Market Forecast For the Week of June 27, 2022: The Rally Continues To Lure Investors, But Rather Than Returning Prosperity It’s New Lows That Are Just Around The Corner

FORECAST: The S&P 500 rallies to 4000 and consolidates into month-end, as global investors warily speculate the bottom of this tortuous bear market is in. The prospect of an incipient recession is boosting the bulls as it implies a Fed put is back on the table, supposedly relieving the market of having to fall further and drag consumer confidence down with it. But I don’t believe a Fed put is on the table nor will it be catalyzed by market movements, since this is an election year. Consequently I expect the bears retake control by late this week and send the market sliding towards new lows around 3600, culminating a vicious head-fake that auspiciously began with the Juneteenth 3-day weekend and ends around Independence Day.

The Fed is clearly concerned with only half its mandate, namely to vanquish inflation expectations that are keying off pent-up demand by consumer around the world. Equity bulls reason that the wealth effect of a bear market goes far in reducing demand, while last week’s precipitous commodity price declines do their job to reduce inflationary pressures. But while inflation may have peaked that won’t sate the Fed, who are frightened by both the 1970s experience of feckless inflation-fighting and the prospect of Republicans bashing them if they turn dovish before the mid-terms. The real signs of profound disinflation will come from a sudden deterioration in labor markets, as that would both reduce inflation and keep profit margins up, which provide the foundation for what the Fed believes is a healthy economy. Until that happens the Fed will continue to reduce liquidity, and under those conditions the market has much more uncertainty to discount before it can make a bottom.

On Friday I initiated small short positions in the market via the levered ETF SPXU. Consequently my current positions are a large but slightly smaller cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.