Stocks rally in summer and fall in autumn: the bet riding on crude oil

Rally in summer, crash in autumn: the calendar at stake in the stock market

There is a thesis circulating among investors for months now, and it gains trinc with every green candle: the US market will draw a textbook rally during the summer and then plunge. The S&P bounced off its lows, the DXY seems to have peaked, and insiders —the executives who buy and sell shares of their own companies— have started buying again. Everything points to a breather. And that breather, according to this reading, is the perfect trap: anyone getting in now will be the exit liquidity for those who have been selling for months.

The figure underpinning the thesis is not a technical analysis chart or a hunch. It is eurodollar options, the market where the Federal Reserve's rate path is priced in. That market points to a return to cheap money by June 2023, give or take a month. If the central bank caves in, the logical consequence is a continuation of the inflationary process already underway and, further down the road, a breakdown of the monetary system as we know it.

What eurodollar options say about Fed rates

The core argument is that the rates market is pricing in a return to QE by mid-2023. It is not an isolated prediction: it matches the bottom expected for the S&P between December and April, and the idea that the brutal recession anticipated for October 2022 will be priced into stocks much earlier, starting in June. The result would be a textbook bull trap: rebound highs, summer euphoria, and then reality.

Those defending this reading are not alone. Some argue that a recession with 10% inflation is something that has never been managed before —the 1970s saw recession and inflation, but not zero rates— and that the mountain of money parked in bonds will have to seek shelter somewhere. That money, they argue, could flow back into stocks and fuel the rally before the final capitulation.

QT kicks off and bonds tremble

On June 1 the Fed's balance sheet reduction, known as QT, began, and bonds felt it immediately. Futures fell from Monday onwards and UK debt yields, more sensitive to shocks, moved before US ones. The rally thesis wobbles when the fixed income market starts pricing in higher rates for longer than expected.

Add to that the behavior of insiders, which fails to confirm capitulation. During the Elbichito crash they stopped selling and started buying. This time buying has been cut in half and selling has been plentiful. Without capitulation there is no solid bottom, and without a solid bottom the rally is anemic. The VIX has not spiked above 35, a sign that panic has not yet arrived.

The bonds' warning: Sri Lanka, Japan and the domino effect

The most uncomfortable argument has a name: Sri Lanka. The country has run out of dollars and cannot buy anything, not even food. Japan cannot raise rates and the yen is paying the price, liquidating reserves of US bonds to prop up its currency. If that trend spreads, institutions from half the world will dump bonds to save their economies and corporate bonds will go to hell. This is not a science fiction scenario: it is what is already happening in emerging markets.

The math that leaves the door open to a rally

There is one figure that invites moderate optimism: $5 trillion has left the US stock market since November. The S&P's P/E ratio stands at 16.6, below its ten-year average. If that liquidity returns to the market with the narrative that stocks are a hedge against inflation, the rally could be substantial. The problem is that this same money could be the bait the big players need to offload their positions before the definitive crash.

Astrology, surprisingly, also appears in the conversation. A 2019 article circulating in financial gossip circles anticipates a pattern that fits the calendar: the worst ends in the first week of May, calm until summer, and then the crash. Someone using it as an argument does not make it science, but it illustrates the level of desperation to find signals anywhere.

What to do with cash: the debate dividing investors

The underlying discussion is not when the market will rebound, but what to do in the meantime. There are those who have been in cash for months waiting for the big correction, and those who warn that getting out of the market has a hidden cost: inflation eats away at cash and the tax authorities take their share of capital gains when you sell. 10% inflation plus a 21% tax on profits turns prudence into a silent loss.

The counterargument is just as solid: if you buy 30% cheaper, the dividends you miss out on do not make up the difference. The question is whether that 30% drop actually comes or whether the market just trades sideways for months while inflation does the dirty work. Nobody has a crystal ball, and those who boast of having one usually forget their past mistakes.

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With QT underway, bonds under strain and insiders not yet giving a clear buy signal, the summer rally is a bet with some grounding but no guarantee. The question left hanging is the usual one: is this the bottom, or just the pause before the next step down?