The Morning Call
10/17/22
The
Market
Technical
About the only correct
thing I said about the S&P’s technical picture in Friday’s Morning Call was
that it needed to get through the downtrend off its 8/16 high in order seal the
upside follow through from Thursday’s dramatic intraday reversal. Clearly, it
didn’t. Indeed, Friday it declined back through the 6/13 trading low and is
once again heading for the 50% Fibonacci retracement level (`3507). Of course,
the index could rebound this week---and as I have pointed out, we are fast
approaching the most positive seasonal time of the year. On the other hand, the
S&P still needs to successfully challenge the aforementioned downtrend to
confirm any kind of upside follow through. If it can’t, then support levels
remain: (1) the initial 50% Fibonacci retracement level [~3507], (2) the
initial 61.8% Fibonacci retracement level [~3198] and (4) the newly established
lower boundary of its intermediate term trading range [~2788]. Those three gap
up/down opens in the last couple of weeks remain in the picture both from the standpoint
of illustrating the current high level of volatility/instability and the need
to be filled.
Patience remains a
virtue.
Hedge funds are big time shorting again.
More bear markets
end in October than any other month.
https://jeffhirsch.tumblr.com/post/697945454738112512/more-bears-end-in-october-than-any-other-month
Remember the Santa rally.
https://www.zerohedge.com/the-market-ear/remembersanta
Groping for a bottom.
https://ritholtz.com/2022/10/groping-for-a-bottom/
Broken
market.
https://www.zerohedge.com/the-market-ear/brokenmarketstwo
I am throwing in
the towel on the long bond. I thought that it would hold the lower boundary of
its long term uptrend. And I was wrong. As you can see, TLT is now in a very
short term, short and intermediate term downtrend and in a long term trading
range. There is no real support until it reaches the lower boundary of that
range. So, more downside is likely, absent a reversal in central bank monetary
policies or some horrendous recessionary news.
Bond
market volatility near covid crisis levels.
https://www.axios.com/2022/10/14/bond-market-volatility-index-covid
BofA’s
credit dysfunction indicator breaches critical zone.
Gold remained
within that developing pennant formation, though after a rough week it is now
near the lower boundary. That leaves GLD directionless until one of those
boundaries are taken out. Notice the 10/10 gap down open that needs to be
closed.
The dollar remains
solidly in an upward trajectory across all time frames. I do think that the
upper boundary of its intermediate term uptrend will continue to act as a
restraint on the rate of its upward momentum---which it did last week. UUP is well
above the lower boundary of its very short term uptrend; meaning that it could
drop almost five percent and not disrupt even its shortest term upside momentum.
The assumption has to be that the trend remains up.
Hedge funds continue
to bet on rising dollar.
https://www.ft.com/content/bffe3d9a-998d-43d8-ad5e-6b69a1e0dfc5
Dollar squeeze
panic.
Friday in the charts
https://www.zerohedge.com/markets/chaotic-week-clobbers-bonds-bullion-big-tech
Fundamental
Headlines
The
Economy
Review last week
The
US data last week was negative (primary indicators were two neutral, one minus).
And in this case. negative news (PPI/CPI) was negative.
Overseas
the stats were somewhat upbeat, though the good news was bad news. I said last week
that I believed that the EU was in recession. That call remains unchanged and
poses a question: how big an effect will that have on the rest of the world and
especially the US? The answer for us likely lies with the course of Fed policy.
Which
brings us to the two questions that I posed weeks ago:
(1) how deeply embedded is inflation in our
economy? So far, there is no sign of an answer. But
there are clear signs that the economy is weakening. But that doesn’t tell us how
deeply embedded inflation is and more importantly,
(2)
how
firm will the Fed remain in its policy decisions to bring the inflation rate
back to acceptable levels? [if it is deeply embedded]
If we use history as a guide, then answering the question is easy
because the Fed has never, ever, ever successfully managed a transition to
normal monetary policy. So, we are faced with two scenarios (three actually if
you want to believe that the Fed will successfully negotiate the return to
stable monetary). One is that it stays too tight for too long resulting in a
severe recession. And two, it will chicken out before inflation is squelched---which
is its historic modus operandi---leaving us in the same boat in which we
started, i.e., inflation above the Fed’s mandate, the necessary creative
destruction needed to cleanse the system of the misallocation of assets and the
mispricing of risk incomplete and, hence, the need to ultimately have to repeat
the whole process.
You know my opinion: I don’t think that the
Fed has the fortitude to hold firm in the face of a faltering economy and
plunging asset prices. That means ever slowing secular economic
growth, ever increasing income disparity, ever increasing leverage in the
financial system and ever increasing volatility in the securities markets.
David Stockman’s take.
https://brownstone.org/articles/inflation-and-recession-are-becoming-entrenched/
Patience remains the better part of valor.
.
US
The October NY Fed manufacturing
index came in at -9.1 versus estimates of -4.0.
International
Other
Potential supply deficits in the oil market.
https://www.zerohedge.com/markets/opec-decision-cut-output-may-lead-supply-deficit-oil-markets
The Fed
In last Friday’s Morning Call, I linked to an
optimistic article from Scott Grannis citing the large amount of liquidity in
the monetary system as a reason not to worry about a credit event. The article below
from Jeffrey Snider addresses that point and voices a major disagreement.
Inflation
An optimist:
https://www.advisorperspectives.com/commentaries/2022/10/13/disinflation-might-be-upon-us
Or not.
https://www.advisorperspectives.com/commentaries/2022/10/13/disinflation-might-be-upon-us
Desperately seeking peak inflation.
https://www.capitalspectator.com/peak-inflation-watch-14-october-2022/
Bottom line
BofA continues to
see more pain ahead for stocks.
News on Stocks in Our Portfolios
What
I am reading today
The
deep optimism manifesto (absolute must read).
The impact that exercise
has on the health of our fat cells.
https://www.washingtonpost.com/wellness/2022/10/12/exercises-to-shrink-fat-cells/
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