The Morning Call
8/7/23
The
Market
Technical
The S&P had a
rough week---something that technicians and traders have been calling for (as
described in these pages). So, (1) it is
not a surprise and (2) no real technical damage has been done. As you can see, the index is still above the
lower boundary of its very short-term uptrend (~4401). Other areas of support are (1) the 100 DMA [~4246],
(2) the lower boundary of its short-term uptrend [~4133] and (3) its 200
DMA [~4096]. The universe is convinced
that this is just a sell off in a bull market; though the stats supporting the
economic justification (inflation in the rear view mirror accompanied by a soft
landing) for that position remains a bit iffy.
But a sell-off down to its 100 DMA (about 5%) would be perfectly normal
in that scenario. The task now is to
wait till the S&P finds support, evaluate any new economic data then make an
educated guess based on the dataflow whether or not, this is indeed a selloff
in a bull market. You know that I am skeptical;
but if it continues to appear that scenario is unfolding, I will put some money
to work.
Debt
Downgrade As Fitch Drops Rating - RIA (realinvestmentadvice.com)
The
weakest time for stocks.
https://allstarcharts.com/weakest-time-for-stocks/
The bond market
made a stronger protest against the inflation over/soft landing forecast, blowing
through the lower boundary of its intermediate term downtrend like s**t through
a goose. I noted last week that the bond
market appeared to be questioning the scenario.
So, this waterfall behavior was just a continuance of that. Given that the bond market was already questioning
the validity of the Goldilocks scenario, it adds credence to the notion that
all may not be coming up roses, economically speaking. But we need more time to gain clarity. Nonetheless, I don’t see a continuing strong
equity market when the bonds are behaving as they are.
https://www.zerohedge.com/markets/pain-trade-steeper-yield-curve
GLD was off for
the week but didn’t move with the same ferocity as stocks and bonds.; although
it did reset its 100 DMA from support to resistance. As I have noted in the
past, gold usually moves inversely with interest rates, so a sell-off in the face
of rapidly rising rates is not a surprise.
The dollar was up for the week but did
experience a sell-off on Friday. I am
not sure how to
Friday in the
charts.
Fundamental
Headlines
The
Economy
Last Week Review
Last
week’s US stats were quite downbeat with the primary indicators evenly divided:
one positive, one negative. Overseas, the data was copious and roughly equal in
magnitude.
So,
the results continue their less than enthusiastic support of both the Markets’
takeaway and the growing consensus among leading economists that (1) inflation
is in the rear-view mirror and (2) we will get a ‘soft’ landing. Hence, for me,
it remains unclear whether inflation is in a secular decline or a recession
will be avoided. Perhaps last week’s pin action is the first sign the Markets
may be questioning their Goldilocks scenario; but as I noted above, it may just
be a normal sell off within a broad uptrend.
I am sticking with my recession forecast though (1) my conviction
remains weak and (2) if there is one, I have no idea of its magnitude.
I
am also maintaining my position that the Fed loosens at the first sign of
trouble; Powell’s assertions notwithstanding. That means it will not likely be
the kind of recession that cleanses the economic system of years (decades) of
monetary/fiscal mismanagement and returns secular inflation to ~2%.
As an aside, I will note that the one scenario that would screw almost
all investors/forecasters/current elected officials would be for either the Fed
to stick to its guns, pushing the economy into a rough recession or the economy
falls into a severe recession of its own accord weighted down by years of
monetary/fiscal mismanagement. To be
clear, I don’t think that will happen, but I would pose it as the major
Market/economic risk.
Longer
term, irrespective of how low inflation goes in the short term, irrespective of
whether or not we have a recession and if so, how deep it will be, we are still
faced with an economy growing at well below its historic secular rate and a base
rate of inflation above 2%.
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
The preliminary Japanese
leading economic indicator index came in at 108.9 versus estimates of 109.5.
Other
Geopolitics
The Ukraine war is about to get worse.
https://unherd.com/2023/07/the-ukraine-war-is-about-to-get-worse/
Bottom line
Will rising rates trash the stock market?
https://allstarcharts.com/will-rising-rates-lead-to-a-stock-market-bloodbath/
BofA
clients turn negative.
News on Stocks in Our Portfolios
What
I am reading today
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