This Market Is Unfolding

Right now, 76% of CEOs and much of America believes a recession is assured. Yet as economist Paul Samuelson famously said, the stock market has predicted nine of the past five recessions.

So today, I’d like to take a look at several metrics to examine what we’re really seeing right now… and what we can expect going forward.

To start, let’s examine what the markets have been doing lately… Last week’s sessions were oddly consistent. Each day, the market opened weak. But then it casually lifted the rest of the day.

We can see that here in the Nasdaq index:

It seems that Europe is selling in premarket and mornings. When their market closes, “algos” – algorithmic traders – start buying through to the end of the day.

Now, Europe’s economy is in worse condition than the U.S.’s. They face a recession coupled with a commodities shortage.

Remember, commodities are priced in U.S. dollars. And as the euro continues to weaken, it seems headed for parity with the dollar. And this pressure in Europe seems to translate to them selling U.S. equities.

And that’s not the only interesting action we’re seeing…

Where Big Money Is Headed

As we can see here, the Big Money Index (BMI) is chopping along sideways. As a reminder, I developed the BMI to track all unusually large-volume institutional buy and sell signals. The BMI plots a 25-day moving average.

This way, we can see money either moving in or out of markets trending over a period of multiple weeks. That gives us a great idea of near-term trends when looking at the movements of Big Money.

For a bull market to begin, we need some buying as a catalyst.

Yet there has been hardly any unusual buying in stocks and zero buying in ETFs. This is because uncertainty still looms large, shaking confidence and erasing the seemingly unending underlying bid for stocks.

But in the U.S., despite the rhetoric and talking heads, the news isn’t as terrible as stocks would have you believe…

Positive Signs

Several signs are pointing toward a more positive outlook.

The Institute of Supply Management (ISM) numbers released last week were better than expected for the first time in five readings – since February.

Likewise, the June job numbers were strong, adding 372,000 jobs while unemployment held steady at 3.6%. The labor market continues to reinflate, nearing pre-pandemic levels:

There are other signs of peak inflation, too. Energy has peaked near-term. Oil fell from $120/barrel to $95. It’s on the rise again, but near term, it is in a downtrend.

This should translate to some relief at the gas pump. Demand also slowed for gasoline, indicating prices at the pump might be breaking consumers’ usual fill-up habits.

This set of events has rocked energy stocks. The energy sector is the strongest in terms of future sales and earnings. But energy saw a drop in my system’s sector rankings – from first place in mid-June to fourth place as of last week.

The fundamentals haven’t changed – yet the technicals weakened due to the heavy selling we have seen.

But as has been the case for much of this year and last, when one cup empties, another fills. We saw significant health care buying recently. Health care moved from sixth to now third place in sector rankings.

We’re also seeing small breakouts in growth and tech. Suddenly some stocks in the unloved areas are starting to see some capital inflows. It’s too early to call it the start of a trend, but it’s a positive development.

So we’ll keep our eyes on tech. The space is deeply oversold, and demand will only grow – not wane – in the days to come.

In sum, the market is still unfolding. From January until now, we’ve seen ghost tightening. The Fed used scary language to spook risk assets downward.

It took a while for rates to rise to 1.5–1.75%. I foresee two more hikes of 50–75 basis points each in July and September. (There is no August meeting.)

Then nothing will happen in November, as it’s a midterm election month. By then, I believe data will indicate slowing inflation. This should alleviate uncertainty and give the market a reason to rise.

And if the Ukraine conflict ends, the market will zoom. Should it line up with Q4, it will give even more upward pressure on markets.

So I believe, if there is a technically defined recession, it will be mild.

As far as markets are going these days, it can feel hellish. But remember, we’re in the middle of summer. That means trader vacations, making room for lots of algos to play their games.

And as I mentioned, the stock buying virtually disappeared because of uncertainty. As clarity comes, that bid for equities will eventually resume.

When it does, it will create a lift in what I believe will be Q4.

Talk soon,

Jason Bodner
Editor, Outlier Insights