Dow Avoids The 'Bear' But Recession Fears Can Pull Risk And Push Dollar

• The Trade Perspective: S&P 500 Bearish Below 4,075; USDJPY Bearish Below 134.00
• A return of US liquidity has not translated into an outright extended collapse in sentiment, but the narrow avoidance of a Dow 'bear market' doesn't inspire confidence
• Fear of recession has hit a record high in Google data terms, but monetary policy concerns can quickly come back to the forefront given scheduled event risk

After a long holiday weekend in the US, liquidity was restored this past session with a notable bounce in 'risk trends'. This wasn't just a move from the S&P 500 and Dow, but rather it leveraged some breadth that further inspired some degree of speculative reach. While there was some sliver of speculative opportunity to rouse the bulls in this first full session of trade for the week, it still registers as a correction in a dominant bear trend for me. There remain too many systemic headwinds that are far from capitulating – much less reversing course to support speculative appetite. Inflation forecasts, monetary policy commitments and recession warnings are all on a troubling trajectory moving forward. That shapes my evaluation of moves like the Dow Jones Industrial Average that has turned just before hitting the official 'bear market' threshold of a 20 percent retreat from all time highs at 29,562 or the more proximate 38.2 percent Fibonacci retracement of the post-pandemic recovery at 29,780. While the S&P 500 is bouncing from below its own bearish tipping point, I look to the 'value index' as the next escalation of transition from bullish to bearish for the financial system. Should this hold out slip its last vestige of upside credibility, it will materially alter the course of speculation.

Chart of Dow Jones Industrial Average with 20-Day SMA (Daily)

Chart Created on Tradingview Platform

When it comes to market motivation, it is important to assess what systemic themes are guiding speculative intentions. While 'sentiment for sentiment's sake' is of course a factor, it seems that more traditional fundamental matters are still exerting consider pressure on the financial system. Monetary policy remains one of my top priorities for determining relative value and the overall confidence in economy, fears over 'recession' have overtaken all the other high-profile matters I track as well as the historical peaks for the same fear (going back to 2004). In the Google search results below, worldwide search interest in 'recession' has handily overtaken 'bear market' – pertaining to the S&P 500 – as well as the perpetually buoyant interest in 'earnings'. If attention has focused to economic contraction, there is no serious opportunity for bullish potential as dip buying on a theme that takes months to turn represents the epitome of a 'long shot'.

Google Search Interest in the US for 'Recession', 'Bear Market', 'Rate Hikes' and 'Earnings'

Chart from trends.google.com/trends

In the hierarchy of fundamental influence, I believe recession fears represent the greatest potential for redefining our course moving forward. The threat of an economic contraction is still generally viewed as an improbability despite the varied warnings from major group and the evidence registered in sentiment surveys. Nevertheless, monetary policy still has a very clear role to play. On a relative basis, there is plenty of exchange rate and 'pairs trading' potential from the major players disproportionate approach to global conditions. However, in aggregate, a tightening of policy conditions will stifle economic potential – potentially to the point of sparking a recession. Notably, the NBER felt is necessarily to clarify its definition of a 'recession' last week as the 2-10 spread probed inversion. Meanwhile, the pressure for an aggressively hawkish policy stance has not eased much at all. While James Bullard may have stuck to his contrarian guns to try and quiet concerns, we have heard both the Fed's Waller and Barkin state their view that another 75 bp July hike was a possibility. Fed Fund futures are pricing in approximately a 98 percent chance of just such a move come July 27th.

Chart of US Dollar Index Overlaid with July Fed Rate Forecast (Daily)

Chart Created on Tradingview Platform

Where monetary policy discrepancy and risk trends really converge are the crossroads of USDJPY. This pair managed to post yet another 1.2 percent charge through this past session – a drive that would earn the benchmark cross highs not seen since 1998. This does not register as a reliable transfer of capital from 'risk' to 'value'. Instead, the rally seems more an expression of purposefully divergent monetary policy. The Bank of Japan reiterated its commitment to a 0.25 percent JGB yield which has stretched the bounds of expectation for how much government debt should a local central bank hold. If risk trends collapses, carry trade – the pursuit of higher yield – will suffer. Should the Fed's outlook cool or the BOJ capitulate on its inflation fight, USDJPY will again feel the burden. Should both happen concurrently, the retreat could be violent.

Chart of USDJPY with 20-Day SMA Overlaid with Nikkei 225 to Dow Ratio (Daily)

Chart Created on Tradingview Platform

If you are following the calendar to assess where flare ups in volatility could occur, there is no need to look beyond the immediate 24 hours docket. Top of my calendar will Fed Chairman Powell's semi-annual testimony, first before the Senate. The central bank will absolutely be asked about the decision to tigthten monetary policy in the face of inflation, but the concerns around capital markets' response to the more restrict regime may force introspection for which investors are not ready. Outside of the Fed speculation, we also have direct consumer inflation statistics from the UK and Canada which can stir the pot. My next major concern though remains on the economic milestones that can quickly feed fears. I will be watching Powell testimony for cracks; but Eurozone consumer confidence and UK and Canadian CPI should be able to mainline the speculative response.

Calendar of Major Global Economic Events

Calendar Created by John Kicklighter

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