S&P 500, VIX, Earnings, FOMC, Recession and USDJPY Talking Points:
- The Trade Perspective: S&P 500 Bearish Below 4,075; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
- July PMIs for the developed world economies slid Friday. The growth focus continues in the week ahead between 2Q GDP readings, earnings and the updated IMF forecasts
- Top event risk through the week is Wednesday’s FOMC rate decision which where debate of a 75 or 100 basis point hike continues, but the market reaction is what truly matters
A Correction or Trend Change?
Between earnings, seasonal expectations and the relentless evolution of speculative interest; the leading measures of ‘risk’ managed to eek out a modest gain this past week. That said, the backdrop turns meaningfully less favorable heading into the new trading week from the historical averages of the VIX volatility index to the heavy event risk scheduled for release. What ultimately separates genuine trends from mere corrections is conviction. While I have seen plenty of illogical confidence from the bulls in previous years, this market seems far more introspective with the threat of a recession (and not a fast one) rolling in while financial conditions are purposefully tightened to curb excess risk taking. From the S&P 500 – my preferred yet imperfect measure of risk – this past week, the 2.6 percent advance cleared resistance on congestion, but there are numerous red flags that should give the bulls pause. For the chart watchers, clearing 3,905 may carry some weight; but the overlapping Fibonacci levels (see below) aligned to the former gap resistance around 4,000/4,015 will draw far more attention. Also, for some contrast to the heavily-discussed BOA fund report, net speculative futures positioning dropped further to its biggest net short position since June 2020.
Chart of S&P 500 with 20-Week SMA, Volume, and Net Futures Spec Positioning (Weekly)
Chart Created on Tradingview Platform
Despite the tangible speculative headwinds from technicals, fundamentals and market conditions; a respite in the bleeding can often be enough to rouse the speculators from their burrows. Looking for a gauge for enthusiasm that is not merely a reflection on price, I looked to see what level of market opportunistic language was being searched in Google. While ‘stock market bottom’ has been on the rise, it remains significantly lower than the peaks around the pandemic and Great Financial Crisis in 2009. What is more interesting in my book is that the decidedly more tactical – read less conviction – search for ‘buy the dip’ remains as active as it has been through the past two years. There is certainly some interest and effort it seems, but is it enough to override concerns?
Google Worldwide Search Levels for ‘Buy the Dip’ and ‘Stock Market Bottom’
Chart Created by John Kicklighter with Data from Google Trends
Sticking with Google search as a quantitative measure, the interest in key bullish terms may be strong in historical terms; but the enthusiasm seriously pales in comparison to the search around market trouble. ‘Bear market’ is soundly outpacing ‘bull market’ but that may be owing to the technical position of measures like the US indices. When you compare the active bullish trader and investor language against bearish macro catalysts like ‘recession’ and ‘inflation’, the contrast is severe. It is certainly possible that the markets can restore a bullish trend despite utter fear of an impending recession; but without the natural assumption of external support (Fed or government stimulus) or a full ‘capitulation’, it is an outlier possibility.
Google Worldwide Search Levels for ‘Buy the Dip’, ‘Stock Market Bottom’, ‘Recession’ and ‘Inflation’
Chart Created by John Kicklighter with Data from Google Trends
What’s Ahead According to History and the Docket
As we head into the new trading week, there will be some serious expectations and assumptions. From the seasonal perspective, we are going to close out the month of July which historically exhibits lower volatility and volume with the best overall performance from capital market benchmarks – all derived from the S&P 500. Yet, drilling down to the more granular, the 30th week of the year takes us beyond the nadir of the year’s volatility swoon. Pair those expectations to the scheduled event risk on tap, and there is plenty of capacity for upheaval.
Historical Weekly Average of VIX Volatility Index vs 2022/2021 VIX (Weekly)
Chart Created by John Kicklighter with Data from S&P
Looking out over the docket for the coming week, it becomes immediately clear that the density of market-movers is substantially greater than the list we just closed out. Sometimes, when the docket is overloaded, it is possible that competing high-profile listings throttle the reaction of one update due to the anticipation for the something a little later down the line. There is capacity for that this week, but there are also very definitive, top-shelf events that can create a hierarchy to define conviction. What’s more risky is that the deep run of events carry a significant probability of aligning to a singular view – a bearish view. If you are looking to sheer headline space to gauge influence, the FOMC rate decision due for release Wednesday is top concern. Whether the central bank moves 75 or 100 basis points, there will be surprise to at least a significant segment of the financial system. And, this is an even whose impact will not stop with the Dollar and/or US markets.
Global Calendar of Major Macro Economic Event Risk for Next Week
Calendar Created by John Kicklighter
Top Themes and Top Asset to Watch
While most traders would point to the Fed decision this week as singularly most capable event risk to charge volatility in the global markets, I don’t believe it to be the most potent theme. While we are contemplating a very hawkish policy view from the US and other central banks, this has been significantly discounted and there is evidence that we are nearing the peak of acceleration in the tightening pace. In contrast, the extreme of economic activity is still up in the air. A recession still seems to be coming between the 2-10 spread (US 10-year from 2-year Treasury yield differential) inversion and this past week’s PMI drop. For measures ahead, the FAANG earnings may be interpreted more readily as an economy signal than the official US 2Q GDP reading. Either way, I will be putting more emphasis on the IMF’s updated growth forecasts on Tuesday than I do on the government’s backwards looking report.
Chart of Composite Monthly Activity Reports from S&P Global for Major Economies (Monthly)
Chart Created by John Kicklighter with data from S&P Global
For interesting markets in the headlines of the development of speculation and run of event risk, there are countless interesting technical pictures. The US indices are appealing as risk measures and EURUSD is a sensitive monetary policy reflection, but I see USDJPY as a convergence of most of these top systemic themes. Relative economic activity is a decades old theme behind this major exchange rate while interest rate differentials have been competing for its attention in more recent decades. Should the outlook for the Fed beyond the July 27th meeting start to taper off with traction on expectations for 2023 rate cuts, we see bearish pressure build on the exchange rate even as the yield differential continues to coast higher through the end of the year. That said, I consider direct risk trends in the broader financial system to be a greater force for near-term and long-term direction of USDJPY.
Chart of USDJPY with 20-Day SMA with Spot-20SMA Differential (Daily)
Chart Created on Tradingview Platform
