Coiled Spring Capital Aug 17th, 2022

Last weekend in our weekly Macro Report, we highlighted that the positive momentum in our indicators has not let up. The positive divergences that we were seeing in Jun have held strong. This is why we have been expecting any weakness to get bought, at least initially. But there hasn't really been much weakness since Mid-Jun to buy. This makes testing the 200 day a logical conclusion, and test it we did. Of course, the first reaction is negative, which is to be expected, as sellers have standing orders there. But is this the current top for this recent move?

It seems too obvious for that to be the case but as we wrote in our report a few weeks ago, '08 had a similar move and failed at the 200 day. We are not going to draw conclusions on whether this time frame is similar to '08, because it is different in so many ways. We think the 70's is a much better comparison and something we've discussed previously, many times.

More importantly, what drove the reversal today and is this the beginning of something more sinister?

We redrew the rising wedge and it seems for now this move is contained. Can it break lower tomorrow? Sure. The RSI was above 70 and now broke below the threshold. This can be interpreted as a short term sell signal. Preferably, I'd like to see a higher high on lower momentum, so we shall see.

Today, we saw the FOMC minutes from their last meeting. The market rallied at first and then gave it all back. Basically, they said nothing and reiterated that they are data dependent. This was already known.

The issue with this comment, in our opinion, is it makes the Fed look like they are losing control. They indicated that maybe they have overtightened (bullish) but will raise rates more than expected if they need to. Bravo! So, they basically told the world their clueless. Markets do not like uncertainty, and this was a nice dose of "I have no idea."

Europe is undoubtedly heading into a recession; the Chinese data is abysmal and US consumer spending, and the job market are set to slow. This doesn't sound like a good set up when liquidity is still being sucked out of the market and the SPX is trading @ +20x EPS. Price is 1 factor, and that's what the majority of people buying into this rally are basing their opinions on. We agree that it's very important, and why we are always open minded as to the eventual outcome, but EPS #'s still need to come down materially. Rate rises have a lag effect on the economy so it's very conceivable that the 2H of the year is not going to be aesthetically pleasing.

8.5% CPI is a step in the right direction but the inputs that dragged it lower are much less sticky than rents. This means higher inflation is likely going to stick around, which implies that the Fed (If they stick to their messaging), will keep raising rates to get to their 2% target.

This means the Fed has to lean more hawkish and we think we get that message next week into Jackson Hole. Couple that with QT doubling in Sept, the cocktail for fall volatility is set.

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