May 1 , 2023
Good morning,
The big news headline this morning is the JPMorgan rescue takeover of First Republic Bank. The big event this week is Wednesday afternoon’s Fed decision on rates now and hopefully insights into the tightening cycle in the months ahead. Do you see the contradiction there? In a week where another bank failure is clearing the market, the Fed is raising rates again – markets reflect a 90% probability of a 25 basis point hike Wednesday. These are interesting times – head-scratching in the strategist community is almost universal.
The technical signals from the market continue to lean bullish – particularly from a short-term perspective (weeks). Fears of a recession closer to year-end and into next year continue to grow based on the macro-economic data coming out.
The 4200 level on the S&P 500 Index is a major line of resistance going back almost a year (chart below) and looms just above Friday’s close. If the Fed indicates it will pause after Wednesday’s hike, markets may interpret that as the end of the tightening cycle. I can imagine 4200 gets taken out under those circumstances. Bulls will be excited, but It will say nothing about a recession later this year. It may be one of the great “sucker” rallies of this generation.
I remain cautious even in the face of a possible rally through overhead resistance.
Be well,
Mike