UPDATE: Is the Worst Really Over for US Stocks?

Last month, we posed the question: “Is the worst over for US stocks?”

Answer: apparently not.

A week after that August 10th article, the S&P 500 did climb higher, only to be resisted by its 200-day simple moving average.

The blue-chip stock index even closed above the 50% Fibonacci retracement level, which was the key criteria for suggesting that the worst is over for the 2022 rout in US stocks.

As cited in the August article, according to data by the CFRA and S&P Global, in 18 of the 19 ‘bear markets’ seen since World War II, the S&P 500 then went on to a fresh bull run after closing above its 50% Fib retracement line.

But as the saying goes across financial markets “Past performance is no guarantee of future results.”

And that track record (stated above) now needs to be updated to “18 out of the past 20 bear markets …”.

Since that August article, the S&P 500 has unwound all of its summer gains, even printing intraday prices not seen since end-November 2020.

In essence, we have seen “worse” levels this week for the S&P 500 compared to those June lows.

Why Did the S&P 500 Erase Its Summer Gains?

Recall the premise for the S&P 500’s summer rally, as stated in last month’s article:

“Arguably, the primary reason is that markets believe that the Fed has done the largest chunks of its rate hikes already.”

Additionally, the S&P 500’s summer gains was based on the idea of a “dovish pivot” by the Fed.

That’s to say that markets had expected the Fed to be less courageous about sending US interest rates higher, for fear of triggering an economic recession.

But now we know better.

Since then, we have seen the US inflation data stubbornly printing near its highest levels in around 40 years.

Hence, many Fed officials, including Fed Chair Jerome Powell himself, have since sent a strong message to the markets:

The US central bank is hell bent on taming multi-decade high inflation by sending US interest rates even higher, and is willing to tolerate economic pain along the way.

Markets duly paid heed and raised their forecasted peak for this ongoing Fed rate hike cycle by about 90 basis points!

  • Back in August, markets expected that US rates won’t go higher than 3.6% in March 2023.
  • Today, that forecasted peak is now expected to reach nearly 4.5% by March.

What Do Higher Us Interest Rates Mean for the Us Economy?

Essentially, the Fed wants to see some “demand destruction”.

Policymakers want to see less money in an economy chasing after scarce goods and services.

That should, in theory, discourage businesses from ramping up their selling prices, hopefully resulting in slower inflation.

However, more economic pain could also bring about a shrinking economy i.e. a recession.

What Do Higher US Interest Rates Mean for the US Economy?

More downside likely.

With the US unemployment rate forecasted by the Fed to rise to 4.4% by end-2023, significantly higher from the 3.7% figure from last month, more jobless Americans should translate into less demand/spending in the US economy, which should also mean less earnings for companies.

Lower earnings due to such “economic pain” should also lead to lower share prices, with such a narrative already dragging on the S&P 500.

Tech Not Spared

Also, higher interest rates mean its tougher for so-called “growth companies” to continue borrowing cheap loans to fund its expansion plans while forsaking profitability.

Hence, as higher interest rates chock some of the potential growth (and earnings potential) for these growth companies, that has led to lower stock valuations as well.

Keep in mind that, with many of these growth stocks concentrated in the tech sector, no surprise then that the tech-heavy Nasdaq 100 has a year-to-date decline of almost 30%, falling deeper than the S&P 500’s 22% year-to-date decline.

However, the Nasdaq 100 is still managing to not surpass its June lows … for now.

Also, note that tech-led declines would only exert more downward pressure on the S&P 500.

This is because IT stocks (think Apple, Microsoft, Nvidia, etc.) account for over a quarter (26.6%) of the S&P 500.

So, if you couple the S&P 500’s exposure to tech stocks with the weightage of consumer discretionary stocks (e.g. Amazon, Tesla, McDonald’s, etc. – which tend to take an earnings hit when customers have less disposable income during times of economic pain), then a US recession that’s triggered by higher US rates would only exert more downward pressure on the S&P 500.

NOTE: The S&P 500 index is widely used as the benchmark to gauge how overall US stocks are performing.

So What’s Next for the S&P 500?

