The Mechanical Bull Rally Lives
Michael Kramer | Jul 28, 2022 03:46AM ET
Stocks lifted yesterday due to the better-than-expected results out of Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) and gained further steam, following the typically implied volatility melt we see post-FOMC. That helped the S&P 500 rally by around 2.6%.
But one shouldn’t confuse the strong equity performance with the actual Fed decision. The Fed removed forward guidance which means that volatility could pick up as investors try to piece through every economic data point. Additionally, today we will get the highly anticipated GDP report. Powell dismissed it to some degree, noting that he felt the economy was not in a recession; he also reiterated that the Fed’s terminal rate may still be around 3.8%.
It is a lot to take in, but it was clear that very short-dated implied volatility was crushed, which led to the rally we saw from 2:30 onward. That structure gets flat quickly. So upside from a volatility standpoint is almost burned off.
Also, the dollar index dropped some yesterday, which also aided the rally. The dollar will ultimately be one of the determining factors in whether the market can continue to rally or not. If the dollar continues to strengthen, it will push the S&P 500 down and vice versa.
It is too early for me to determine what happens with the dollar at this point because there is positioning that happens and is being unwound. But if I take the press conference at face value, the dollar should continue strengthening.
From a relative strength index standpoint, the dollar’s momentum is still bullish.
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The S&P 500 rally killed the Head And Shoulders pattern, and when H&S patterns get killed, they become continuation patterns, which is what happened yesterday. So could the rally continue on a bit higher, I guess, perhaps to 4,075.
From a basic Fib and Elliot wave standpoint, this could be the end of a wave C higher.
Breakeven inflation expectations rose sharply yesterday, by 11 bps, to 2.47%. So this move could be the market repricing unevenly between the TIPS and the Treasury rates. We have to wait and see.
It could also be that if we get a risk-on rally in markets, inflation gauges like copper will start rising again. Which sort of goes against the Fed’s intentions.
Shopify (NYSE:SHOP) was up a lot yesterday, despite bad results. I believe the stock is in a bottoming process, you can see the stock has firmly held that $30ish level for some time now, and that is all that matters to me at this point.
Finally, Teladoc (NYSE:TDOC) is getting destroyed after giving what appears to be horrible guidance. No surprise, the options guys were all over this one.
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