The Morning Call
12/18/23
The
Market
Technical
The S&P did a
moonshot last week propelled by the (alleged?) ‘Fed pivot’, resetting its short term trading range to an uptrend.
This likely means relative smooth sailing through year end and into
January. Traders may want to play this
move---IWM is a decent candidate.
On the other hand,
I remain bothered by those multiple gap up opens down below, the sudden
reversal in Fed policy (see below) and the continuing lack of concern of our
ruling class over the escalating budget deficit and national debt. I am not selling
into this strength but I am making a Sell list.
Stock prices
trend.
https://allstarcharts.com/you-see-stock-prices-trend/
Ten charts on
sentiment and positioning.
https://www.zerohedge.com/the-market-ear/10-latest-charts-you-need-know-sentiment-positioning
The long bond did
as you would expect it to when the Fed ends its tightening phase---it soared,
in process closing above its 200 DMA; if it closes above that MA on Tuesday, it
will reset to support. If the Fed has indeed pivoted, we likely have seen to
lows in bond prices at least in the short term. As you can see, there is little
visible resistance overhead. So if you are underweight bonds, consider adding
to that position.
As positive as the
prospects for interest rates are for gold, it still couldn’t make back to its all-time
high. Indeed, it couldn’t even get back to its most recent high. Until it does
so, I see no reason to be invested here.
The dollar followed
the script of the Fed easing and other central banks holding firm, in the
process resetting its 100 DMA from support to resistance. As long as the ‘Fed
easing/others not’ scenario holds, expect more of the same. Although it does
have major support from its 200 DMA and its short and intermediate term
uptrends.
Friday in the
charts.
https://www.zerohedge.com/markets/fedspeak-pushes-back-powell-pivot-panic-bid-bonds-stocks
Fundamental
Headlines
The
Economy
Last Week Review
Last week’s
economic data was slightly to the negative side while the primary indicators were
balanced (two positive, two negative), leaving me still uncertain as to whether
the coming landing is soft, hard or we have no landing at all. The consensus is
for a soft landing; and that was reinforced by this week’s major economic
headline---which was the now well publicized and discussed ‘Fed pivot.’
Markets
interpreted the Fed’s move as a sign that rate cuts are coming sooner rather
than later and that will increase the odds of a soft landing. To be clear, I
still think that it is way too soon to be betting on that outcome. But given the pin action, investors clearly
disagree.
What is mystifying
to me is that Powell et al could change their outlook so dramatically, so
quickly. Recall that only two weeks ago, Powell pushed hard on the ‘higher for
longer’ scenario; and in those intervening two weeks the data if anything
suggested a stronger than anticipated economy. Clearly, the Fed has the right
to change its mind. But to do so and alter policy on such short notice is not
its usual MO.
There are several
possible explanation for this seeming anomaly. (1) the Fed really didn’t change
its outlook and the Market just misread the FOMC and Powell’s narrative, (2)
Fed policy always follows the Market and the Market has been saying for
sometime that lower rates are coming, (3) the Fed was afraid it kept rates too
high for too long and ‘chickened out’, (4) the Biden administration put heavy
pressure on Powell/the Fed to loosen up going into an election year, (5) the
Fed is clueless and this policy change was a shot in the dark, (6) the Fed examined
the data and came to the conclusion that it was time to change policy however
abrupt it may appear.
The Market
obviously favors (6). You choose your own explanation. Mine is anything but (6).
In other words, (1) history suggests that something other than brilliance
prompted the move, and (2) as I noted above, it is too soon to be placing long
bets on a soft landing.
https://www.nytimes.com/2023/12/14/business/economy/markets-federal-reserve-stocks-bonds.html
Lance Roberts
disagrees.
Wealth
Effect Increases and Recession Risks - RIA (realinvestmentadvice.com)
On the other hand,
I do think that the corollary (inflation risks are behind us, at least for the
short term) to the Markets’ new narrative is probably correct. However, longer
term, I believe that the most important economic factor is the potential (inflationary) impact of a grossly
irresponsible fiscal policy which if left unresolved will ultimately push
interest rates and inflation to higher levels, risking a tighter monetary
policy and impeding the economy’s ability to grow.
Two final
thoughts. (1) recessions historically begin after the yield curve uninverts. Right
now it remains inverted. Pay attention to the normalization of the curve. (2)
again, historically, Markets tend to fall after the Fed’s first rate cut. No
rate cut so far. But be careful when it happens.
US
International
The December
German business climate index was 86.4 versus estimates of 87.8; the December
current conditions index was 88.9 versus 89.7.
Other
The
Financial System
Bank loans fall as deposits rise.
https://www.zerohedge.com/markets/bank-loan-volumes-shrink-deposits-rise-trouble-brewing
Bottom line
The latest from
BofA.
https://www.zerohedge.com/markets/hartnett-here-they-come-152-rate-cuts-2024
News on Stocks in Our Portfolios
What
I am reading today
Monday morning
humor.
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