Bulls On a Tirade

Equities have had a nice June after breaking from a multi-week trading range in April and May. In the chart below of the S&P 500 ETF, you can see there is quite a rebound underway but the move has been sharp and the momentum will be difficult to maintain without some consolidation or resting.

S&P 500 by @kiscocap

If you look at the technicals on the bottom we can observe that the Relative Strength Index (RSI) is now overbought. Over the last two years, I have denoted when this condition has occurred with a vertical white line. It shows the RSI did a good job in identifying exhaustion points in the chart. So, if this is a bear market, we should see a sharp decline in the coming weeks.

On the other hand, prices have retraced a good portion of the decline from the all-time high and bull markets typically pin the RSI in an overbought condition. Also, the MACD momentum indicator is turning up in a positive for momentum. So, this looks to be a crossroad in the technicals.

If the bulls are winning this battle, the next pullback will be telling and should hold the $410 area otherwise this was just a bear market rally. The fly in the ointment for bulls is the yield curve.

The Bond Market

The Fed paused this week at their meeting but signaled that they are not finished fighting inflation and that there will be more rate hikes in 2023 (a “hawkish” pause). The curve also remains inverted beginning around the six-month tenor implying rate cuts early next year. Rate cuts typically happen when economic conditions fall apart and means we are heading to a recession. Alternatively, you could say inflation abates, the economy grows and the Fed declares victory with a soft landing. Just keep in mind the yield curve inversions have a near perfect track record preceding recessions (timing is 12-18 months and we are at month 12).

US Yield curve by @kiscocap

Economic Data

  • The Fed paused and kept rates unchanged this week but signaled more rate hikes are needed to stem inflation. Balance sheet reduction will continue, however.
  • The Consumer Price Index went up in May by 0.1% and 0.4% for Core CPI. Compared to last year, the headline is up 4% and the Core at 5.3%. Notable in the report was that energy prices dropped 3.6% last month and are 12% lower compared to last year.
Retail Sales
  • Retail Sales increased 0.3% in May at retail stores, restaurants and online, following April’s strong 0.4% advance. The report reflected robust hiring and rising wages that pumped up incomes in recent months.
  • Producer Prices in May fell 0.3% and the core rate was higher by 0.2%. Verses last year, priced increased 1.1% in a sign of progress in fighting inflation. Food and gasoline prices fell in May which helped keep wholesale prices from rising.
  • The ECB hiked by 25 bps this week but signaled additional rate hikes will be likely in the Fall.
  • China cut interest rates this week by 10 bps.
  • Japanese exports in May exceeded expectations.
  • The May Cass Freight Index fell 0.8% lower by 5.6% compared to 2022. The company said, “Freight markets continue to work through a downcycle…..declining real retail sales trends and de-stocking remain the primary headwinds to freight volumes.” 
Paul McCarthy, President of Kisco Capital, LLC

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.