The S&P 500 continues to drift lower over the last several weeks as we start to look at the month of July. The month of July is likely going to continue the bearish trend, as the Federal Reserve continues to tighten monetary policy. After all, they are anticipated to raise interest rates significantly, and that works against the value of stocks in general. The market looks as if it is going to go looking to reach the 200-week EMA, perhaps even the 3500 level after that.
That being said, bear markets are awfully difficult to short aggressively, because there is almost always a reason for buying. If for no other reason than the occasional short squeeze when it comes to an options expiration, forced buying, or even forced covering of short positions. Nonetheless, I do think that the month will be negative unless, of course, we can somehow break above the 4000 level. At that point, then we begin to try to turn things around. At this point, it’s not until we break above the 4200 level that I think the momentum has shifted to the upside, and at that point then things become bullish.
However, the Federal Reserve tied in the monetary policy in America is going to continue to weigh upon the markets, especially if they continue to be very aggressive. There will be the occasional “bear market rally”, which can be quite violent. However, every time we rally a few percent, there will probably be people willing to get out of the market that has been struggling for a while. In other words, there is going to be a persistent amount of downward pressure, at least until the fundamentals change.
Furthermore, companies are going to have to write down estimates, and comps are going to get much more difficult. At this point, I do think that there is an area between 3500 and 3400 that should be a significant amount of support, so if we were to break below there, that could open up a massive amount of selling. I don’t see that happening, but if it does things could get rather ugly. I anticipate that we will probably continue to drop for a while, and then try to find our footing by the end of the month. Whether or not it holds is still a completely open question. I do not trust rallies without the Federal Reserve changing its tune.
