Morning Notes – 6/15/2022

Good Morning:

• Considering the wholesale inflation report was as bad as the consumer report yesterday, the stock market barely reacted.
• And there were many other positive divergences (e.g., momentum and junk bonds failing to follow the S&P 500 index to new lows), demonstrating that the market is trying to put in a (temporary?) bottom at 3700.
• The chart pattern also showed a bullish falling wedge into 3700, which is THE critical level to watch in the next few sessions. 
• 3700 is where the most strikes and negative gamma concentrate. Falling wedges typically lead to reversals higher.
• In brief, the market wants to rally, and we even saw a small short-covering rally start into the close.
• The futures are positive this morning. The overnight range barely tagged the halfback from yesterday and has stayed in the upper half of yesterday’s range. 
• Bulls and bears were evenly matched overnight, much as they were yesterday.
• So it does not take much for the market to take out yesterday’s high and end the brutal one-time-framing lower bear candles of the past few days on the daily chart.
• Today is Fed day, and the street has baked 75 bps into the price cake.
• And as I have been saying for a few days, the street is incredibly short, and it won’t take much to send the shorts on a relentless buying spree.
• Recall that the WEM low sits at 3800 for the S&P 500 futures (3804 on the cash SPX and 380.40 on the SPY).
• The WEM low target is still in reach as a magnet to draw the market up for the few Dealers who did not bail on Monday’s significant breach of the level.
• The volatility range for today is roughly 65 points in either direction from yesterday’s SPX close at 3735, so it will be a wild ride as usual. I usually don’t trade until at least an hour after the announcement, if at all. 
• I think framing the market on days like this might be pointless. But price acceptance above yesterday’s high at 3782 and the overnight high at 3783 is the most bullish outcome. Dropping sustainably below the overnight low at 3739 would cause me to question the bullish case. Acceptance below 3700 is bearish. 
• Given the strikes sitting at 3700, there is also a case for pinning at the level on Friday, which may draw the market back after some short-covering. Pinning at 3700 is a very low probability but keep the possibility in mind.
• And don’t forget that sometimes statements at the news conference can reverse the market’s initial reaction to the rate change.
• My best guess is that the stock market is poised to start a short-covering rally at a 75 bps or higher rate increase.
• The market could continue lower if the Fed comes in at 50 bps or less without reasonable justification.
• The rally could be the beginning of the end of the bear if it is cyclical and not secular. I doubt it, but keep that possibility in mind as the crowd would least expect it.
• Also, the street is short and expecting a short-covering rally into the quarterly options /futures expiration on Friday with some Vanna tailwinds. I am inherently suspicious when too many traders and investors agree on the same thing.
• The magnitude of options expiration cannot be overstated. We only get options and futures expiring simultaneously four times a year.
• If the market topples further here, it will be on the Fed’s forward guidance, not today’s rate increase.
• Using the original CPI calculations before the government tried to put lipstick on them after the 1970s, inflation is running very hot at 20% – almost hyperinflation by any other measure. As far as the street is concerned, the Fed cannot be aggressive enough.
• The problem is that much of this inflation is deep and structural, unlike “Happy Days are Here Again,” consumer-driven inflation. So the interest rate cure may be worse than the ill.
• Higher rates cause more consumer suffering. Demand destruction will not likely stop the structural inflation caused by (i) deglobalization (nobody’s fault) and (2) extraordinarily poor and unwise Biden administration energy policies.
• Until events check the rise in oil prices, there will be no inflation hope on the horizon. It is not as much a demand problem as anti-energy government policies and insane, ineffective global sanctions.

Let’s see what the day brings. Good luck today!

A.F. Thornton