Morning Note | Aug 18, 2022

Good Morning!

Futures are pointing to a slightly higher open as technicals are more and more pointing to an overbought, tired rally.  The failure to test the S&P 200-day moving average of 4,330 yesterday led to a risk-off tone.   The July FOMC minutes were largely in line with Powell’s press conference as the Fed officials continue to describe inflation as “unacceptably” high and see the Fed move into restrictive territory. SPX initially rallied in response to the lengthy discussion on over-tightening risk, but the initial gains faded after an hour. 

JP Morgan still sees a 75bp increase, though hedged themselves a little saying they also see a risk of 50bps if jobs growth slows notably in the next report.  Initial jobless claims dropped 2,000 to 250K.  

On short covering, JP Morgan highlighted the risk of a continued short squeeze:

In our last Prime Time note, we highlighted the continued short squeeze in the markets and it seems this has been playing out with high short interest stocks squeezing higher amidst increased short covering. Now the covering is getting quite extreme (a 2z event globally over the past 20 days and a >3z event in N. America), while the rally is one that HFs are not trying to chase with longs. This would suggest that few investors find the market fundamentally attractive, which is consistent with the team’s Signal from the Noise monitor – i.e. currently none of the fundamental metrics that are associated with a bullish market set-up are being triggered.

Interest rates continue to inch higher with the 10-yr back to 2.90% and threatening the 3.0% threshold once again.  10s-2s remains heavily inverted which is a big, blaring recessionary alarm signal.