Recession Fears & Capitulation| Morning Express 06/24/22

Posted: June 24, 2022, 8:28 a.m.

- This week can be characterized by recession fears.

- On Tuesday we noted:

o Goldman Sachs “sees recession risk as higher and more front-loaded”. They cut U.S. growth forecast and increased odds of a recession over the next year to 30% from 15%, and 48% over the next two years from 35%. Adding the main cause is the Fed’s “overtightening”, and the recession is “likely to be shallow”. They noted that shallow recessions have seen Unemployment rise by 2.5% on average. Bloomberg

o Goldman Sachs echoes exactly what we have been talking about for weeks and now months; forget the two quarters of contracting GDP, the economy is already in a recession. In our view, there are front-loaded market risks, pricing in weaker growth over the next 9-12-18 months. Furthermore, the stock market should bottom before newspapers, magazines, and pundits admit we are in a recession.

- We believe this because markets are efficient. They typically discount such a scenario before it is absolutely realized.

- The Federal Reserve began tightening into a slowdown, ultimately forcing this recession.

- The stock market was able to foresee this when the Fed shifted its rhetoric and inflation became visibly unanchored in Q4.

- Of course, poor energy policy around the world, supply chain bottlenecks, and the war in Ukraine helped exacerbate such inflation tailwinds

- Whereas the Fed’s tightening quickly bludgeoned equity markets, those inflation tailwinds and geopolitical risk premiums kept a bid under many commodities.

- Other central banks around the world have also gotten more hawkish

- Over the last three weeks, the continued deterioration of the world economy and a dissipation of geopolitical risk premiums has cratered many commodity markets.

- We find the reprieve in prices extremely healthy as it should translate in the upcoming inflation data, reaffirming the importance of such data for June through August, released in July through September, leading into the Inflation Showdown at Jackson Hole.

- Yield of 10-year has come back in to our 3.00% target. The reprieve in yields has helped fuel stocks.

- Fed Governor Bowman was hawkish yesterday talking about 75 basis points in July and continued hikes.

- Look out for added Fed speak today.

 

Do not miss a quick history lesson on Fed Chair Paul Volcker in yesterday’s Morning Express

 

Our daily Midday Market Minute, from yesterday

E-mini S&P (September) / NQ (September)

S&P, yesterday’s close: Settled at 3799.75, up 37.00

NQ, yesterday’s close: Settled at 11,737.50, up 171.75

- Did equity markets incur capitulation over the last two weeks?

- Last week was record weekly volume in the Russell 2000 and the most weekly volume in both the S&P and NQ since March 2020. Capitulation is defined by volume.

- Despite ongoing weakness, investors have been resilient, until now; another sign of capitulation.

- According to Bank of America data, in the week ending June 22nd, U.S. equities had their first week of outflows in seven weeks, totaling $17.4 billion. Bloomberg

- Global equity funds had their biggest week of outflows in nine weeks

SURE SEEMS LIKE A NICE TIME FOR STOCKS TO RALLY. Friendly Friday?

- Yesterday’s close was a bit of a disappointment, with the S&P unable to clear resistance aligning with the May 20th low. Like the Sunday/Monday holiday session, it was overnight action that helped lift the tape through here.

- This brings major three-star support at 3795.50-3799.75 and price action must hold above here.

- With overnight strength, the NQ has covered the Friday June 10th gap, which was rare major four-star resistance at 11,868 and is now a three-star after the first test.

- Our minimum target for this rebound is 3900 S&P and 12,021-12,068 in the NQ, but we must continue to see construction above supports listed.

- Still, we do have major three-star resistance in the S&P before that at 3843-3855.25

 

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NQ (September)

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Crude Oil (August)

Yesterday’s close: Settled at 104.27, down 1.92

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Gold (August) / Silver (July)

Gold, yesterday’s close: Settled at 1829.8, down 8.6

Silver, yesterday’s close: Settled at 21.042, down 0.379

- The metals complex has seen continued liquidation. We attribute this to both recession fears = deflation and the impending expiration of July futures in Silver, Platinum, and Copper.

- We have noted many times how end of month, and especially end of quarter, contract rolls can bring excessive volatility.

- 10-year futures +1.2% on the week and 30-year +1.6%

- U.S. Dollar Index and USDCNH both consolidating all week

- The above two bullet points should pave the way for Gold and Silver strength but has not.

- Gold slipped sharply into our next wave of major three-star support at 1808.2-1814.8 and responded quickly by $10. This is so far a higher low than the June 16th 1816.3.

- Silver has tested the May 13th low of 20.42, trading to 20.545.

- It is go-time for metals, they must respond and regain our previous support, now aligning with our momentum indicators at our Pivot and point of balance at 1826.5-1830.9 in Gold and 20.77-20.95 in Silver.

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Silver (July)

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