The Morning Call
11/14/22
The
Market
Technical
In Friday’s
Morning Call, I gave a verbal depiction of what you are looking at now. Thursday, the S&P sprinted through its
100 DMA (good news) but only after making a huge gap up open (bad news). (As an aside, look at all the gap up and down
opens in this chart---how many are not filled?
Zero. This gives you a sense of
why this trading maxim came about.) Despite
this potential reversion in the 100 DMA from resistance to support, the S&P
still has a lot of work to do to confirm any notion that this latest move is
anything other than a rally in a bear market.
Specifically, it has to (1) reset its 200 DMA from resistance to support
[~4081] and (2) negate its short term downtrend [~4161]. My
conclusion remains the same: you may want to trade this rally, but don’t invest
in it.
Counterpoint
https://www.zerohedge.com/the-market-ear/caq9bonrf0
Big moves: bears
and bottoms.
https://ritholtz.com/2022/11/big-moves-bears-bottoms/
JP Morgan trading desk is not buying the rally.
Neither
is Goldman’s.
But Morgan’s strategist is.
https://www.zerohedge.com/markets/wall-streets-biggest-bear-buys-dip-i-dont-think-rally-over
Stay patient.
Like stocks, the
long bond rallied on the CPI print; and like stocks, made a big gap up open. Unlike
stocks, there is no technical sign that its downtrend could be ending. I said last week that ‘if
he (Powell)
means what he says, I can’t think of a reason for bonds to trade higher,
at least until/if higher rates tank the economy. Further, there continues to be
signs of extreme stress in the credit markets; so, I don’t think the worst is
over for the long bond’.
Last week, I commented that ‘Gold tested (unsuccessfully) the lower boundary (long term uptrend) on Thursday, then exploded higher on a monstrous gap up opening on Friday to close above the downtrend off its March high (the upper boundary of that developing pennant formation). A finish above that boundary on Tuesday will signal a further move to the upside.’ Well, not only did GLD void that pennant formation to the upside, but it made a second explosive gap up open, pushing well above its 100 DMA (a finish there today will reset that DMA from resistance to support). To be sure, I am concerned about those two gaps up opens; but there are plenty of signs that GLD may have bottomed. So, any backing and filling could provide an entry point.
Like last week, the
dollar’s chart was a mirror image of gold’s:---though slightly more dramatic. It
made not one but two gap down opens, voided its very short term uptrend and will
likely reset its 100 DMA today from support
to resistance. That said, like all the
other indices it has multiple gap opens to contend with. Plus, it is still a long way from its 200 DMA
and the lower boundary of its short term uptrend. While the solid uptrend in the dollar has
clearly been broken, I think it too soon to be assuming a trend reversal.
Friday in the charts.
https://www.zerohedge.com/markets/dollar-collapses-stocks-soar-biggest-short-squeeze-ever
Fundamental
Headlines
The
Economy
Review last week
Last week was a slow one in terms of the
volume of data both here and abroad. The
US stats were slightly negative; though that means little because the big news was a
lower than expected CPI. I covered this
development in Friday’s Morning Call, so I don’t want to be repetitious. But in sum, it probably marked peak
inflation. However, (1) it is one month’s
number, so there remains the possibility that it was an aberration, (2) even if
it did represent peak inflation, we still have no idea how deeply embedded
inflation is---and we won’t know for some time.
https://www.capitalspectator.com/peak-inflation-watch-11-november-2022/#more-19103
We
also don’t know how the Fed will react if it is deeply embedded. Judging by the commentary on Thursday and Friday
from a number of FOMC members, the Fed remains on a path of tight money. However, you know my opinion on that subject:
If
we use history as a guide, …... 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.
I don’t think that the Fed has
the fortitude to hold firm in the face of a faltering economy and plunging asset prices.
And here is their solution---move
the goal post to 3% inflation (must read)
Just
as important, I continue to believe that the EU is in a recession and that the
US is not far behind---which is not only lousy economic news, but it also means that the Earnings part of P/E will be declining.
And, if the Price part of P/E doesn’t rise (which would occur when inflation and
therefore interest rate declines) faster than Earnings fall, then the Market
has a problem.
Bottom
line: inflation may have peaked, but Fed rate hikes have not. We are still faced with the twin risks of the
Fed staying too tight for too long (recession) and/or the Fed halting rate
hikes before inflation has returned to the 2% level (i.e., higher inflation for
longer).
https://www.ft.com/content/d52fc13f-ab17-4143-9806-00732d02df88
The Fed never gets it right (must read)
US
International
September EU industrial production was up 0.9%
versus estimates of +0.6%.
Other
Mortgage
rates back above 7%.
https://www.cnn.com/2022/11/10/homes/mortgage-rates-november-10/index.html
The Fed
Powell’s favorite sentiment indicator shows
inflation expectations rising.
The Fed and the dollar.
https://www.pragcap.com/the-triffin-dilemma-and-why-it-matters-more-than-ever-video/
Fiscal Policy
Irresponsible government
spending has given us huge debts, high inflation and weak growth. (must read)
https://www.zerohedge.com/markets/keynesian-policies-have-left-big-debt-high-inflation-weak-growth
Recession
Europe braces for recession.
https://www.nytimes.com/2022/11/11/business/economy/uk-eu-economy-recession.html
Bottom line
A policy ‘pivot’
may not be bullish.
https://www.zerohedge.com/markets/policy-pivot-may-not-be-bullish
Growth versus
value.
https://allstarcharts.com/value-stocks-follow-rates-higher/
Ten lessons from Buffett and Munger.
News on Stocks in Our Portfolios
What
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