July 6, 2022

As most know, this space is a bit pessimistic regarding the economy and markets, however recent market activity suggests that there could be a short term bottom forming.

There are still so very many things that could go against the market that bullishness is not warranted, however the large downward moves are not as severe and the selling season is now done.

Over the past few weeks there have been a few interesting developments:

  • interest rates have peaked and have started to come back down (a recognition that the economy is slowing and recession is likely).
  • the last significant drop in the market (through mid-June) was met with significant bottoming from early decliners, namely tech stocks.
  • commodities have now suffered a serious decline, which will take pressure off of producer inflation
  • logistical bottlenecks are not getting worse. That doesn’t mean they are getting better, but they are probably stabilizing

Taking significant positions would not be wise as the next phase will be to see what breaks/fails in the economy and as posted a few days ago, there are many failures and breaks occurring all at once, right now. But many of the larger companies will continue to do well, even in a difficult economy and some level of investment may be warranted.

It hasn’t been a focus of this space to select equities specifically, but some of the larger tech names (chip manufacturers for instance) or entertainment names (people have staycations during downturns) might be worth a nibble. At the same time, the rout in basic materials over the past week, including metals and oil are likely overdone, but may take weeks to bottom.

Overall, another leg down is still expected when the full effects of a recession are better quantified, however that probably won’t happen until the fall, and the bounce can be powerful here if all of the liquidity sloshing around decides to participate.

As always, these are times to be cautious, but signs of a bottom are forming and only nimble traders should consider putting significant money into play. For long term investors, there will likely be better entry points later in the year.

Do keep in mind timing markets is very difficult and volatility is very high so take time to enter any new positions (spread out purchases if deploying a significant percentage of a portfolio). If you are considering selling positions, then a bounce may offer more attractive opportunities.

The June Drop was fast, but the bounce has had a lot of volume
10 Year yield is starting to moderate and a strong dollar is supporting this move
Shipping Rates are moderating as well suggesting the supply chain is healing
Commodities have been ‘plunging’ for almost a month

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