Mid-week market update: It’s remarkable how resilient the stock market has been in light of the challenges it’s facing. The S&P 500 ended an upper Bollinger Band ride last week and it’s been consolidating sideways. The newsflow has been mostly negative, and stock prices have been given lots of opportunity to retreat but the index remains in a narrow trading range, all while the percentage of S&P 500 above their 20 dma has retreated from overbought levels to neutral.
FOMO stampede continues
I am reiterate my bullish view that asset managers and hedge funds have missed this rally and now they are forced into a FOMO chase for equity exposure. as evidenced by this analysis from J.C. Parets.
The BoA Global Fund Manager Survey tells the same story. Risk positioning is normalizing, but readings aren’t excessive.
Remarkably, reported equity exposure is barely overweight despite the recent buying stampede.
In the absence of significant and unexpected shocks, the path of least resistance for stock prices is up.
Bond Market Risk
That said, the biggest risk to the equity bull is the bond market. Two recent developments have pushed up my inflation expectations factor. More importantly, the 30-year Treasury yield is now above the psychologically important 5% level and the USD is in a downtrend.
Inflation expectations were boosted yesterday with the release of the June CPI report. Even though CPI came in softer than consensus, the market was rattled by the increasing evidence of tariff pass-through. Bloomberg U.S. chief economist Anna Wong reported that her estimate of the tariff pass-through coefficient had risen from 0.20 to 0.26. Ernie Tedeschi of the Budget Lab observed that prices of tariff-sensitive consumer goods were rising strongly. As a consequence, the market adopted a risk-off tone as it awaited the next inflation shoe to drop.
Today, reports circulated that Trump was about to fire Fed Chair Powell for cause based on cost overruns of the renovations of the Federal Reserve building. Trump later denied that he was planning to dismiss Powell. I interpret these threats as a red herring as a way of putting pressure on the Fed to cut rates. The relevant excerpt from the Federal Reserve Act states [emphasis added]:
The Board of Governors of the Federal Reserve System shall have power to levy semiannually upon the Federal reserve banks…an assessment sufficient to pay its estimated expenses and the salaries of its members and employees…and such assessments may include amounts sufficient to provide for the acquisition by the Board in its own name of such site or building in the District of Columbia as in its judgment alone shall be necessary for the purpose of providing suitable and adequate quarters for the performance of its functions. After September 1, 2000, the Board may also use such assessments to acquire, in its own name, a site or building (in addition to the facilities existing on such date) to provide for the performance of the functions of the Board…The Board may maintain, enlarge, or remodel any building or buildings so acquired or constructed and shall have sole control of such building or buildings and space therein.
The Trump Collar
In conclusion, I regard the recent market action as the Trump Collar in action. High market anxiety creates the market discipline to active a Trump Put, otherwise known as the TACO trade. As markets calm and Trump gains political capital from the passage of his tax bill, his natural tendency is to assert his authority to disrupt markets. Even though the market is at edge of the Tariff Man zone, what’s remarkable is its tendency for stock prices to rise. At the current rate, my base case for the next short-term top is the August-September time frame.
My inner trader remains long the S&P 500 in anticipation of higher prices. The usual disclaimers apply to my trading positions:
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
It’s hard to ignore the news, but it’s the best thing. Look at what prices are doing. If the market is going up bad news is “shrugged” off, if it’s going down the news is “terrible”. There are so many false signals in the narrative, it is best ignored. It’s hard to tune out though.