed into corner when "inflation" reaccelerates

The Federal Reserve has no answer for an economy that demands more energy and materials, for whatever reason. If capital reallocates from "tech" to "commodities" then the CPI goes up. The wildcard is Ukraine. The developed markets created a self-inflicted commodities embargo with their Russia sanctions. They can undo this at any time and alleviate pressure. That is the last outlier risk, it would be the last leg of any rally and trigger a low in commodities.

Profit Taking in Biotech

After leading the rally, biotech is selling off today. Potentially a side of running out steam, but also a sign of natural profitaking as sectors such as communication services (XLC) take the mantle.

As long as biotech is an outlier, I think this is healthy rally action. It will be concerning if the rest of market sells off and biotech continues falling.

Credit Spreads Crushed

The catalyst for this spike was a decline in consumer inflation expectations according to the University of Michigan's consumer sentiment survey. Dropped to 3.1 percent versus 3.3 percent expected. My Eurodollar calls were down in the AM and popped on this news. If this keeps up, the rally can gain steam.

Will Credit Spreads Kill a Rally?

High-yield bond spreads are widening as treasury yields fall. 

I've focused on the March to May 2008 rally in stocks because it's the best example for skeptical bears. Bear Stearns had just collapsed. We know what doom followed. Yet stocks rallied for about two months and gained 15 percent (measured by SPX). It even happened with credit spreads blown out. Here is the spread with IWM inverted.

Here is it now. Thus far tracking step for step.

Here's HYG divided by TLT, another indicator that turns on a dime with the end of QE, tapers and QT, and vice versa.

I do not expect a very strong rally if credit doesn't participate. It could terminate at any time if HYG turns down.  If credit participates, then a large rally of 20 to 25 percent becomes possible. 

Rally On

The most important levels are the gaps on the ES and RTY, and support on RTY. The ES has a gap 1.5 percent higher (as I'm tryping) at around 3890 and RTY about 4 percent higher near 1800. Support for RTY is at 1715, it is the only major support level on the three main indexes.

Will Fed Reduce Balance Sheet by $70 Billion This Week?

The Federal Reserve's balance sheet has grown by $20 billion in June. It was supposed to reduce by $47.5 billion. These balance sheet readings come on Wednesdays. The Fed is already about $70 billion off course with one week to go. We can debate whether the Fed should or should not be doing this much QT, but there's no debate on this: the Federal Reserve is destroying the last shreds of its credibility when it contradicts its own policy statements.

Another Trade Setup That Will Emerge

Short Australian and Canadian housing, via various proxies.