Weekly Wisdom: Rate Cuts Right After Rate Hikes?

Greetings fellow traders and welcome to your May 4th edition of Weekly Wisdom: Levels to Know and Moves to Look For!

Let’s get to what we’re currently seeing in these crazy markets and what we have our focus on going forward.

Taking a look back on this week, May 1 – 5:

• The Fed raised interest rates yet again on Wednesday, bringing Federal funds rate up to 5.00-5.25%, despite further regional bank drama stemming from multiple names including FRC and PACW. Interest rates are now matching the highs seen in 2006-2007 before cuts came into the housing market crash of ‘08.  
• Once again, markets are disagreeing with what the Fed says, with Fed Funds Futures showing a total of 3-4 rate cuts by the end of next January, including a possible rate cut as early as July or September. Powell clearly stated in his press conference that it would not be appropriate to cut rates given their view that inflation will take further time to fully come down. So markets seem to either be expecting a nose dive in inflation this summer, a recession to begin, or once again the market is wrong.
• $SPX futures attempted to break higher on Monday over 4200, putting in a high of 4206 before rolling over to close below at 4185. Regional banking fears were then revived on Tuesday morning, sending $SPX lower throughout the week, eventually breaking 4100 support. Bulls are risking giving up full control here and bears are starting to make a real stand again.  
• $VIX finally broke over the big 20 resistance level on Thursday after making a new year low in the mid 15s on the Monday breakout attempt. $VIX has not been able to sustain any moves over 20 for over a month now – this is a notable change in the short term here.
• Friday, May 5 we’ll get the official April jobs report at 8:30 a.m. ET. We’ll also get the update for consumer credit m/m at 3:00 p.m.

Here’s what we are eyeing next week, May 8 – 12:

Level Highlights:

• Following $SPX future’s failed breakout over 4200 as well as revived banking fears, $SPX risks losing support with a close below 4100. If you recall, the big March breakout occurred over 4050, so that is the next major support level bulls should try to hold below 4100. Bears now have 4150 to play against for a bigger picture breakdown that may ultimately take us back under 4000, data depending of course.  
• Overall, these markets have stayed more or less range bound, but have finally loosened up. Bulls should be careful thinking we need to perfectly keep this uptrend in tact.  
• $VIX above 20 for the first time since March is certainly concerning for bulls – there was some minor resistance at 18 bears had broken through that bulls will ultimately need a close back below in order to gain full control again. Otherwise, be careful of further VIX upside now that 20 has cleared in a real way. 28-30 has been a consistent big picture sell zone for the $VIX throughout this bear market.
• $VVIX bearishly diverted late last week / earlier this week as the VIX made a new low for the year on Monday, yet the VVIX remained well off year lows and actually made a higher low on the daily chart compared to the low made in mid April. This was a warning hopefully many saw as we discuss the relationship between $SPX, $VIX, and $VVIX often here. $VVIX managed to get above the 100 level on Thursday but has pulled back intraday – bulls need the $VVIX back below 90, bears need $VVIX to hold and eventually accelerate into the 115-120+ area. 

Upcoming News:

• Monday, May 8 we’ll get the update for final wholesale inventories m/m at 10:00 a.m. ET.  
• Wednesday, May 10 is a big day next week with new inflation data being released at 8:30 a.m. ET with CPI y/y, CPI m/m, and core CPI. It looks like market participants are looking for a 5% print on CPI y/y. We’ll also have a 10-year Bond auction just after 1:00 p.m. ET.  
• Thursday, May 11 we get updates for PPI y/y, PPI m/m, and core PPI all at 8:30 a.m. ET, as well as weekly unemployment claims. We also have a 30-year Bond auction taking place just after 1:00 p.m. ET.
• Friday, May 12 we get the University of Michigan’s consumer sentiment index and inflation expectations at 10:00 a.m. ET. 

Here’s Your Chart of the Week:

Via Goldman Sachs Global Investment Research: Similar to the range bound market we are seeing, we are seeing less notable surprises in economic data releases following a spree of positive surprises to start the year off… will our economic data continue this trend and deteriorate further as we head into a recession the second half of this year?

Source: https://twitter.com/WallStJesus/status/1653129604582744069/photo/1

SPY Daily Update:

$SPY daily chart finally has some volatility after a failed breakout on Monday was followed by further regional banking drama. Bulls really prefer 405 to hold on a closing basis here, otherwise our uptrend begins to break and we move from a more bullish market to a neutral market.

SPY Weekly Update:

$SPY weekly chart is seeing an ugly red candle here nearly engulfing last week’s action after the failed breakout at the start of this week. A weekly close below 408 here may get bulls a bit nervous of further downside risk.

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-Patrick Hawe

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*As of 3:40pm ET May 4, 2023

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