The Morning Call
7/20/26
The
Market
Technical
As you can see,
the S&P has been building what technicians call an ascending
triangle---which historically results in an upward breakout. However, Friday’s pin action brings that
scenario into question as the index fell (1) below the lower boundary of that
triangle but also (2) below its 50 DMA.
That doesn’t necessarily mean that the jig is up---as you can also see, earlier
the S&P had a one day drop below both the lower ascending boundary and its
50 DMA and quickly recovered. Arguing
for such a recovery is (1) the index remains above both its 100 and 200 DMAs
and (2) it is in uptrends across all timeframes.
Right now, follow
through is what matters.
Friday’s pin action
aside, the long bond has had a pretty dismal last couple of weeks. I would have thought that there would be more
churn given the upbeat inflation numbers, the subsequent hawkish Fed speak and
then the resumption of the Middle East war.
That said, given the somewhat confusing news flow, I continue to think
the long bond is going nowhere. What we
know technically is that TLT is below all three DMAs and in downtrends across
all timeframes; so for the long bond to rise enough to even challenge the upper
boundary of its very short term uptrend, I think that it is going to take a
series of positive developments. I await
such with my heart all atwitter.
GLD remains in a well-defined
downtrend. It is below all three DMAs; and
is now challenging the lower boundary of its short term uptrend (if it closes
below it today, it will reset to a trading range). Like TLT, I was a bit surprised that it didn’t
experience more churn give the conflicting headlines. With that said, the chart clearly suggests
that more downside is in the cards.
The dollar continues to develop
a very well defined very short term uptrend but on a longer term basis is
wandering in the wilderness, i.e., it has a long way to go to get out of its
short term trading range. At the moment, the only thing that I can see that will
reset that to an uptrend is if Warsh is the real deal---and we don’t know that
yet.
Friday in the charts.
https://www.zerohedge.com/markets/kimi-kuwait-korean-chaos-cap-ugly-week-tech-oil-jumps-most-start-war
Summary: A busy week of macro (inflation inflected lower,
growth steady), was dominated by various headline catalysts impacting market
narratives: Peace-premium (endless
escalation culminating with Iran attacking Kuwaiti water and power plants
in counterstrikes against the US), AI Spendaholics (China's
'low cost to build' Kimi from Moonshot crushes the 'expensive'
American dream), & Semis to the Moon (Korean
retail wakes up to the downside of leverage). By the end of the week,
stocks were down led by Nasdaq (Semis/Momo ugly), bonds were bid (rate-hike
odds tumbled) despite oil's biggest week since war started. The dollar and
gold were weaker, bitcoin managed to end unch. This week's market action
was fundamentally anchored by a sharp macro regime shift triggered with
surprisingly cooler than expected inflation prints, derailing near-term Fed
rate hike expectations and fueling broad USD weakness across G10 currencies. he inflation surprise forced an immediate repricing of
duration risk, transitioning markets inflation-anxiety induced higher yields
(and a yield curve steepening - as growth optimism picked up in the soft
survey data)...
As
the following chart shows, while crude has been rising recently, product
prices are soaring back near recent highs (and bond yields are following
products, not crude)...
An ugly week for US stocks
with Nasdaq clubbed like a baby seal (as Small Caps and The Dow
outperformed... but were still red on the week)...
Equal-weight
S&P 500 closed at a record high Thursday even as the Nasdaq 100 fell
1.75%, with 10 of 11 sectors positive at one point intraday. This is
rotation, not broader defensive liquidation...for now.
Friday in the technical stats.
https://www.barchart.com/stocks/momentum
https://www.barchart.com/stocks/market-performance
https://www.barchart.com/stocks/sectors/rankings
https://www.barchart.com/stocks/signals/new-recommendations
Traders stunned by momentum meltdown.
https://www.zerohedge.com/geopolitical/traders-stunned-momentum-meltdown-earnings-quality-problem-simmers-under-surface
Signs of panic.
https://www.zerohedge.com/markets/signs-panic-goldman-derivs-guru-warns-ai-credit-blowout-spilling-over-entire-market
Summary: One
week ago we were delighted to see that none other than Goldman's top
derivatives trader, Brian Garrett, echoed what we had been warning for nearly a
year, namely that the real risk to AI stocks was not within the stock market at
all, but
rather with bonds, where spreads had been aggressively ramping wider in
recent weeks as the market's concerns about return on hyperscaler investment
once again spilled over into credit land......in the process crushing
semiconductor/memory stocks, amid fears the relentless capex tsunami would hit
a brick wall and spark a market crash as hyperscaler capex has firmly cemented
itself as the
primary source of the global credit impulse. One week ago we were
delighted to see that none other than Goldman's top derivatives trader, Brian
Garrett, echoed what we had been warning for nearly a year, namely that the
real risk to AI stocks was not within the stock market at all, but
rather with bonds, where spreads had been aggressively ramping wider in
recent weeks as the market's concerns about return on hyperscaler investment
once again spilled over into credit land...
..