Brace for the low-3000s.

In market fears surrounding a US recession continue ramping up, that may send the S&P 500 to as low as:

  • 3400: around the pre-pandemic peak set in Feb 2020
  • 3200: double-bottom from Sept/Oct 2020

Though for more immediate consideration, the S&P 500 is testing a crucial support level – its 200-week simple moving average.

This technical indicator has supported the S&P 500 in recent years, with such an episode last occurring at end-2018.

Athough the Fed was also busy raising interest rates back in 2018, those benchmark rates today have already surpassed those levels and are now standing at its highest since 2008 at 3.25%.

And US inflation is still around its highest levels since the early 1980s.

So if this 200-week SMA doesn’t hold, the S&P 500 is likely to then set course for the low-3000 region, dragged down by heightened  fears over a potential US recession and higher-for-longer US interest rates.

For more information visit FXTM.

BoE is in The Game. Will Fed Follow?

The intervention in Britain came after a central bank committee warned of the risks to financial stability from disruption in the government bond market.

What Happened in UK?

The biggest problems stem from a sharp rise in bond yields that has created massive margin calls for big investment firms, including pension funds.

That led to a lot of funds trying to sell bonds in order to raise cash and risked sparking a downward spiral. The Bank of England is now a buyer of bonds at “whatever scale necessary” and is delaying the start of its quantitative tightening (QT) program – aka its plan to unwind its securities holdings.

The lack of liquidity in Britain’s bond markets highlights a similar issue that some fear we could see happening in other parts of the world. This means that central banks might not be able to be as hawkish as some bears have been thinking.

Will Fed Follow BoE?

Keep in mind, in the USA the US Federal Reserve continues to hike rates at a historically fast clip while also working to reduce its balance sheet.

The Fed is now allowing its holdings of Treasury securities to drop by up to -$30 billion per month by letting them mature without replacement, and its mortgage-backed securities (MBS) to drop by up to -$17.5 billion a month.

The program has already dramatically reduced liquidity in US Treasury markets and some worry things could get dangerously volatile as “Quantitative Tightening” (QT) continues to drain money from the system.

Keep in mind, government debt markets across the world are experiencing extreme degrees of volatility right now, meaning bears believe there’s a heightened risk that something could break and possibly spark a wider crisis across global financial markets.

On the flip side, as I mentioned above, bulls believe the risks of extreme volatility and illiquidity in US bond markets could prompt the Fed to pause some of its tightening plans sooner than currently anticipated.

The Fed did reverse course on its asset reductions during its first and only attempt at QT back in 2019.

Several Fed officials have noted that the Fed’s aggressive pace of tightening does pose some risks, including recession, but most right now believe “inflation” is the bigger threat to both economic and market stability.

Data to Watch

Investors get an update on inflation on Friday from the PCE Prices Index. Wall Street expects the year-over-year headline rate to fall again for August but the “core” rate, which strips out food and energy prices, is expected to climb from +4.6% to +4.8%.

Today, the final read of Q3 Gross Domestic Product (GDP) is the data highlight. On the earnings front, Bed Bath & Beyond, CarMax, Carnival, Micron, and Nike results are due today, which we mistakenly had slated for yesterday…sorry for any confusion.

Turning to geopolitical headlines, the US yesterday joined most other governments around the world in condemning Russia’s moves to take over separatist-backed regions of eastern Ukraine after holding what the White House called “illegal and illegitimate” referendums. Officials say the vote was orchestrated by the Kremlin and could represent a major escalation of the war if Russia tries to claim that Ukraine is attacking what is now Russian territory. At least that is the theory.

Ukraine is asking for significantly more military support from the US and other NATO allies and there is talk of more US and EU sanctions against Russia as well.

Who would have ever guessed a year ago we would be sitting here today with the US dollar at twenty year highs, the 30-year mortgage up at 7%, money in a 2-Year Treasury earning +4%, inflation at multi-decade highs, and Russia in a full blown war trying to take over Ukraine.

Did Wall Street Reach “peak bearishness”?

