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Mish's midweek update: A trendsetting week in the markets (part 1 of 2)

Mish's midweek update: MarketGauge's Mish Schneider offers her expert analysis of US markets.

In the first article of this two-part series, I look at the Federal Reserve’s crucial 26-27 July meeting and analyse a few key indicators that illustrate the state of the US economy. Next week, I’ll move onto actionable trading ideas that may emerge from this all-important week. 

The Federal Reserve’s Economic Data (FRED) charts tell us stories. The latest chapter is set to be written by this week’s meeting of the Fed’s policy-setting Federal Open Market Committee (FOMC).

One key story centres around interest rates. The general consensus is that the Fed is set to raise its benchmark interest rate by 75 basis points for the second consecutive month. That would lift the federal funds rate to a target range of 2.25-2.5%.

Rate rises

The chart below shows that in 2018 the federal funds rate stood at 1.25%. It then climbed to 2.4% in 2019, before dropping to near-zero after the onset of the Covid-19 pandemic, where it remained for almost two years. In March 2022, the Fed raised rates for the first time since December 2018, kicking off a series of rate rises that have brought the benchmark policy rate to a target range of 1.5-1.75%, with further increases imminent.

Perhaps even more interesting are market expectations for the federal funds rate, as implied by overnight index swaps. These offer clues about where rates may be heading. Aside from all the talk of recession, investor sentiment seems to indicate that the fed funds rate could be close to peaking and will decline in 2023 and 2024.

Lending support to that theory, Fed chair Jerome Powell has hinted that policymakers could opt for a 50-basis-point rise this month, rather than the 75 bps that 86% of polled analysts expect. Furthermore, Powell said that he expects rate rises to be less aggressive going forward.

With this in mind, I’ll be keeping a close eye on a few key indicators this week.

Bond ETFs to remain firm?

First up, let’s look at bond ETFs; specifically, two funds that track high-grade and high-yield corporate bonds. 

LQD, which tracks investment-grade corporate bonds, is in the red but still in good shape. HYG, which tracks high-yield corporate bonds, is even stronger than LQD, which makes sense given how many tech companies are reporting earnings this week. If LQD and HYG remain firm, that could point to a risk-on situation. 'Risk-on' refers to an environment or mindset in which investors' appetite for risk may increase, potentially sending asset prices higher. 

A busy week for retailer earnings

The number of companies reporting earnings this week is a staggering 175, with retailers well represented.

After Walmart’s and Shopify’s poor results spooked the market this week, the consumer discretionary sector became a concern. The US consumer confidence report for July, which found confidence to be at a lower-than-expected level, did little to allay fears that the US is heading for a recession.

The S&P retail ETF [XRT], which I fondly refer to as dear old Granny Retail, appears braced for a recession, although stagflation can also negatively impact the consumer. Ahead of the Fed’s July meeting, and in the wake of Walmart’s and Shopify’s disappointing earnings, XRT looks a lot weaker than the bulls would wish.

XRT is back below the 200-week moving average (the green line in the below chart). It gapped below the 50-day moving average on the daily chart (the blue line). 

That said, the week is still young. Granny Retail could still rally following the Fed’s rate decision. 

Where next for the S&P 500?

Next, we look at the performance of the S&P 500, the index that best reflects reactions to this week’s glut of earnings reports, as well as projections for upcoming quarters. 

The S&P 500 sits smack dab in the middle of its most recent trading range. In June, the S&P 500 ETF [SPY] reached 417.44 before falling to its nadir at 362.17. A 50% move between peak and nadir is 390.00, give or take a few cents, which is roughly where SPY currently sits.

Should SPY hold at 390 and move back above last week’s highs around 400, then not only is the risk clear (390 area), but we can also anticipate a move up towards 417, and perhaps even higher to 433-434 before much bigger institutional selling emerges. 

On the flipside, if we see a move under 390 after the FOMC meeting, the recent lows come back into focus. Furthermore, the major support at 350-353 would be a realistic target for put-buyers, as well as a place to look for a mean reversion for those trading long.

It’s a rare thing to see the 50% retracement area aligned with a major moving average, as is the case in the above SPY daily chart. Plus, our real motion indicator is also holding its 50-DMA. 

Stay tuned for part two

Having run the rule over the Fed’s interest rate meeting and identified the key indicators to watch in this action-packed week, next Wednesday’s follow-up article will outline a few potential trading ideas. 

I’ll examine the sectors and assets to watch in both recessionary and inflationary environments, and discuss best practices for risk management. See you on 3 August.  

Mish’s ETF support and resistance levels 

S&P 500 (SPY) 403 big resistance, above we saw that support at 390 is pivotal 
Russell 2000 (IWM) 176.50 support to hold, now must take out 182.50
Dow (DIA) 322-323 resistance, 316 support 
Nasdaq (QQQ) 308 big resistance, 293 support key
Regional banks (KRE) 60 key support
Semiconductors (SMH) 221 support, 230 resistance
Transportation (IYT) Second weakest sector in my ‘modern family’ of key indicators as it broke below the 50-DMA
Biotechnology (IBB) support at 120
Retail (XRT) Weakest modern family sector, now back below the key 200-WMA at 60.92

Mish Schneider is MarketGauge’s director of trading education and research. Read more of her market analysis here.

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