Range Bound and Pressure Building

US PCE Inflation continued to moderate nicely in June and as the final piece of the puzzle to confirm the Federal Reserve is most definitely on hold, it fitted well.

US PCE Inflation 0.2% month, 4.1% year.

US stocks were buoyed by this data and the upward pressure persisted.

Still, stocks remained in their range of the past week. Again highlighting the point being made here that despite some rather major historic bullish news, the incredible bull run of recent months is looking a tad tired.

US stocks are up over 20% from their lows, but still below the previous high, when we went aggressively bearish, in January 2021. Is that previous high assailable on this run? This powerful up-trend?

Throughout last week I was emphasising the importance of the Federal reserve’s last rate hike, Q2 GDP and the PCE outcome. All were clearly and emphatically bullish. Yet, no new high since Thursday. In fact, the US500 closed on Friday only near the highs of seven trading days ago.

The market has been going sideways with only one momentary blip higher for nearly two weeks now. Hardly the kind of price action you would expect from a market which received such emphatically bullish news.

Markets are always a challenging matrix of underlying fundamentals, data and news headlines, and of course market positioning. The view here is that the fundamentals remain worrying to say the least, even if a soft landing there is no take-off in sight, the news is all very good to the markets view on the Fed, and so this leaves market positioning?

We all know there have been massive share buybacks going on that severely distort the markets true perception of a particular stock. This distortion can even tilt the markets view to the positive, because of the upward price action that is achieved. Regardless of whether the company is really performing better at all.

Then we have that broad based funds pool of excess liquidity being driven by US and European government largesse. In all forms of spending including the war in Ukraine.

So where is the markets true value? In truth, we never know this. However given current PE ratios it is probably lower than where it sits now. This is the battle between reality, and excess funds plus buy backs.

The price action of the past seven trading days is a bit of a giveaway. It signals the equity market is tired. That positioning is already extremely long.

The other unknown is just how leveraged can this global US and equity market become? New leveraged products abound every day and reach an ever widening market. Does this mean the rally can be perpetuated for quite some time? Maybe until the fundamentals of the West recover in the next 1-3 years? It is possible.

However, with this kind of immediate price action, a break below last week’s trading range in any of the major stocks or indices, would indeed be confirmation that the market is tired beyond belief. Share buybacks cannot go on forever. If they were to stop, that could be the end of the game.

Right now, I strongly suggest being cautious at least and perhaps going defensive in a big way should last week’s supports at US500 4,530, Dow30 3.520, and NASDAQ 15,400 give way. At any time.

It should be an interesting week, one way or the other.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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