Fed’s Tightening Campaign

Most are citing concerns of a recession due to the Federal Reserve’s aggressive tightening campaign. Fed officials this week have continued to acknowledge that some pain likely lies ahead for the US economy and job market as the central bank continues its campaign to beat back inflation.

Investors seem inclined to believe the tough talk at the moment, particularly as inflation has shown few signs of fading.

One big problem is that the areas where pressure does appear to be coming off are still highly elevated. Home prices for instance are still up nearly +16% year-over-year while energy prices remain nearly +24% higher than what consumers were paying last year.

Meaning there is still a long way to go before inflation is back down to the Fed’s target rate of around +2%. Until there are more widespread and consistent signs of declining inflation, it will be hard for economists and investors alike to forecast how long that might take.

Likewise, it makes trying to guess how high and for how long the Fed will continue lifting rates extremely difficult. In turn, the high degree of uncertainty over where the Fed’s rate hikes might end means investors are lacking a key piece of the puzzle when it comes to stock valuations.

If we end up over +4.5% or even +5% like some are predicting, bears argue that stock prices need to fall even further.

History Repeats?

The S&P 500‘s average peak-to-trough decline during past bear markets is about -36%, taking an average of around 10 months to hit bottom. The S&P 500 yesterday sunk to a new 2022 low and is now down just over -24% from its most recent peak in January.

Some on Wall Street that have been looking to history for clues as to where markets might go from here are pointing to the bear market of 1973 to 1974. It was second-longest bear market since 1928, lasting about 21 months, and similarly coincided with a period of high inflation and slowing economic growth, as well as extreme energy market volatility.

Since the 1950s, the longest bear market was in the early 2000s, when the dot com bubble burst. It lasted about 25 months.

Data to Watch

Today, investors will be digesting Pending Home Sales and advance reads on Retail Sales, International Trade, and Wholesale Inventories.

It’s worth noting that data yesterday showed Consumer Sentiment ticked up nearly 5 points this month. The gauge is considered a leading indicator of consumer spending.

Consumer spending is the single-largest driver of the US economy, so if that’s not slowing down, inflation is not likely going to either. Today also brings several key earnings with Bed Bath & Beyond, CarMax, Carnival, Micron, and Nike the main highlights.

Break It or Make It – S&P 500 Is On The Edge

Stock investors are trying to figure out the markets next move as all three indexes just tumbled back below the June lows, it is not surprising that the CBOE Volatility Index, aka the VIX, has climbed to its highest levels since mid-June as well, trading to over 32 yesterday.

Are We Into Recession?

Bears will argue that if the US economy takes steps toward a more full-blown recession and investor sentiment turns even more bearish the S&P 500 could tumble to sub-3,000 levels, which is where the market was trading in October of 2019 a few months prior to the Covid outbreak.

The US dollar is creating a major headwind, and wage-growth looks difficult to slow. Meaning overall corporate profit margins could remain in the crosshairs for an extended period of time.

The Federal Reserve’s aggressive tightening program continues to fuel the US dollar rally while also pushing bond yields higher, two major pain points for stock bulls right now. A report from EPFR Global circulating shows that some +$30 billion flowed into cash last week alone, raising investors’ total cash pile to +$4.6 trillion.

There is another +$18 trillion sitting in bank accounts and +$150 billion in ultra-short bond funds. It’s likely that, return wise, money markets and bonds will only get more attractive as their rates climb in-step with the Fed’s benchmark rate, at least until investors believe the Fed is nearing the end of its rate hiking campaign.

The high degree of volatility and general uncertainty stands to continue boosting the appeal of these “safe havens” at the expense of money flowing into stocks. While that massive pile of cash will likely make its way back into stocks eventually many investors for now seem inclined to wait for more clear signs that the Fed is going to back off.

Many believe that a slowdown in the housing market could take a big bite out of overall inflation levels as shelter costs account for about a third of the Consumer Price Index (CPI). The pace of home price gains has slowed but outright declines have mostly been limited to regions that may have gotten a little overheated during the pandemic.

Keep in mind, while a more widespread decline in home prices might help pull down headline inflation eventually, there is also a risk that a major downturn could usher in a recession as consumers watch their home equity sink closer to zero.

