Warsh's first meeting could reset the entire playbook.

KR Opinion

Yesterday gave us another genuinely interesting session, and it left the same question hanging over the tape that has been hanging over it for six weeks now. The CPI report came in at 4.2% year-over-year, right in line with expectations, yet the market sold off anyway. That is the tell. When a number prints exactly where the consensus said it would, and the price still goes the other way, the report was never what the market was trading. So the question every desk is asking is whether this selling is even about inflation at all. Is it about crude oil. Is it about the war. Is it about the war starting up again. What exactly is this market focused on. That question has been with us literally since the war began, and the honest answer is that the market keeps refusing to tell us. Some days it acts like the story is inflation, some days it acts like the story is the disruption of shipping and the broader fallout, and most days it simply does the opposite of whatever the headline would suggest. That is the difficulty. You cannot anchor to a single driver when the market itself will not commit to one, and traders who have tried to pin this tape to one clean narrative have been whipsawed for six weeks running.

That is what I keep coming back to: how contrary the price action has been to expectations. Almost every day works against the textbook. Oil rallies and you brace for a negative tape, and the market rallies instead, or it sells off on the session when it had every reason to hold. It has been a schizophrenic environment, the kind where the reflexive trade is wrong as often as it is right, and while we have managed to push higher within a number of the patterns, the reality is that we are simply seeing a continuation of what was already in place earlier in the year. We had a long, choppy range, then a sharp reaction to the war that sent us vertical, and now a drift back toward the middle of it, running in the same contrary trend I have described before. We live in a headline-driven market, and right now that description feels truer than it has ever been. On top of that, contrary to character, the pressure from the tech sector, the chip names, and AI in general has not let up since last week’s selling, and that is a meaningful weight given how much of this market’s leadership has come from exactly those names. What the market looks like it is actually trying to do here is build out a larger consolidation range rather than resolve cleanly in either direction, and a consolidation after a vertical move is usually the market deciding which way the next real leg goes.

Underneath all of it, the thing that continues to lurk is last week’s action. We printed a weekly reversal pattern, and that is not a small thing. In my work, it has happened only a handful of times in the last three decades, which is exactly why I am not willing to wave it off as ordinary chop. A weekly reversal is the market changing its mind on a timeframe that institutions actually trade off of, and when it shows up that rarely, it deserves to be treated as a real event until proven otherwise. So here is where I want every reader to focus, because this is the whole game. As we come into Thursday’s market, with two sessions already behind us, the only number that matters is 7368. I have said this all week and I am going to keep saying it until the market resolves it. A confirmation below that level gives us a confirmed three week decline, and that pattern carries a minimum target of 7100 to 7000. Everything else in front of us this week, the data, the headlines, the intraday noise, is just texture around that one line. Hold above it and the bears have nothing yet. Confirm below it and the character of this entire move changes.

Let me slow down on why this matters so much, because the level itself is only half the story. When you get a reaction like this, you very often see the same sequence play out in stages. You get the outside reaction first, then you reach a support point, then you get a secondary rally as the market tries to repair the damage. The secondary rally is the one to watch, and it is the one that fools the most people, because it feels like the all clear right at the moment the risk is highest. If it fails, that failure is what sets up a more intermediate high, and from that kind of structure you can open the door to a much deeper move, something in the ten percent range and possibly even fifteen percent off these levels. I am not predicting that today, and I want to be precise about that. I am telling you the structure is now in place, which makes it possible, and that is a meaningful change from where we sat a month ago, when nothing of the sort was on the table.

I do not expect anything satisfying out of the war to rescue sentiment, no settlement or breakthrough that suddenly clears the air, though in a headline regime you can never fully rule out a development that validates one side of the tape and lets the market start behaving more rationally again. That is always the wild card. We also have the SpaceX offering coming Friday, and I will be watching closely to see whether it moves sentiment at all or whether the market shrugs it off, because a marquee offering can sometimes set the tone for risk appetite well beyond the single name. And lurking in the background is Kevin Warsh, the new Federal Reserve chair, who will hold his first meeting next week. That first meeting is its own kind of catalyst, since the market will be reading every word for how this chair intends to operate. I intend to do a live stream of that meeting next Wednesday, and I will put out more announcements about it shortly. I will also be publishing a YouTube video Thursday night, so make sure you tune in to that as well.

