The Morning Call
10/24/22
The
Market
Technical
The S&P closed
back above the downtrend off its 8/16 high. If it finishes there today, that
downtrend will be voided. Providing some additional strength to that notion is
that the index made a higher low on Thursday. If the downtrend is negated, then
it may mark the beginning of the Santa Claus rally. Also helping are (1) the
start of the Fed blackout period prior to the November FOMC meeting and (2) the
end of blackout period for corporate buybacks. Note the upside resistance
levels: (1) the 1000 DMA [~3918], (2) the 200 DMA [~4134], and (3) the upper
boundary of its short term downtrend [~4204].
All that said, I
don’t need to tell you how volatile that this Market has been, including
multiple intraday reversals. Plus, the credit markets remain extremely stressed
(see TLT chart below) in which a negative event could make all technical
speculations moot. The bottom line being that there is a strong probability
that we haven’t seen ‘the’ bottom, so I am not going to chase this rally.
Patience remains a
virtue.
The painful upside.
https://www.zerohedge.com/the-market-ear/painful
If equities are
rallying on the possibility that the Fed will might be signaling a ‘pause,’
wouldn’t bonds also reflect that possibility? Well, as you can see that didn’t
happen---suggesting as I noted above that the credit markets remain stressed. The
bad news is that its next support level (the lower boundary of its long trading
range) leaves room for a lot more downside. The good
news is that that gap down
open needs to be filled.
But there are signs that credit stress isn’t
that significant.
https://allstarcharts.com/no-stress-in-credit/
Gold remained
within that developing pennant formation. 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’s chart
showed its first hiccup last week---with it making a second lower high and
starting to develop a downtrend. That said, I noted last week that the upper
boundary of its intermediate term uptrend will likely act as a restraint on the
rate of its upward momentum---so the loss on momentum isn’t surprising. In addition,
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.
Friday in the charts
https://www.zerohedge.com/markets/fedspeak-yentervention-spark-buying-panic-bonds-stocks-gold
Fundamental
Headlines
The
Economy
Review last week
The
US data last week was negative (primary indicators were one plus, one neutral,
one minus). And in this case, the positive indicator (industrial production)
was negative as far as the Fed is concerned.
Overseas
the stats were upbeat, though again the good news was bad news. As you know, I
believe that the EU is in a recession. And given the US data flow, I think that
it is only a matter of time until the US will join it.
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. And
while there are clear signs that the economy is weakening, 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.
Patience remains the better part of valor.
US
The September Chicago
Fed national activity index was 0.1 versus expectation of 0.12.
International
The October German
flash manufacturing PMI came in at 45.7 versus consensus of 47.0; its flash services PMI
was 44.9 versus 44.7; its flash composite PMI was 44.1 versus 45.3; the October
EU flash manufacturing PMI came in at 46.6 versus 47.8; its flash services PMI
was 48.2, in line; its flash composite PMI was 47.1 versus 47.5; the October UK
flash manufacturing PMI came in at 45.8 versus 48.0; its flash services PMI was
45.7 versus 49.0; its flash composite PMI was 47.2 versus 48.1.
Other
Bottom
line.
Figuring out the possibilities.
https://ritholtz.com/2022/10/sussing-out-probabilities/
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