Data to Watch

There is also always the risk of fallout spreading across other financial markets. The FHFA House Price Index, the Case-Shiller Home Price Index, and New Home Sales will all provide updates on the housing market today. Richmond Fed Manufacturing and Consumer Confidence are also due today.

On the earnings front, Advantest, Cintas, Concentrix, Jefferies Financial, Paychex, and Vail Resorts are all scheduled to report.

Financial Markets Including Precious Metals Continue to Recalibrate

Precious metals, U.S. equities, U.S. debt instruments, and the dollar continue a major recalibration as market participants factor in interest rates moving much higher for longer than anticipated before Jerome Powell’s Keynote speech on Friday of last week. Chairman Powell’s keynote speech at Jackson Hole outlined and redefined the Federal Reserve’s monetary policy as it pertains to lowering inflation.

Currently, inflation is running at its highest level in 40 years. The Federal Reserve’s target for an acceptable level of inflation is 2%. In July the CPI (Consumer Price Index) was at 8.5%, declining from 9.1% in June. The Federal Reserve prefers to use the PCE (Personal Consumption Expenditures Price Index) which strips out food and energy costs.

The PCE is currently fixed at 6.3% declining from 6.8% in June. By any standard inflation is currently 3 times the acceptable level when gauged against the PCE, and 4 ½ times when gauged against the CPI.

Historical Perspective of Inflation and Interest Rates in the United States

Jerome Powell is certainly not the first chairman of the Federal Reserve to tackle high levels of inflation. Multiple Federal Reserve Chairmans have been faced with the task of bringing inflation to its target level. In all cases, they used the same tool to lower inflation; the fed funds rate. The fed funds rate is the key borrowing benchmark set by the Federal Reserve.

The Effective Federal Funds Rate Since 1954

The Federal Reserve Chairman in the 1980s was Paul Volcker. He led the Federal Reserve until Chairman Alan Greenspan took over the position in 1987. Volcker was tasked to reduce inflation which was at its highest level on record at 14.6%. From 1981 through 1990 the Federal Reserve raised the fed funds rates to their highest level ever to combat the “Great Inflation”.

In January 1980 the fed funds rate was at 14%. On December 5, 1980, the Federal Reserve concluded a conference call and raised interest rates to their highest level in history between 19 and 20%. Rates began to drift lower falling back to 13% and then 11 ½ -12 % in 1982. The “effective” fed funds rate averaged 9.97% during these ten years. By January 1991 the Federal Reserve had reduced rates to 6.75%.

Over the last 40 years, the Federal Reserve has had to deal with different financial crises such as the examples cited above. There was the “Dotcom” bust at the start of the century, the 9/11 terrorist attacks as well as the financial banking crisis of 2008.

Looking at how the Federal Reserve dealt with times of financial uncertainty in the past one thing is clear. Inflation reduction has never been accomplished without raising interest rates to levels near or above the inflation rate. Chairman Powell’s keynote speech last week was a wake-up call.

There has never been a time in history when the Federal Reserve fought inflation without taking rates close to or above the inflation rate. Powell’s statement that the Fed will do whatever it takes to reduce inflation signals that interest rates will most likely move to 4% by the end of the year and possibly higher in 2023.

Gold Price Movements after Jackson Hole

Gold daily chart

As of 5:40 PM EDT gold futures basis, the most active December contract is currently fixed at $1708.80 declining today by $17.40. Last Friday gold opened at $1771 before Chairman Powell delivered his keynote speech at the Jackson Hole Economic Symposium. Gold has dropped almost $70 since Powell delivered his keynote speech. All asset classes in the United States began the process to recalibrate their value as factored in much higher interest rates in the future.

For those who would like more information simply use this link.