The pattern we are living in, stepping back from any single catalyst, is a regime of lower prices. We have printed lower prices each day this week, methodically, and yet here overnight we are getting a bit of a reversal rally. If that rally holds, we could see the market push back toward 7400 and above, and that kind of bounce would negate the larger bearish pattern outright. That is exactly the configuration to respect right now, and it is why I am not banging the table to short into the hole. Selling weakness into a market that has already printed lower every day is how you get caught in the secondary rally I described, and I would rather let the level do the work. The market is going to stay highly reactive to news, and the rhythm of this regime is consistent once you learn to see it. A headline hits, the market reacts, liquidity dries up, and prices fall into that illiquidity, and then they normalize. Only once they normalize can we actually read direction, because the move into illiquidity is noise and the normalization is signal. For the moment, it looks like we are fairly close to a possible bounce, and that bounce is the one thing standing between us and confirmation of the bigger pattern.

Those of you who have been around a long time will remember 2021, when we got an outside reversal on a monthly basis and then another on a quarterly basis, and that pairing set the tone for a very large decline that followed. This is a similar pattern in character, and because this reversal happened right at an all-time high, it could carry even more weight than it would have lower in the range. Reversals from the highs tend to matter more because there is no overhead supply left to argue with; only the question of whether buyers will step back in remains. When they hesitate at a new high, the air underneath can be thin. As we close the week, we will get more labor statistics on claims and continuing claims, but I do not think any of it is material to the larger picture, and I would caution against reading too much into a single print. I believe sentiment is going to start settling into next week’s Fed meeting and what it might signal.

Most of us who want to be optimistic on the new chair are hoping to see new metrics and new techniques for managing the economy rather than the old school playbook run on repeat. I will say it plainly, because I have never been shy about it. The Powell regime was, in my view, one of the worst we have seen, and the only thing that could rival it was the Yellen years, where the defining feature was sheer passivity. She was the one chair who never presided over a true catastrophe, but she also did not do much of anything, while nearly everyone else in that seat had to navigate genuinely adverse conditions and at least act. We are now going to have to talk seriously about real shifts in policy and sentiment, the kind that actually move how capital gets allocated, and on the brighter side I believe we have one of the better treasury secretaries we have had in some time. One theme I raised last night and want to keep in front of you is the defense of the dollar and the petrodollar becoming a genuine focus, a coordinated one, between Treasury and, even with its independence intact, the Fed. That coordination is not something Washington likes to advertise, but the conditions for it are lining up. There may be more of a combined effort there than many would care to admit, and if it materializes it becomes a real variable for the dollar and for everything priced against it. For now, none of that changes the task in front of us. Watch 7368 into Thursday, and let the market tell us whether this is a bounce or the start of something much larger.

Economic Calendar, Week Ahead

Week of June 08 - 12

Jun 11

08:30 ET: PPI

For: May | Trading Impact: High | KR Forecast: 0.8% | KR Forecast Cons: 0.7% | Prior: 1.4%

08:30 ET: Core PPI

For: May | Trading Impact: High | KR Forecast: 0.5% | KR Forecast Cons: 0.4% | Prior: 1.0%

08:30 ET: Initial Claims

For: 06/06 | Trading Impact: High | KR Forecast: 220K | KR Forecast Cons: 222K | Prior: 215K

08:30 ET: Continuing Claims

For: 05/30 | Trading Impact: High | KR Forecast: NA | KR Forecast Cons: NA | Prior: 1786K

10:30 ET: EIA Natural Gas Inventories

For: 06/06 | Trading Impact: Low | KR Forecast: NA | KR Forecast Cons: NA | Prior: +95 bcf

Jun 12

10:00 ET: Univ. of Michigan Consumer Sentiment - Prelim

For: Jun | Trading Impact: High | KR Forecast: 45.5 | KR Forecast Cons: 46.2 | Prior: 44.8

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