Last Week of Q2. Questions Remain on Fed's Plan

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Our View

This week marks the end of the second quarter and has several economic and inflation-related updates.

We’ll get a glimpse at the housing market with new home sales (from May) on Tuesday and pending home sales on Thursday. The GDP report is due out on Thursday, while the PCE Price Index is due up on Friday — which is the Fed’s preferred inflation measure.

Speaking of the Fed, Chair Powell is on tap twice this week, on Wednesday and Thursday. The bank stress tests results are also due up on Wednesday.

While all of these data points are not exactly like what we saw a few weeks ago (with the Fed’s rate decision, CPI and PPI data and quad-witch), it is a lot of potential headline-moving events ahead of the Q2 rebalance.

Despite the big YTD and Q2 rally, there are still lingering questions surrounding the markets. First, is the Fed saying that they are not done raising rates?

The Bank of England raised rates 50 basis points last week. Further, “The world's central bank umbrella body, the Bank for International Settlements (BIS), called on Sunday for more interest rate hikes, warning the world economy was now at a crucial point as countries struggle to rein in inflation.”

Lastly, bond markets are now starting to price in that the Fed won’t cut rates this year.

The second question is, one has to wonder if the recent selloff is a prelude of things to come…

Our Lean — Danny’s Trade. S&P Down 4 of 5

MiM and Daily Recap

The ES sold off down to 4385.50 on Globex and opened Friday’s regular session at 4386. After the open, the ES sold off down to the level I talked about earlier last week — 4384 — then slowly rallied its way up to the VWAP at 4397 at 10:12, back-and-filled between 4391 and 4397 until 10:00 and made an ealy high at 4399.75 at 10:40. After the high, the ES sold off down to 4385.50 — just a few ticks off the 4384 level — and then rallied up to 4397 at 11:46 and then rallied 19.5 points up to a new high at 4406 at 12:34.

From there, it pulled back to 4399 at 2:07, rallied up to 4408 and then dropped down to 4381.50 at 3:05 — the session low — and slowly rallied back up to 4394.25 at 3:40. The ES traded 4393.75 as the 3:50 cash imbalance showed $2 billion to sell, jumped to 4397.75 and then traded 4390.25 on the 4:00 cash close. After 4:00, the ES fell down to 4383.25 and traded 4388.50 on the 5:00 futures close, down 35.50 points or down 0.80% on the day.

In the end, the Dow (YM) snapped a three-week winning streak, the NQ ended an eight-week win streak and the ES snapped a five-week win streak. All three are still up for the year, though. In terms of the ES's overall tone, it was weak. In terms of the ES’s overall trade, volume was on the high side for the week at 1.46 million contracts traded, but low given the recent trading volume over the past month.

Technical Edge

• NYSE Breadth: 20% Upside Volume

• Advance/Decline: 30% Advance

• VIX: ~$14.25

  • Traded a recent low of $12.73. That’s the lowest it’s traded since pre-pandemic in early 2020 (i.e. with stocks at ATHs)

The dip is exactly what we were looking for. Now the question is, will they turn the screws to the dip-buyers or will the bulls rescue the S&P after declining in four of the last five days?

The ES is under modest selling pressure this morning, giving room for both sides of the tape to have their way. If we see further weakness this week, there’s an opportunity at 4350 for the ES and 4300 for the SPX.