Wishing you as always good trading and good health,

Gary S. Wagner

After steep decline, U.S. small caps tempt investors with cheap valuations

By Lewis Krauskopf and David Randall

NEW YORK (Reuters) -Shares of smaller U.S. companies are outpacing a rally in the broader equity market as they draw investors looking to scoop up cheaply valued stocks and those betting the group has already priced in an economic slowdown. The small-cap Russell 2000 jumped 10.4% in July against a 9.1% gain for the benchmark S&P 500, its biggest percentage-point outperformance on a monthly basis since February. Small caps tend to be more domestically oriented, less profitable and carry a heavier debt load than their larger counterparts, often putting them in the firing line when worries over the economy take hold and markets become volatile. This year was no exception: the Russell 2000 has fallen 16% in 2022 despite July’s rebound, compared with the S&P 500’s 13.3% drop, as the Federal Reserve tightened monetary policy faster than expected to fight red-hot inflation and sapped appetite for risk across markets. The small-cap index is now at its cheapest versus the large- cap Russell 1000 since March 2020, according to Jefferies data, catching the eye of some bargain-hunting investors. “There was an enormous amount of damage in the small-cap space,” said Francis Gannon, co-chief investment officer at Royce Investment Partners. “This is among the cheapest segments of the U.S. market.” Gannon has been increasing positions in small caps, focusing on industrials, materials and technology companies in the space. Some investors also believe that prices for small caps – which are viewed as more attuned to the economy’s fluctuations – may already be reflecting a potential recession, limiting their downside if predictions of one come to pass. Data this week showed U.S. gross domestic product contracted for a second straight quarter, fulfilling an often-cited definition of a recession. However, the National Bureau of Economic Research, which is the official arbiter of business cycles, has yet to declare a recession and Fed Chair Jerome Powell said this week it was unlikely the economy was in one, citing a strong employment backdrop. Small caps appear to be “baking in a lot of economic pain already,” RBC Capital Markets analysts said in report earlier in July.

“Recessions have tended to be good buying opportunities for Small Caps,” they added. The bank also noted that the Russell 2000’s forward price-to-earnings ratio has been trading in the 11-13 times range, “which tends to mark its bottom.” Citi U.S. equity strategists earlier this week wrote “stocks down the market cap spectrum appear closer to pricing in recession than their Large Cap peers.”

Not everyone is convinced it is time to buy small caps. Appetite for shares of smaller companies could quickly sour if inflation remains persistent and the Fed is forced to raise rates more aggressively than expected, inflicting more pain on the economy. The central bank hiked interest rates by 2.25 percentage points already this year as it fights the worst inflation in four decades, but Powell offered little specific guidance about what to expect next during his news conference following Wednesday’s Fed meeting. “There might be some more disappointing economic news to come even though the market is (already) pricing in somewhat of a mild recession,” said Angelo Kourkafas, an investment strategist at Edward Jones, which recommends clients “underweight” small caps for now. The economy’s strength faces a key test next week, when the monthly U.S. jobs report for July is released. Economic data is expected to be especially important for market sentiment in the next two months to give cues for the Fed’s next moves.

Analysts at the Wells Fargo Investment Institute said smaller companies will be challenged to maintain profitability and healthy cash positions as the economy slows. The firm projects the U.S. economy will be in a recession in the second half of 2022 and into early 2023. “We don’t think this move in small caps has legs,” said Sameer Samana, senior global market strategist at the Wells institute.

(Reporting by Lewis Krauskopf and David Randall in New YorkEditing by Matthew Lewis)

Wood’s ARK fund on track for first monthly gain since Oct as risky stocks rally

By David Randall

NEW YORK (Reuters) – Cathie Wood’s ARK Innovation fund is on track to post its first monthly gain in eight months in July, riding a rally that has seen beaten-down speculative stocks surge on hopes that the Federal Reserve may not be as hawkish as expected in its fight against inflation.

ARK Innovation is up 11.3% in the month despite falling Friday, Refinitiv data showed, thanks in large part to a 27% gain in top holding Tesla Inc and a 35% gain in Coinbase Global Inc. It will be the first monthly gain for the fund since a 9.6% rally in October.

Wood’s $9.6 billion fund, which outperformed all other U.S. equity funds in 2020 thanks to its concentrated bets on stocks such as Teladoc Health Inc and Zoom Video Communications Inc, has been among the high profile casualties of this year’s drop in markets.

