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Tuesday, October 25, 2022

The Morning Call---More on the potential year end rally

The Morning Call

10/25/22

The Market

Technical

Monday in the charts.

https://www.zerohedge.com/markets/us-stocks-uk-bonds-soar-china-chunders-yen-tervention-fails

Say hello to 3800.

https://www.zerohedge.com/the-market-ear/chapwr8s

More on the technical argument for a year-end rally.

https://www.zerohedge.com/markets/here-comes-next-leg-higher-ctas-momentum-flips-bullish-buybacks-restarting-4-days

Fundamental

Headlines

The Economy

Month to date retail chain store sales grew slightly faster than in the prior week.

The August Case Shiller home price index fell 1.6% versus predictions of -0.7%.

The October flash manufacturing PMI was reported at 49.9 versus expectations of 51.0; the flash services PMI was 46.6 versus 49.2; the flash composite PMI was 47.3 versus 50.1.

International

The October UK industrial trends orders index came in at -4 versus estimates of -12; the Q4 UK business optimism index was -48 versus -40.

The October German business climate index was 84.3 versus consensus of 83.3; the October German current conditions index was 94.1 versus 92.4.

Other

October vehicle sales show signs of life.

https://www.calculatedriskblog.com/2022/10/october-vehicle-sales-forecast-signs-of.html

Update on four high frequency economic indicators.

https://www.calculatedriskblog.com/2022/10/four-high-frequency-indicators-for_24.html

Ocean shipping costs decline 84%.

https://www.zerohedge.com/economics/ocean-shipping-costs-decline-84-truckers-verge-losing-money

The Fed

Monday, October 24, 2022

Monday Morning Chartology

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.

https://www.realclearmarkets.com/articles/2022/10/21/qe_amounts_to_involuntary_tightening_by_central_banks_860322.html

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.

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/

News on Stocks in Our Portfolios

What I am reading today

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Wednesday, October 26, 2022

The Morning Call--More reasons for a market melt up

Tuesday, October 25, 2022

The Morning Call---More on the potential year end rally

Monday, October 24, 2022

Monday Morning Chartology

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