The Morning Call
5/22/23
The
Market
Technical
The S&P had a decent
week. It was up and attempted to challenge the Fibonacci 23.6% retracement
level (~4200) but failed. That in no way suggests that it won’t try again or
that if it does, it won’t be successful.
However, it is to say that 4200 continues as resistance, leaving the S&P in
a trading range, fostered by the continuing uncertainty surrounding the odds of
recession/inflation/the debt ceiling/the banking crisis and the Fed’s policy
reaction to any or all. The assumption remains that it will stay there until it
doesn’t; therefore, it makes no sense to me to be betting money on direction.
Barry Ritholtz
responds to the bear case (s).
https://ritholtz.com/2023/05/10-bad-takes-on-this-market/
What happens if
the Market range is broken?
The long bond got
smacked last week, clearly voiding that pennant formation to the downside, and
resetting both DMAs from support to resistance. The bond market appears to be
alerting us to higher interest rates, i.e., the Fed staying higher for longer. It
also suggests higher inflation/no recession/soft landing/risk or further
problems arising from either the debt ceiling negotiations or bank balance
sheet problems or all of the above. That should add to the cautionary note on
stocks.
The only remotely positive thing about this chart is that TLT is approaching the lower boundary of its intermediate term downtrend (purple line) where it will likely find some support. On the
other hand, if it gets there the long bond will have established a trend on lower highs and lower lows---and that’s not good. Stay in short maturities.
Gold was down for
a second week in a row; and as of last Thursday’s close, appeared ready to challenge
the lower boundary of its very short-term uptrend. A hard bounce on Friday at
least temporarily removed that risk. So, it basically did what the technician
would want---ceased declining at a visible support level and bounced. Of
course, it can always try again. But right now, it remains in long, intermediate,
and very short-term uptrends and above both DMA’s. While all this is a plus, I
would still wait for more info/clarity on interest rates, recession, the debt ceiling,
and the banking system before venturing into this puppy.
The dollar had another
great week, pushing well above that pennant formation and resetting its 100 DMA
from resistance to support. While it has made several higher lows and higher
highs, it needs to get through the upper boundary of its short-term trading
range to truly re-establish upside momentum. So far, so good.
Friday in the
charts.
https://www.zerohedge.com/markets/bumper-week-banks-big-tech-bonds-suffer-biggest-bloodbath-year
Volatility across
asset classes.
http://mrzepczynski.blogspot.com/2023/05/volatility-across-asset-classes-scored.html
Fundamental
Headlines
The
Economy
Last Week Review
The
US stats last week were mixed (the overseas data were quite negative) as were
the primary indicators (one negative, three neutral, one positive). In short,
the numbers remain directionally inconclusive with no clear near-term signs of
a recession and certainly no sense of how deep it may be if it occurs at all.
As you know, I am not an optimist on this count; but to date, we are
still lacking sufficient evidence to back up a recession forecast, although
some historically accurate forward-looking indicators like the yield curve and the latest
read on the leading economic indicators are still predicting one. However,
time is running out on the doomsayers. I am not conceding a no recession/soft
landing outcome yet but clearly my conviction remains greatly diminished.
The
other issue investors must deal with is, of course, inflation. And perhaps more
importantly, how the Fed perceives this problem and even more important, just
how firm is its determination to achieve its 2% target. As you know, I believe
that inflation is the red-headed stepchild of Fed priorities. Not without
cause---the Fed has proven time and again that that any sign of
economic/financial/Market turmoil will result in the immediate reversal of any
tight money measures. So, if we rely on history, the Fed won’t likely be the
instrument of 2% inflation.
Bottom
line: my best guess is that there is a recession (though I have no clue
regarding its intensity) and that at the slightest hint of disruption, the Fed
folds, leaving inflation as an ongoing problem.
Jeffrey
Snider has some thoughts on recession and its likely intensity.
Longer
term, irrespective of what happens over the next year, we are still faced with
a struggling economy growing at well below its historic secular rate.
Regrettably, years of fiscal profligacy have left us with a debt to GDP
ratio far in excess of the boundary marked by Rogoff and Reinhart as the level
at which the servicing of too much debt negatively impacts the growth rate of
the economy. And years of irresponsible monetary expansion have led to the
misallocation of resources and the mispricing of risk.
Correcting those self-inflicted wounds won’t be easy. It will take years
of fiscal and monetary restraint to do so. And that would mean less fiscal
stimulus and interest rates staying higher for longer than many now expect---which
unfortunately is not apt to happen.
The
Economy
US
International
March EU construction output fell 1.5% versus estimates
of +0.7%.
Other
El Nino is coming and is likely to
have a significant economic impact.
https://gizmodo.com/el-nino-gdp-economic-loss-climate-1850450784
Recession
The
latest nowcasts suggest no recession in Q2.
https://www.capitalspectator.com/us-q2-gdp-nowcast-points-to-pickup-in-growth/
The Banking System
Yellen
says more bank mergers ahead.
https://www.zerohedge.com/markets/bank-stocks-puke-yellen-reportedly-warns-more-mergers-ahead
News on Stocks in Our Portfolios
What
I am reading today
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