The fund is down 53% for the year to date, thanks in part to the Fed’s aggressive rate increases weighing on the sort of companies that Woods focuses on, many of which are comparatively young or unprofitable. The S&P is down 13.8% this year after rallying nearly 12% from its mid-June lows.

“You can look at the market action and flows into ARK versus other sectors and see there’s still a lot of speculative fervor in the marketplace,” said Chris Wallis, chief investment officer at Vaughan Nelson Investment Management.

The gains in the ARK Innovation fund come as investors increasingly expect the Federal Reserve to pull back sooner than anticipated from its most aggressive series of interest rate hikes since the 1980s.

Approximately two thirds of investors now expect to Fed to begin cutting rates in March 2023, down from one-third a month ago, according to CME’s FedWatch Tool. [/FEDWATCH]

RISKY ASSETS

Expectations that the Fed will pump the brakes pushed riskier assets broadly higher in July, lifting the Russell 2000 index of small-cap stocks up 10% and the S&P 500 up 8.7%. Both remain down by 13% or more for the year to date.

U.S. Treasury yields, meanwhile, are down around 80 basis points for the month after hitting 11-year highs in June as global investors price in rising fears of a recession. Higher yields tend to weigh on tech and growth stocks by discounting future cash flows. At the same time, investors appear to be covering their bets against speculative stocks and funds such as ARK Innovation, said Matthew Unterman, director at data firm S3 Partners.

Shorts have covered 48% of their positions in ARK Innovation since short interest peaked in April, and shares shorted in the fund are now at their lowest since August 2021, he said. Still, not all investors expect the recent rally to last.

While the U.S. economy shrank over the first two quarters of the year, the jobs market remains too strong for inflation to come down quickly enough for the Fed to cut rates, said Max Wasserman, senior portfolio manager at Miramar Capital. While he expects the Nasdaq Composite Index could rally another 5% in the short term due to strong earnings from Apple and Texas Instruments, investors are “premature” to expect the Fed will feel comfortable enough to cut rates early next year, he said.

“The Fed is not going to be moving as quickly as this rally is indicating,” Wasserman said.

(Reporting by David Randall; Editing by David Holmes)

Can Fed Reduce Its Tightening Pace?

Most bulls want to see more concrete evidence that inflation is starting to wane before diving back in.

Interest rates in detail

Historically, stocks have a hard time gaining ground when the Fed is in the beginning or middle of a tightening cycle. Past tightening programs have typically utilized rate increases of 25-basis points, but the Fed is hiking three-times as fast right now with a 75-basis points hike in June and the same expected for July.

Some Fed officials have hinted that a full percentage point hike could be on the table for September (there is no Fed meeting in August) if prices are still rising. Bulls believe that a pullback in inflation over the summer could provide the central bank with an excuse to reduce its tightening pace or even pause rate hikes.

Weakness in commodity prices

Many bulls are pointing to recent weakness in commodity prices as a hopeful sign that underlying inflationary pressures are starting to find some relief. Those in the bear camp warn that the slump may only be temporary though, as China is still trying to ramp its manufacturing sector back up after months of Covid lockdowns.

It’s also not clear how energy politics between the West and Russia will play out and what the impacts might be to global oil and natural gas prices. There is also concern that Russian output is going to begin to tumble as sanctions limit the country’s ability to service its oil and gas infrastructure. Several OPEC countries are also dealing with political unrest that is threatening output there as well.

What’s more, global ag producers have an entire season of weather and chemical supply shortfalls to get through before we really know where food prices might be next year.

Bottom line, bears question whether commodity prices have much more room to come down and believe raw material prices will likely keep inflation underpinned and hot for many more weeks and months to come.

There are undeniable signs that the transition out of the “cheap money” era is already cooling some sectors of the economy, particularly housing.

Data you need to know

Data yesterday showed that Pending Home Sales did see an unexpected bump in May but were still down almost -14% versus last year and housing analysts caution that a considerable slowdown is still in store with mortgage rates expected to keep climbing.

The good news is that the housing market slowdown has also corresponded with cooling demand for construction materials as well as things like appliances and furniture. This and similar slowdown trends across other sectors should theoretically help cool consumer prices.

