/ June 23 / Weekly Preview
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Monday:
Existing Home Sales (3.96M exp.)
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Tuesday:
Fed Chair Powell Testimony
CB Consumer Confidence
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Wednesday:
Fed Chair Powell Testimony
New Home Sales (0.7M exp.)
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Thursday:
Durable Goods Orders MoM (7.2% exp.)
Initial Jobless Claims (247K exp.)
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Friday:
Core PCE Price Index MoM (0.1% exp.)Personal Income MoM (0.3% exp.)
Personal Spending MoM (0.1% exp.)
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Monday:
FactSet Research Systems Inc.
KB Home
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Tuesday:FedEx Corporation
Carnival Corporation
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Wednesday:
Micron Technology, Inc.
Paychex, Inc.
General Mills, Inc.
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Thursday:
Nike, Inc.
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Friday:
N/A
Oil, Inflation and Interest Rates
Last week, we discussed how the bull market continues uninhibited in the equities asset class despite all of the negative narratives that encompass tariffs, the deficit and the potential onset of WWIII.
We’ve seen a consolidation pattern emerge as a result of these fears, combined with the short term overbought nature of the market. Negative news headlines from the ongoing Iran-Israel conflict continue to push and pull traders daily. Technically, SPY held support at the 20-DMA, but broke below a “rising wedge” pattern that was forming since late May. Taken together, we see the potential for further consolidation this week, as the S&P 500 Q2 “buyback blackout” period is just getting started.
While many bearish headlines remain, the market is back into “risk-on” territory. The sentiment has mostly been carried by retail investors, as they have primarily been responsible for the run-up in May, buying the dip in an unprecedented aggressive manner. By definition, the counterparty to that trading have been professional investors, who have been more inclined to sell on green days.
However, while history tends to show professionals have the advantage, it doesn’t mean that they are always on the right side of the trade. Professional investors are generally more concerned with not losing capital rather than hitting a “home run” in a couple of trading sessions using leveraged ETFs and options. That’s the behavior of WallstreetBets type investors, which have turned out to be winners so far.
Meanwhile, other pro-risk measures have surfaced, as Sentimentrader notes:
“Human nature never changes, especially regarding making and losing money. When the market falls, investors become more fearful and lose their risk appetite. This creates an opportunity for individuals who know what to look for.
The S&P High Beta / S&P High Quality Relative Ratio Rank indicator shows where the ratio is relative to its range over the past four months. When the relative ratio is high, investors are showing risk-on behavior. When the ratio drops to a low level, they exhibit risk-off behavior. The chart below highlights those dates when the indicator dropped below five and then crossed above 75. The most recent signal occurred on 2025-06-09.”
When that risk-on signal is triggered, it generally leads to higher asset prices over the next few months. This type of backtested analysis is also coming soon to Signal Sigma FYI!
The conclusion from Sentimentrader is as follows:
It is always important to remember that no favorable indicator – or combination of indicators -guarantees higher stock prices. Nevertheless, from a “weight of the evidence” perspective, the information above suggests giving the bullish case the benefit of the doubt unless and until price action provides us with a reason not to.”
As such, the bullish bias to the market remains intact, though near term results may be ho-hum. The main issue facing markets at the moment is the classic relationship between oil, inflation and path of monetary policy (interest rates).
Over the past week, a surge in oil prices caused by the outbreak of the Iran/Israel conflict caught investors’ attention. When put into proper context, we can see that the price spike matches previous instances when supply became a problem, but there’s no actual breakout yet. Oil has simply been trading in a very broad range over the past 2 years.
When viewed through an even larger historical lens (10 years), oil has lost almost -50% of its value, while Energy companies (XLE ETF) have been doing fairly well by comparison. Overall the trend for oil prices is lower, with a consolidation pattern in place since 2022.
The rise in oil prices, if persistent, can become concerning, as it increases costs for consumers. However, the key question is whether this will translate into a higher Consumer Price Index (CPI). This issue is particularly relevant following last week’s Federal Reserve meeting, where the outlook for “tariff-driven” inflation remained unchanged.
Despite four consecutive months of inflation readings below expectations, the anticipated “tariff-driven” inflation has not materialized amid weakening economic indicators. While a rate cut might seem appropriate from the Fed, the recent surge in oil prices could justify the their stance by triggering a short-term rise in inflation.
To understand the connection between oil prices and inflation, it’s essential to analyze the components of the CPI inflation index.
Out of all categories, it’s “Food & Beverage,” “Housing,” “Transportation,” and “Medical Care” which hold the most significant weights in the CPI calculation. Energy makes up 7% of total CPI, and is excluded from the Core CPI reading. It also tends to not be a factor in Federal Reserve decisions, as they are more concerned with sticky service inflation than volatile food and energy prices.
However, if persistent, higher oil prices will eventually feed into every component, from food to clothing to housing and transportation. It’s the duration of the price spike that’s more relevant than the absolute level of oil prices in this calculation. According to options traders, it’s the medium and long term outlook for oil that has more downside than upside projected.
Nevertheless, we could expect higher core and headline inflation if prices hover around current levels, thus delaying and rate cut from the Fed.
As Investopedia notes:
High oil prices add to the costs of doing business. And these costs are area also ultimately passed on to customers and businesses. Whether it is higher cab fares, more expensive airline tickets, the cost of apples shipped from California, or new furniture shipped from China, high oil prices can result in higher prices for seemingly unrelated products and services.” – Investopedia
As such, higher oil prices act as a tax on the consumer, since higher energy costs translate into lower discretionary spending power on “everything else”. It should not be surprising that sharp spikes in oil prices have been coincident with downturns in economic activity, a drop in inflation, and a subsequent decline in interest rates.
Of course, at the moment it’s the Fed’s restrictive monetary policy that acts as the biggest drag on economic growth. Combined with student loan payments restarting, delinquency rates rising, and slowing job growth, the drag on the economy may be higher than what economists expect. As a result, the demand side of the price equation in oil suffers and prices tend to stabilize lower, not higher.
Perhaps in anticipation of economic growth disruption, option traders are starting to hedge for downside. SPY’s GEX has flipped negative for the first time since late April, signaling a shift in attitudes. While many individual Sector-level and Stock-level components maintain positive GEX, this is nonetheless a bearish signal. Dark Pool traders have been bullish on the SPY ETF itself (74% buying on Friday), but bearish on the top 20 stocks that make up the index (just 42% when measuring the buying average).
Our Trading Strategy
We’re not saying that the spike in oil prices is a “non-event” but it’s certainly a passing market disruption that tends to resolve itself. If anything, higher oil prices tend to precede lower interest rates and lower economic growth. This is a net positive for the bonds side of our portfolio allocation and less positive for stocks.
With the overall vibe in equities being neutral to bearish in the short term (1 month), we would adhere to a wait and see approach. The medium and longer term indicators look healthy, and the Fed will eventually cut rates to support growth. The only question is if they’ll do it organically, supporting the economy, or they’ll do so sharply, in response to a credit market exogenous event. In our opinion, the Fed should cut now, despite the rise in oil prices.
Jerome Powell will shed more light on this subject on Tuesday and Wednesday, as he is set to deliver his speech to Congress.
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