This afternoon the Federal Reserve announced its latest policy, raising interest rates by 0.75% for the second consecutive month. Afterward, Fed Chair Jerome Powell answered a number of questions from the press gallery.

First, Powell was asked whether he agrees with the White House that ‘we won’t be in a recession.’ He then replied…

‘We think it’s necessary to have growth slow down. We need a period of growth below potential… We think it’s probably necessary if we’re going to get inflation down to a path to 2%… We’re going to be focused on getting inflation back down.’

At that point someone asked him ‘ ‘Why should we believe you when you said inflation was ‘transitory’?’

We thought that was a good question.

For some reason the markets  loved this rater announcement, with the S&P 500 closing the day up 102 points or 2.62%. There is serious resistance near the 4200 level.

The tech heavy Nasdaq did even better, rising 4.06% for the day.

With such a positive move in the markets, many are asking if the bottom is now in. Our answer is ‘no.’

In our weekly issues of Trend Letter, we highlight to subscribers a number of key indicators our models follow and the bottom line is, that even though sentiment has been very bearish until recently, it has further to go before we get the final bottom.  We are still seeing far too much bullish commentary from the mainstream media calling every one of these bear market rallies the start of the next bull market.

So many investors today have never experienced a true bear market; all they know is ‘buy the dip.’ Bear markets are different than simple corrections, they like to punish over enthusiastic investors.  We will know the bottom is in when no one wants to talk about the stock market. For those old enough, it will be like in 2000 and 2008, when the markets just kept going lower. Sure, there were bear market rallies, but every one of them was a bear trap, sucking in the ‘buy the dip’ players.

This bear market will end when investors are sick of hearing about the stock market.

Now, this does not mean that we will not continue to see bear market ‘relief rallies’, and some of these can be very strong. Typically, they get stronger the closer we get to a bottom. But in almost every case, these ‘relief rallies’ fail to make new highs and instead typically see lower highs and lower lows.

Here is what our models are telling us:

Stocks: rally into August, then head down into September

Currencies:  $US has had a huge run up and is now overbought. Look for a pullack over the next month and then move higher in September. This means most other currencies will trade sideways or higher over the next month, then head lower after August.

Commodities: Most commodities were red hot up until April on inflation, supply chain and war concerns. Then as they became overbought and recession fears have pushed prices down. We called for a rally in many commodities a few weeks ago and expect that could last through August, but after that, we will likely see another downturn in most commodities.

Gold: Gold and silver have been hit hard since the high in early March. We are getting a bit more optimistic that gold may be able to make a longer-term rally in the next few months.

Stay tuned!

As noted in Sunday’s issue of the Trend Letter, after the big sell-off, we are now seeing a relief rally. This could last for days, weeks or even a couple of months, but be very careful because if we do not see higher-highs and higher-lows, then we are most likely to see the market turn even lower. Bear markets tend to get very nasty with wild swings both up and down. While these relief or reflective rallies can be traded, in bear markets these rallies regularly fail.

For the S&P 500, we need to see it push through its near-term resistance at 4300.

One of the things that does suggest we get a rally here is that market sentiment has been very beamish, which tends to be a contrarian indicator.  Below is the CNN Fear & Greed Index and as we can see it is at an ‘Extreme Fear’ level.

The next chart is the put/call ratio (orange line) overlayed on the S&P 500. When this ratio is rising it tells us that investors are being more bearish, risk-averse. When the ratio is declining it means the investors are becoming more bullish, risk-on.  The vertical pink lines show how when we see peaks in the put/call ratio, it usually identifies short-term bottoms in the S&P 500, suggesting a relief rally has started.

Central bankers had been keeping interest rates low and have been major buyers of their domestic bonds.  Those loose monetary policies have fueled the bull run in the equity markets. But now the US Fed, Bank of Canada, and others are raising rates and are no longer buying their domestic bonds. In fact, the Fed will start to be SELLERS of these bonds.  The correlation of the bull market in stocks (green line) with the massive increase of the Fed’s balance sheet (red line) from buying all those bonds,  is very clear on this chart. Rising interest rates, a reduction in the balance sheet and a slowing economy, are serious headwinds for the equity markets.

Since the start of the year we have warned investors to have a hedging strategy for what we anticipated would be a very volatile year in 2022. The market action in these last 4 months is exactly the reason investors need a strategy to protect their wealth in volatile markets.  Our Trend Technical Trader (TTT) service was originally a hedging service and although it now recommends long positions as well, TTT is still a hedging service with many hedging strategies that are doing very well as the market crashes.

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