Market participants look uncertain as we warp up the first half of the year. The S&P 500 is on track to post its worst first six months since the 1970s, and there are few signs that the bear market is coming to an end.
Unlike prior bear markets, this one is quite different because we have a Fed that is becoming even more hawkish as the market struggles at the lows. There is no likelihood that the Fed will be riding to the rescue soon. It is just starting to contract its balance sheet, and there is a great likelihood we will see another interest rate hike of three-quarters of a point in a few weeks.
The market is looking nervous here on Friday morning as European stocks performed poorly overnight and investors anticipate the latest Personal Consumption Expenditures (PCE) report, which is another measure of inflation similar to the Consumer Price Index (CPI).
In addition to macroeconomic concerns, it is the last day of the quarter and there will be plenty of positioning for the second half of the year. It has been an absolutely miserable quarter for most money managers and they will be anxious to show clients they are positioned to deal with what may lie ahead.
Typically the last few days in front of the July Fourth holiday have a positive bias, but seasonality is never a certainty. We have very unusual market conditions right now and anyone betting on typical action is likely to be surprised.
With the markets acting poorly and sentiment extremely gloomy, there will be the usual folks who will believe that such senitment is a contrary indicator and time to go long. This approach is often driven by a desire to be active and do something because that is what they are paid to do. Money managers feel an obligation to act even when the better course of action is to do nothing.
I strongly believe this is a market only for short-term trading. There is likely to be some tradable volatility as we wrap up the week and look ahead to the holiday, but this is not the time to build big long-term positions in hopes that the market is close to a low. There will be plenty of time to put cash to work after the technical action improves.
The most important thing to keep in mind is that this market does not have the support of the Fed right now. The best advice for the past decade has been "don't fight the Fed," and that is still the best advice. Don't forget it.