The bad news is that housing is responsible for about 62% of US household wealth, so a slowdown or pullback in home prices would pose another threat to consumer spending and raise the risks of a recession.

Investors today will be digesting Consumer Confidence, the Case-Shiller Home Price Index, Richmond Fed Manufacturing, and advance reads on International Trade, Wholesale Inventories, and Retail Sales.

The Midway Point of the Year – What Is Next for the Stock Market?

While bulls want to believe this is an early sign that stock prices may be close to finding a bottom, others caution that portfolio rebalancing could be having an outsized influence on markets right now.

The midway point of the year

This week brings the end of the month as well as the end of the second quarter on Thursday, June 30, which will also mark the midway point of the year. Considering the dramatic shift in stock prices during Q2 along with the relatively low trading volume that has set in, this “rebalancing period” is expected to be particularly active and likewise have a stronger than normal impact on market direction.

Some insiders credit portfolio rebalancing toward the end of Q1 for a short-lived rally during the last week of March. For reference, the S&P 500 is still about -700 points lower since the peak of that rally, so there could still be more room to upside as the money continues to move and reposition into quarter-end.

Data to watch

This week, investors have a ton of key data to digest that will touch on a broad range of economic sectors as well as provide critical updates on inflation. The PCE Prices Index due on Thursday is by far this week’s highlight with bulls anxious to see any signs that prices are starting to moderate.

Fed Chair Jerome Powell made it clear in comments last week that the central bank needs to see “substantial evidence” that inflation is coming down before they will consider slowing down the current policy tightening path. Headline PCE Prices is expected to see a pretty big rise due to the surge in May gas prices.

The core rate, which strips out food and energy, is expected to hold steady or move down slightly. The Fed typically prefers “core” inflation gauges but has indicated that it may rely more heavily on headline numbers, at least temporarily, due to the heavy influence that gas and food prices have on consumer and business sentiment.

Results on Friday for the University of Michigan’s Consumer Sentiment survey showed that inflation expectations have moved down a bit but overall sentiment fell to a new all-time record low. This has investors growing more concerned that a stiff gain in the headline rate will pressure the Fed into raising rates even faster and higher than planned, and possibly looking at other ways to pump the brakes on the economy.

Some on Wall Street believe the economy has already slowed substantially or may even be in a recession, so the idea that the Fed wants to slow slow things down even further remains a pretty big stumbling block for many bulls. Economists are closely tracking the manufacturing sector for early warning signs of bigger trouble.

The more closely-followed ISM Manufacturing Index on Friday will provide slightly more up-to-date data, capturing manufacturing activity and inflation through early June. The final estimate of Q1 GDP is due out on Wednesday and could fan recession worries if the read is lowered from the previous estimate for a decline of -1.5%.

Don’t forget, traders and investors will also be positioning ahead of the upcoming extended July 4th holiday weekend. The market will more than likely thin out ahead of the holiday and create the possibility of increased volatility.

As Market Trends Continue To Drop – Where Is A Good Place To Invest?

Market trends continue to drop due to investor concerns about geopolitical events, record inflation, rising interest rates, slowing housing, plummeting auto sales, increasing retail inventories, expanding consumer credit, and pending layoffs.

Even stocks that had previously held up or remained strong now seem to be showing signs of topping and breaking down. This is normal behavior for a bear market trend where the initial wave of vulnerable markets takes a hit which then causes traders to shelter their remaining cash in more robust markets. But as losses mount and their capital diminishes, traders eventually are forced to liquidate even their strong market assets to meet margin calls and raise needed cash.

As we review the following market trends, we quickly realize that the best option for most traders is to simply go to cash, watch, and wait.

BERKSHIRE HATHAWAY -25.34%

  • BRK was one of the few companies in the early part of Q1 2022 that bucked the downtrend and had remained strong.
  • By the end of Q1 2022, BRK had put in a top that was greater than 200% of its Covid 2020 low.
  • Now, as we approach the end of Q2 2022, BRK has lost -25.34% and is down -10.34% year-to-date.

