The dramatic 9%+ CPI print only temporarily resulted in Equity weakness before prices reversed back to near unchanged for the session. As discussed, markets likely remain within a triangle consolidation pattern, and those seeking immediate resolution in either direction might be disappointed. The early pullback held late June lows at 3738 which will continue to be important in the days/weeks to come. Meanwhile, any move above 3873 could result in a temporary 2-3 day bounce, with maximum resistance at 4040-65 before turning back down to lows into late July. Wave structure remains premature to think a larger low is at hand, and it remains right to hold off on getting too aggressive with buying dips until June lows have been breached. Cycles are reviewed inside this report which detail why late July is important.
July Swaps market now showing a 1 in 2 chance of a 100bps hike—why this might be an overreaction
Interestingly enough, despite the plummeting Gasoline prices, along with Lumber, Grains, and Copper, over the last month, June’s eye-catching CPI print really doesn’t square with what the commodity market has told us. Tom Lee illustrated in Wednesday’s first word that over 1/3 of the CPI components, such as Energy, Food and New & Used Cars, have been tanking lately.
While the spread between headline and core CPI has widened to over 300 bps for the first time since the 1970’s, Tom Lee estimates that June’s report might be the “last bad” report before this starts to turn lower.
Below we see the July estimated forward market for Fed Funds futures, which has risen to over 2.51%, or nearly 94 bps higher than the current effective rate Fed Funds for July’s meeting in a couple weeks. At current levels, the chance of the FOMC hiking 100 bps is now higher than 75 bps based on the swaps market.
Given that my technicals still point to Crude, Gasoline, Copper and Grains all falling further in the weeks to come, I view this ratcheting up in rate hike percentages as a likely overreaction for what should happen given prices having pulled back sharply.
Equity cycles continue to point to late July for a likely low.
While I highlighted last month that a June low was quite likely given the bottoming in the Mass Pressure index (happened nearly on cue) the resulting rally off this model (using my inputs) turns back lower into late July and makes another low before officially bottoming out and turning sharply higher.
This model has worked amazingly well this year, and until it gives us reason not to take it seriously, it’s worth highlighting as a major input for possible 2H 2022 direction into end of year. In this case, it turns higher after 7/25, and moves up sharply into mid-September.
What’s fascinating is the degree to which the near-term price action has followed this cycle composite nearly “to a tee”. Notice that the most severe part of this year’s selloff happened from April into June. Furthermore, this peaked back on 7/7 for a decline into 7/12 which also largely has played out.
The next step, if this were to follow as closely as what the model says, would call for a bounce into 7/18, next Monday, followed by a “final” rally into 7/25, into the last week of July. Then this model turns up and rallies sharply into mid-September.
Bottom line, given how closely this has lined up with highs and lows this year (and has also worked well in recent years), I’m willing to speculate that lows should be made for US Stocks in July, and any retest of June lows into 7/25-7/27 should prove short-lived, not result in ^SPX 0.45% breaking 3505, and then turning higher. Note, this would directly line up with Elliott-wave structure on any violation of June lows, along with bearish sentiment, and could provide a great buying opportunity for dip buyers.
Gasoline cycles show continued weakness
I did some work on Gasoline cycles last month, which showed prices pulling back into late July as part of a larger 2H decline. I largely ignored this cycle composite, as prices were holding up and showing no deterioration. However, this looks to have proven 100% correct to have heeded this composite, as this correction has proven severe and broke existing uptrends a few weeks ago.
Interestingly enough, when combining three cycles of 252, 118 and 77 trading days, the resulting pattern has mirrored many of the past highs and lows. If this daily composite proves valid, then further downside does in fact look likely into October in Gasoline.
Thus, similar to cycles and wave structure on WTI Crude, Gasoline looks to have further to go on the downside. Many investors are hearing of the 9.1% CPI headline print, while not realizing that Gas prices are down .40 cents from last month, something which is not included in this June calculation.
Cycles now show the potential for further weakness, and movement down to 2.81 from the current 3.22 per gallon. Thus, prices look to likely fall further at least for the next few weeks, based on the initial model presented and potentially into October before rebounding, based on this latest model.
