SPY's Next Move: Overbought Short Term, Medium Term Bullish

Stock Market Short-Term Overbought

In yesterday's update (to subscribers) I wrote that the market was overbought and in combination with hawkish Fed speakers we could get some risk. That's pretty much what took place. To work out overboughts the market needs to go flat or down. Down today is a step.

These overboughts aren't as simple as they just go away. We need to measure how the market responds to them. SPY down 1.6% is a normal day. If we see down 3-4% days then this uptrend can turn into a down trend. Another normal day like today though then I think overbought gets washed away and we can be back into an uptrend.

Fed Speakers Bearish

For tomorrow I also see more risk with more Fed speakers talking about higher rates also in combination with the market overbought.

The last core CPI at .3 was not enough for the Fed to shake deer-in-headlights that they are way off leaning the wrong way.

So while the market is bullish the Fed is not until we see the next PCE price but really the next CPI print. If inflation doesn't make more progress (lower numbers) then the market could have a problem because the market won't continue to try to outguess the Fed. In the meantime the general trajectory for inflation has been down and I think there's still gravitational pull for the data.

PCE Price January 27th, CPI Feb 14th. Next Fed meeting Feb 1st.

Bonds Showing No Inflation Risk

Bonds were up a lot meaning it does not agree with the Fed. The Fed talking tough means the bond market thinks they will effect a slowdown which is good for longer-term bonds. If bonds were worried about inflation especially with the extreme force of QT, they'd been going down. They are not. That tells me very smart big money is buying big in bonds against the Fed's QT and against the Fed's thinking inflation is a problem. Again, bonds would not be jumping especially with the Fed backing away from the bond market if there were inflation risks.

The bond market is usually much much smarter than the Fed.

The bond market up is also a good support for the stock market.

The QT risk for the stock market comes from the bond market. But if the bond market is holding firm then that's a shock absorber to the stock market.

I'm watching this... The Atlanta GDP estimate did come down today but to 3.5% so it's still strong. But this needs watching (here).

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