Are Interest Rates Heading Higher?
4-Day losing streak has bulls looking for a bounce
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Our View
Last month, the Federal Reserve raised interest rates “to a range of 5.25% to 5.5%, the highest the Fed target rate has been since 2001.”
However, over the weekend Fed Gov. Michelle Bowman said interest rates would likely need to go higher in order to satisfy the Fed’s inflation goals. She said:
“The recent lower inflation reading was positive, but I will be looking for consistent evidence that inflation is on a meaningful path down toward our 2% goal as I consider further rate increases and how long the federal funds rate will need to remain at a restrictive level.”
She added that, “additional rate increases will likely be needed to get inflation on a path down to the 2% target.”
Interesting.
Admittedly, inflation is still a problem (although it’s trending in the right direction) and notably, the market is not really pricing in a rate hike at this point. For that matter, it’s not pricing in a rate cut either.
The Federal Funds futures are pricing in about an 85% chance of “no hike” in the September meeting (and about a 15% chance the Fed raises by another 25 basis points). In December, its largest probability is for rates to remain unchanged from today’s levels, (at 61.7%). However, there are some probabilities of rate cuts and hikes, as shown above.
Finally, will it even matter?
The Fed has been hiking rates throughout the year, but the S&P has been storming higher. At the recent highs, the index (SPX) was down just 4.4% from its all-time high. Even after last week’s correction, it’s down just 7.2%.
That’s not to say we can’t endure a larger correction, but I’m just pointing out that the “Don’t fight the Fed” rhetoric has been silenced by the “Don’t fight the trend” chants.
Our Lean
We’ve had four trading sessions so far in August and the S&P has ended lower in all of them. So we’re starting off a seasonally weak month on a bad foot, which is not too surprising.
The bulls tried to rally the markets on Friday after Amazon’s strong earnings reaction and the jobs report, but prior support flipped to resistance and with Apple’s bearish earnings reaction offsetting Amazon’s bullish reaction, the bears gained momentum as the S&P fell almost 1.5% from the session high and closed near the day’s (and week’s) low.
So what now?
I don’t know that the correction is finished and in fact, I think it could be a multi-week pullback. That being said, bulls are not going to throw out month’s of gains after one disappointing week.
Our Lean: It feels like we can bounce, but the sellers have been in control and the ES is trying to bounce on Globex. If we dip into the 4490 to 4500 zone, I want to be a buyer. On the upside, keep an eye on the 4520-25 area. At least initially, I expect it to be resistance.
If we clear that zone, the 4540s could be in play, then 4560. A clean break of 4490 could put 4475 in play.
MiM and Daily Recap
The ES traded up to 4547.00 on Globex, down to 4514.25 and opened Friday’s regular-hours session at 4538.50. From there, the ES traded up to 4549.75, down to 4542.25, made a new high by one point at 4550.75 just after 9:45, then fell 32 handles down to a low of 4518.75 at 10:05. That’s when the buyers stepped in, slowly grinding the ES to new highs at 4551 at 11:45, where it then back-and-filled in a 3- to 4- point range 30 minutes, then popped to 4560.75 at 12:50, which ended up being the session high.
While the ES looked like it was going to push higher, the 4550 to 4560 zone held as resistance as the ES pulled back about 15 to 17 points to the 4544 area, stutter-stepped back up to 4549.50, then tumbled lower. From 4549.50, the ES fell more than 50 handles below 4500, traded 4496.50 as the 3:50 cash imbalance showed $1.78 billion for sale and traded 4499.25 at 4:00. After 4:00, the ES traded up to 4502.75, but faded a bit and settled at 4498 at the 5:00 futures close, down 23.75 points or 0.53%.
In the end, the decline marked the ES’s fourth straight daily dip as the seasonality trends remain bearish. In terms of the ES’s overall tone, it started off bullish and ended the day with a wave of sell orders. In terms of the ES’s overall trade, volume was high with 2.045 million contracts changing hands.
