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ETF Tracker Newsletter For June 24, 2022

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  1. Moving the markets

After the recent thrashing, the major indexes finally managed to close the first week out of the last four with a win. Gains were broad, as the markets seemed to have found some stability and strung together a nice relief rally.

Given the oversold conditions, after a rough first half of the year, during which all indexes plunged into bear market territory, a rebound comes as no surprise. Especially during the end of this quarter when the Russell and some $30 billion in pension funds finalize their rebalancing acts. This period is often marked by extreme volatility and heavy trading volume, neither one of which is indicative of future market direction.

The odd thing is that the positive sentiment of the past couple of days is the result of growing concerns with global economic growth, which increases hope that the Fed will have to end its interest rate hiking process sooner than later and start lowering rates.

Bloomberg called it this way:

US equities are rallying on Friday, putting them on pace to wipe out the losses from last week, as recession fears calm, and a key economic data suggest inflation may be cooling.

ZeroHedge argued against that conclusion:

It’s a good headline, unfortunately it’s dead wrong, because while stocks did in fact snap a three-week losing streak and also averted being down for a record 11 out of 12 weeks…

… with every single sector closing solidly green…

… the reason for said snapping was just the opposite of optimism because with a recession now assured

… what prompted today’s furious short squeeze, because that’s what it was – a short squeeze of the most shorted names…

… was the market’s realization – helped by our explanation yesterday – that a recession means the Fed will end its hiking cycle much sooner than previously expected, most likely sometime around the mid-term election…

Just that potential of rates possibly having peaked was cause for the bulls to celebrate by ramping up stocks but forgetting that a recession will affect corporate earnings negatively and therefore stump stock prices.

However, in the era of “bad news is good news” everything is possible, even the remote chance that Fed head Powell might stick to his guns and seriously hike rates to battle inflation—recession be damned. Because if the folds, and lowers rates again as markets expect, hyperinflation will be our steady companion, along with a constantly devaluating dollar.  

Next week, I expect some more quarter-end buying to support the indexes, with the S&P 500 possibly recouping its 4k level, but after we enter July, all bets are off.

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