Monday morning
setup: US equity futures rebound from Friday's selling, indicating a firmer
start to the week with S&P futures rising 0.5% at 8.00am ET, and Nasdaq
futures up 1% after a sluggish start to the session, after Iran’s Foreign
Ministry said it had received proposals from mediators about the conflict with
the US. In premarket trading, semis are higher as are Mag7 names; the AI theme
is bid across sectors. Cyclicals are leading Defensives; both are higher in
absolute terms, pointing to an ‘Everything Rally’ today. According to JPM, the
US / Iran escalation is being faded with WTI lower pre-market and Brent off its
highs. Bond yields are flat to up 1bp s the yield curve twists steeper.
Commodities are mixed but net higher with US crude/natgas lower. The update
from Iran has seen energy prices reverse gains with Brent now down 0.3% and on
an $87/bbl handle. European stocks are now a touch higher with the Stoxx
600 up 0.1% Asian stocks were more mixed as a 4.5% plunge in the Kospi was
offset by advances in China after two major state funds showed fresh purchases
of domestic stocks. Bonds are still down but off session lows with
Treasuries off by 3 ticks and yields up around 1bps across the US curve. The
Bloomberg Dollar Spot Index has been choppy but ultimately flat with the
greenback mixed versus G10 peers. Spot gold is up 0.1%, while silver rises
1.5%. Bitcoin has been on the back foot, down 0.5%. This week is a light
macro data with the next Fed mtg on July 29, today we receive the Leading
Index.
Fundamental
Headlines
The
Economy
The
US stats the week of July 6th were scarce but balanced with no primary
indicators and one negative inflation reading.
Last week was also a bit slow though the data was upbeat with one
positive, one neutral and one negative primary indicator and two great price
measures.
Overseas,
the week of July 6th the numbers were also balanced but included two
neutral and one negative inflation datapoint.
Last week, they were also balanced with one positive and one neutral price
indicator.
There
is nothing in this data to alter my view of steadily growing economy. It is the
inflation front that garnered all the attention with both CPI and PPI coming in
better than anticipated. On the surface
that would seem just peachy; but a debate arose over whether a less positive
PPI (than CPI) was a sign that future CPI readings would disappoint. While I tend to agree with those that argue
that it is, I prefer to ‘wait and see’.
Although the renewed fighting in the Middle East (and the accompanying
rise in oil price) may make any disagreement moot.
https://giftarticle.ft.com/giftarticle/actions/redeem/b65ae535-c36d-478c-a65f-44474814b0c1
Of
course, those inflation numbers did lower the odds of a rate increase at the
July FOMC meeting---which is a plus for the equity market---and our ruling class
I suppose (making financing the enormous Federal debt a tad cheaper)---but that
won’t solve the greater macroeconomic problem of irresponsible fiscal policy.
So
for the moment, my ‘inflation is as good as its going to get though it may not
get any worse’ position remains.
Regarding
the end of the war---it didn’t. And as
you might guess from my prior comments, it shouldn’t. With the clear caveat that I am no political/military
strategy expert, I don’t know how Trump could possibly go into the midterms having
spent billions and killed American kids with Iran charging tolls to pass
through the Strait of Hormuz and vowing to continue to develop a nuclear weapon.
Finally,
last week witnessed a hitch in the AI ‘gitty up’ with (1) questions arising
about who’s zoomin’ who between the chip makers and hyperscalers and (2) the
news Friday that China’s AI technology may well have caught up to the US. I don’t think that the end is clear in either
case. But they both raise the question
about the continuing level of AI spend and its impact on free cash flow and earnings.
Bottom
line: the economy continues to grow and inflation remains well above the Fed’s
target even if it is not getting any worse.
However, this scenario is not without some storm clouds, specifically, renewed
conflict in the Middle East and rising uncertainty regarding the course and the
winners in the development of AI technology.
US
From last Friday.
June industrial production was up 0.1% versus
estimates of +0.2%.
The July consumer
sentiment index came in at 54.4 versus projections of 51.0.
International
May EU construction output was up 1.2% versus
consensus of +0.5%.
June German PPI fell 0.3% versus expectations
of -0.2%.
Other
Update on Q2 GDP nowcast.
https://www.capitalspectator.com/us-q2-gdp-growth-expected-near-q1s-increase/
The fallacy of the ‘K’ shaped economy narrative.
Inside the recent retail sales number.
Housing starts and permits continue to show a sector
in equilibrium.
https://bonddad.blogspot.com/2026/07/housing-permits-and-starts-continue-to.html
Iran
Overnight news.
Inflation
Fed comments raise stakes for inflation data.
https://www.advisorperspectives.com/commentaries/2026/07/17/fed-comments-raise-stakes-inflation-data
Tariffs
Has Trump finally admitted that tariffs aren’t
working?
https://thehill.com/opinion/finance/5970190-section-232-tariff-reversal/
AI
The datacenter revolt goes national.
Investing
Hyperscalers drag down bond gauges across the
globe.
News on Stocks in Our Portfolios
What
I am reading today
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