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3 Charts Signal Stock Market May Rip Higher -The Week of June 11

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It will not be a boring week for sure, with a busy economic calendar. The consumer price index reading on Tuesday morning, the producer price index on Wednesday morning, The FOMC rate decision on Wednesday afternoon, retail sales on Thursday, quadruple witching on Friday. By the way, did I mention the North Korea summit on June 12, and the AT&T/Time Warner decision on the same day! There is a lot going on for sure.

The outlook for equities continues to improve, and I think this week may mark a turning point for equities that will unleash the bulls and crush the bears once and for all. The Fed will likely pave the way for rates on the long-end of the curve to decline, boost equity prices, but crushing the banks.

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The Week of June 11

A lot of attention will be on inflation reading, the Fed’s decisions, and the outlook.

CPI is expected at  +2.8 percent y/y, while ex-Food and Energy is expected at +2.2 percent y/y.

PPI  Final Demand is expected at +0.3% m/m, and ex-food/energy +0.2% m/m

The consensus is for a 25 bps Fed rate hike,

Quadruple Witching on Friday, with the expiration of stock options, stock futures, index options and index futures. It will be a wild day as the quad witching always is. Be mindful of big moves on the open of trading and the last hour of trading.

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3 Charts To Watch

The Ten-year Treasury will be in focus, with all the inflation data. But it will be the Fed’s dot plot that will be most impactful and paying attention to what the Fed sees for the future of interest rates and the commentary will move this part of the bond market. I continue to believe rates on the long-end are heading lower, and towards the lower end of the recent range, around 2.75 percent.

The dollar will be the other relevant measure to watch and will also send us valuable clues to the market’s interpretation of any inflation data or Fed commentary.

The equity market is the last thing I would watch immediately following any data or commentary, but the Financials will be the most telling since they are such an interest rate, sensitive group. As I have said multiple times, the financials XLF ETF is the ugliest chart around and looks to be heading lower.

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What It All Means

Each of these groups is sending me a reasonably loud message, and that is this. Rates are heading lower based on the charts of both the banks and the 10-year. They both have bearish patterns and trends in them. Meanwhile, the Fed will raise rates this last time in June, and I think the Fed will take of more dovish approach going into the second half of the year.

The dollar will continue to strengthen, but it will be because the ECB may decide to stall or slow the pace at which they end QE. They appear to be buying as much time as possible in making their decision, now waiting until July. That will allow the dollar to continue to strengthen.

I would expect the broader equity market to be confused over the initial reaction in the bond and dollar market following an FOMC decision, just because that is what the equity market does best, get confused. But make no mistake, if this plays out as I expect, then it will be very bullish for equities, and shares of technology, biotech, and staples with limited FX risk to benefit the most.

Good luck this week, you are going to need it!

-Mike

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