Higher interest rates and inflation, but falling retail sales? Not a great combination for equities. In fact, it feeds right into our base case of stagflation.Not even the venerable VIX gimmick was able to paper over the implications.Back on May 3 [see: Decision Time] we identified the 15-16th as a potential new low. The next day, of course, the massive VIX dump sent stocks scurrying higher. Though we had a nice bounce, ES and SPX reversed course, yesterday, at the lines in the sand we had drawn for them — meaning, the downside case is still in play.
The key, of course, will be whether the damage can be limited to SPX 2703.62. A bounce there at the 2.24 Fib extension would suit bulls just fine. A drop through it would expose stocks to new lows.
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