Dow Jones Industrial Average, S&P 500, VIX, Recession, Rates and USDJPY Talking Points:
- The Trade Perspective: S&P 500 Bearish Below 4,075; USDJPY Bearish Below 134.00; Bullish EURUSD Above 1.0635
- Liquidity will face serious upheaval moving forward with holiday conditions and systemic fundamental issues taxing historical volatility and volume norms
- June closes to an atypical S&P 500 slump while the threat of recession and upended rate forecasts exacerbate uneven market conditions
Risk Trends are In a Vortex of Seasonal Expectations
We are facing quite the conflict of signals for the market due to a confluence of systemically important fundamental issues and the seemingly out-of-place seasonal norms. So, are we looking at the foundations of quiet we normally associate to this time of year, or is this one of those times where we can earnestly state that ‘this time is different’? In taking stock of the market’s current health, we are already deviating from historical trends. Typically, we experience a moderation in this week preceding the start of the ‘summer doldrums’; but circumstances in 2022 are very different from the norms. Historically, risk benchmarks like the Dow or S&P 500 rise over time, and that averages a favorable drift for markets that are ‘suffering’ low liquidity. In 2022, however, we have entered a bear trend with plenty of systemic issues to plague confidence. From the Dow Jones Industrial Average, we are on pace for closing out the worst month’s performance since the height of the pandemic-led crises back in March 2020. The dominant trend seems clear but the liquidity can stunt progress regardless of our general bearing.
Chart of Dow Jones Industrial Average with 50-Month SMA (Monthly)
Chart Created on Tradingview Platform
If we were to compare our current condition to historical norms, it is clear that we are deviating widely from what the seasonal norms suggest. From the S&P 500, we find that historically has produced a modest gain through the month of June with volume (participation) struggling and volatility (via the VIX) hitting its trough. Circumstances couldn’t be much different in the current year. The benchmark US index is on pace for a -7.6 percent drop with volatility holding remarkably high – though volume is generally under control. What does that suggest for July as we enter what is frequently considered to be the ‘summer doldrums’? I, for one, will not simply default to seasonally-defined expectations.
Chart of Monthly S&P 500 Performance, Volume and Volatility Via VIX
Chart Created by John Kicklighter
Turning Down the Monthly Forecast to a Weekly Outlook
From the overview for July to a shorter span of just the first full week of the new month, the averages are much more distinct. Since inception, the VIX has averaged the slowest period of the calendar year through the 27th week of the year. While not always encompassing the US Independence holiday, it most often does include the holiday conditions. That naturally shortens the active trading period and unofficially kicks off the ‘summer doldrums’ that have been adopted by global investors. In my view, there is significant capacity to deviate from these norms with a general bearish tide and very prominent systemically important fundamental issues actively unfolding. In short, don’t simply assume risk exposure is safe because of seasonality.
Chart of Weekly Seasonal Performance of VIX Volatility Index
Chart Created by John Kicklighter
Under normal circumstances, there is an inverse correlation between the volatility of risk-leaning assets (like the S&P 500) and the level of volatility behind the market (in this case the VIX). Where the norm for the 27th week of the year for the VIX is the absolute nadir when averaged out, the subsequent performance from the associated S&P 500 happens to show its second best weekly performance of the year – next to the first week of the year where capital sidelined for accounting purposes is redistributed. In general, I believe liquidity is the most likely seasonal influence to follow the historical norm. A drain on the market due to holidays and exchange closures is not generally open to the interpretation of the masses. That said, risk-oriented performance is very much open to the systemic issues at the given time while volatility can actually be amplified by a thinned market. So, while I am not looking for a systemic trend through the immediate future, a sharp reversal in markets with a sentiment bent is very a very high risk.
Chart of Weekly S&P 500 Performance
Chart Created by John Kicklighter
Through the End of this Week
As we move into the final 48 hours of trade this week, it is important to keep tabs on technical levels, key event risk and of course the liquidity backdrop. Thursday offers enough scheduled event risk to tap into dominant trends of rate speculation and recession fears. However, there isn’t much runway to drive initial volatility into trends. In particular, I will be watching the Chinese PMI statistics for June as a distinct economic update for the world’s second largest economy. Later in the New York session, the PCE deflator update represents the Fed’s favorite inflation indicator with speculation of another 75 bp hike from the FOMC in July close to a 90 percent probability according to Fed Fund futures. Should we pass through Thursday without a significant spark of volatility, expectations for Friday will drop off quickly as the pull of the liquidity drain rushes on quickly.
Calendar of Major Global Economic Events for June 30th and July 1st
Calendar Created by John Kicklighter
For markets to watch through the end of this week, I am focusing specifically on the US Dollar. USDCNH would seem a well-tuned pair given the combination of US and Chinese data, but this is a ‘tended to’ exchange range. Instead, I will be looking for open market Dollar-based pairs. EURUSD’s break lower Wednesday will definitely draw a lot of attention but an earnest move to break through 1.0350 – a multi-decade low – is a low probability event. Follow through is even more fraught. In general, this is a scenario where one trend is a crawl (bullish) while the opposite bearing could be a torrent (bearish).
Chart of DXY Dollar Index Overlaid with 1-Month Fed Fund Futures Expectations (Daily)
Chart Created on Tradingview Platform
The Outlook Beyond the Holiday Weekend
Looking beyond the liquidity distortion of the holiday conditions from Friday through Monday, we will likely see the markets return to the systemically-important fundamental themes – though the implications for a full-tilt risk move is open to circumstance. Looking out over the coming week, I will keep my focus on the growth and interest rate measures. On the former front, the United States will offer two key indicators that can tap into the core of economic activity for the largest player in the world. The ISM service sector report for June is arguably the most indicative measure we have for a representation for the US economy. That said, most people will give pay closer attention to the NFPs on Friday. The problem with this indicator is that it comes at the twilight of liquidity for the week.
Calendar of Major Global Economic Events for Week of July 4th to July 8th
Calendar Created by John Kicklighter
Looking out beyond the unpredictable influences of the liquidity lull, it is important to seek out markets that can express the more influential outcomes of the dominant fundamental themes. For me, the cross roads of rate forecasts, recession projections and risk trends is USDJPY. Having pushed to a fresh 24 year high this past session, the pressure on the disparity monetary policy regime is increasing sharply against the backdrop of recession risks. I will wait for evidence – in part technical and part fundamental – that the market is turning; but that requires I remain on alert.
Chart of USDJPY with 20-Day SMA and Consecutive Candles (Daily)
Chart Created on Tradingview Platform