Technical Edge
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NYSE Breadth: 66% Upside Volume
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Advance/Decline: 53% Advance
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VIX: ~$17
SPY
On Friday we said, “On the upside, they want to take out yesterday’s high at $450.79, then ideally run the SPY up to the $451.50 level.” Well, that’s exactly what we got and then the $451.50 level was resistance.
Now trading ~$448 in the pre-market, SPY bulls have their work cut out for them. On the upside, $449 to $449.50 is the first area of resistance. Above $450 and we could see a potential push back to the $451.50 area.
Not only is that zone significant, it’s also the 78.6% retracement of Friday’s range.
SPY 30-min
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Upside Levels: $449 to $449.50, $451.50, $453, $455.50
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Downside Levels: $446.25, $444 to $445
Daily chart for context:
SPY Daily
S&P 500 — ES Futures
SPX
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Upside Levels: 4500, 4526-30, 4540, 4585
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Downside Levels: 4472-75, 4555-60
S&P 500 — ES Futures
When we look at the daily chart, we got our move down to ~4495, but unless you got long into Friday’s close and unloaded on during Globex, it’s not an area that likely captured many buyers.
Zooming out a bit, I can’t help but wonder if we may trade down to the ~4460 area. Maybe not today or tomorrow, but sometime this week.
ES Daily
Zooming in to the 1-hour chart:
ES 1-hour
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Upside Levels: 4222-26, 4546-50, 4560-64
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Downside levels: 4493-4503, 4476, 4450-60
NQ
Keep an eye on that 15,340 area. A significant break of that could open the door down to the 15,275 zone. On the upside, the NQ really needs to regain the 15,450 area, but it can’t do it without FAANG.
NQ 4-hour
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Upside Levels: 15,450, 15,525-545, 15,610-625
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Downside levels: 15,340, 15,275-300
Open Positions
Bold are the trades with recent updates.
Italics show means the trade is closed.
Any positions that get down to ¼ or less (AKA runners) are removed from the list below and left up to you to manage. My only suggestion would be break-even (B/E) or better stops.
** = previously mentioned trade setup we are stalking.
Down to Runners in GE, CAH, LLY, ABBV, AAPL, MCD & BRK.B. Now Add META, AVGO, UBER, CRM, AMZN, CVS, AMD, TLT and YM.
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JPM — Many are long from $143-145. This is a longer term swing. Trimmed $153s, then $157.50+ on 7/24.
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Down to ½ position vs. Break-even stop. Can make small, ~10% position trim if we see $160+
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ARKK — Long from ~$46 — trimmed near/at $50. Still carrying ⅔ to ¾ of position. Trim at ~$52
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Added back about ⅓ of our position around $45.50. Keep in mind, there could be room down to the 50-day moving average.
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WMT — went weekly-up from this week’s play — Trimmed above $157.55 and then $158. Down to ½ position with trim at $160+
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Break-even stop, down to ¼ position or less at $162.50
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Small add spot at $158 — I like this position, but if worried about the overall market, feel free to trim the “add” portion at $159+
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** XOM — watch for the monthly-up over $108.50.
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TLT — long from $95.63 (daily-up) — and nearly gave us a move to $97. Trim ¼ or ⅓ on anything above $96.40. $97 and $97.75 are additional trim areas.
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Either a Break-even stop or a stop near $94.30.
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Go-To Watchlist
Feel free to build your own trades off these relative strength leaders
Relative strength leaders →
(Lack of updates here but these names remain my top focus list!)
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Growth stocks ARKK — DKNG, DOCN, UPST, SHOP
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LLY, CAH
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Energy stocks — VLO, SLB, EOG
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AI stocks — NVDA, AMD, AVGO, ADBE, SMCI
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Mega cap tech — MSFT, AAPL, META, CRM
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Select retail — CMG, ELF, LULU, COST
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Homebuilders ITB — TOL, KBH, DHI
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BRK.B
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ABEV, DXCM
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Cruise stocks — RCL, CCL, NCLH
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DAL, DT, AMAT
Relative weakness leaders →
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DIS → new 52-week lows
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CF, MOS
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PFE (all vaccine gains now gone)
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EL, FL, DG
Economic Calendar
Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
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