Approaching the Brink: Is the End of a Cycle Imminent + FOMC Coverage

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As the world of finance weaves its intricate web, there's an underlying truth that every investor must come to terms with—the rise and fall of economic cycles. From bullish booms to bearish busts, these cycles are an undeniable reality that shapes the trajectory of markets, industries, and individual investments.

Both experienced and new investors are wondering if the current cycle is nearing its end. With whispers of uncertainty and cautious optimism circulating through boardrooms and trading floors, it's time to delve deep into the signs and signals that could herald the turning point.

But first …

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Federal Reserve FOMC (06-26-23) meeting notes

Fed fund rates are now 5.5%

• Fed Fund Rate is the interest rate at which depository institutions (such as banks and credit unions) lend reserve balances to other institutions overnight on an uncollateralized basis. In the United States, the Federal Open Market Committee (FOMC), a part of the Federal Reserve System, sets this rate.

• When the Federal Reserve lowers the federal funds rate, it encourages borrowing and spending since it becomes cheaper for businesses and consumers to obtain loans and credit.

Based upon the lack of conviction in the Core CPI reaching 2%, I wouldn’t be surprised to see the CPI percentage increase. We went into depth on this topic a few weeks ago. The link is below if you are interested.

Has the recession come to an end?

Fed hinted at no more Quantitative Easing.

The Fed retained its commitment to reversing a previous quantitative easing (QE) policy that involved purchases of Treasury and mortgage-backed securities. QE was aimed at providing more liquidity to capital markets. The Fed is trimming its balance sheet of those assets from its peak near $9 trillion.

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What does it mean when the Fed shrinks its balance sheet?

The process of shrinking the balance sheet is often referred to as "balance sheet normalization" or "quantitative tightening"” It is the opposite of "quantitative easing," which is the process of expanding the balance sheet through asset purchases.

The primary reasons for the Federal Reserve to shrink its balance sheet are:

1. Normalization of Monetary Policy: Following the global financial crisis of 2008-2009, the Federal Reserve engaged in three rounds of quantitative easing to support the economy and stimulate growth. As economic conditions improved over time, the Federal Reserve aimed to normalize its monetary policy by gradually reducing the size of its balance sheet.

   • Sound familiar to what the feds did in 2020-2021 during the rise of meme and covid stocks?

2. Controlling Inflation: Shrinking the balance sheet is a way for the Federal Reserve to reduce the excess reserves in the banking system. Doing so can tighten the money supply and control inflationary pressures.

3. Flexibility for Future Policy: The Federal Reserve creates additional room to respond to future economic downturns by reducing its balance sheet. A more miniature balance sheet provides more flexibility to engage in quantitative easing again if necessary.

4. Market Impact: The shrinking of the balance sheet can affect financial markets. It can put upward pressure on long-term interest rates and affect asset prices, influencing borrowing costs and overall economic activity.

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A New Cycle

If I view things from a macro lens which would lean on blending fundamentals with technicals, here is where we are.

3-year timeline. Now, could we zoom in?

1. Major supply at 4800

2. Major demand at 3700

3. 2023, back at 4600. Price action tells us we have room for a higher support level.

The new support range for bullish continuation could be from 4490s to 4280. Here are two reasons why?

• Our market is full of ‘cry wolves’ and ‘early celebrators, ’ meaning if we come down to these levels, people would start comparing charts to 2008 again or announcing how seasonalities favor a market crash. Still, in reality, we could use this range to trade above 4800 (I do not wish on my worse enemy, but I will trade it if necessary) or trade in range over 6-7 months.

• It took four failed attempts to treat 4200s as support, so why would you think we would give up this critical level with ease?

To Conclude

Is this a new cycle? Possibly. FOMC is over, another rate hike is expected next month, and big tech earnings are almost finished. We could see a rotation into small caps or a downturn in the general market to allow the algorithm and investors to dissect all of the information from the busy month of July.

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I am a fan of trading higher, but levels like 4490, 4365, and 4280 will be vital if we see slippage. If 4490 becomes resistance with a weekly close below, I cannot be bullish. A decent swing trade idea may be to buy dips into 4490s for a scalp, as I do not believe it will break on the first attempt.

If a second attempt comes, I may wait until lower levels near 4420-4370. All /ES mini levels are for September exp.