BERKSHIRE HATHAWAY INC • BRK.A • NYSE • DAILY

Berkshire Hathaway Trend Chart

QQQ NASDAQ 100 ETF -33.16%

  • QQQ put in its top at the very end of Q4 2021 primarily due to rising inflation and the strong US dollar.
  • After its initial Q1 2022 drop of -21.6%, QQQ had a rally back up, which was a 61.8% correction to put in a lower top.
  • Now, as we approach the end of Q2 2022, QQQ has lost -33.16% and is down -30.98% year-to-date.

INVESCO QQQ TRUST SERIES 1 ETF • ARCA • DAILY

QQQ Nasdaq Trend Chart

RUSSELL 2000 INDEX -32.23%

  • The Russell 2000 index (comprised of 2,000 small-cap companies) put in its top at the very end of Q4 2021 due to rising inflation and the strong US dollar.
  • After its initial Q1 2022 drop of -20.93%, the Russell had a rally back up, which was a 38.2% correction to put in a lower secondary top.
  • Now, as we approach the end of Q2 2022, the Russell has lost -32.23% and is down -25.81% year-to-date.

US RUSSELL 2000 STOCK INDEX • DAILY

Russell 2000 Index Trend Chart

BITCOIN -71-87%

  • Bitcoin put in its final top at the very end of Q4 2021.
  • Bitcoin had a 68-day rally back up, which only corrected about 35% of its initial down move to put in a lower secondary top.
  • Now, as we approach the end of Q2 2022, Bitcoin has lost -71.87%.

BITCOIN / US DOLLAR • BTCUSD • DAILY

Bitcoin Trend Chart

LEARN FROM OUR TEAM OF SEASONED TRADERS

In today’s market trend environment, it’s imperative to assess our trading plans, portfolio holdings, and cash reserves. As professional technical traders, we always follow price. At first glance, this seems very straightforward and simple. But emotions can interfere with a trader’s success when they buck the trend (price). Remember, our ego aside, protecting our hard-earned capital is essential to our survival and success.

Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:

  • A loss of 10% requires an 11% gain to recover.
  • A 50% loss requires a 100% gain to recover.
  • A 60% loss requires an even more daunting 150% gain to simply break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown:

  • A 10% drawdown can typically be recovered in weeks to a few months.
  • A 50% drawdown may take many years to recover.

Depending on a trader’s age, they may not have the time to wait nor the patience for a market recovery. Successful traders know it’s critical to keep drawdowns with reason, as most have learned this principle the hard way.

HOW WE CAN HELP YOU LEARN TO INVEST CONSERVATIVELY?

At TheTechnicalTraders, my team and I can do these things:

  • Reduce your FOMO and manage your emotions.
  • Have proven trading strategies for bull and bear markets.
  • Provide quality trades for investing conservatively.
  • Tell you when to take profits and exit trades.
  • Save you time with our research.
  • Proved above-average returns/growth over the long run.
  • Have consistent growth with low volatility/risks.
  • Make trading and investing safer, more profitable, and educational.

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Will Global Markets Be Pushed Deeper Into Crisis Event By The US Fed

US and Global markets recoiled from the higher inflation/CPI data last week. The US Fed raised interest rates by 75pb on June 15. The Fed also warned that other, more aggressive rate increases might be necessary later this year. Before the Fed decision, global markets opened on Sunday, June 12, and quickly started selling downward. US Indexes sold off on Monday, June 13, by more than 2.5% almost across the board. A brief rally after the Fed decision seems to have evaporated in early trading on Thursday, June 16.

It is clear that global markets expected inflation to stay elevated but were hoping for some moderately lower data showing the recent Fed moves had already dented some inflation concerns. Now, it appears the US Fed has its backs against a wall and moved rates aggressively higher to stall inflation (and possibly destroy global asset values). From my perspective, this is unknown territory for the US Fed and Global Central banks. That means traders should expect increased volatility and the possibility of a very determined reversion of price over time.

Another Global Financial Crisis May Be Unfolding

The research conducted by my team and I shows some interesting new data. In particular that the US Current Account data is very near to the levels reached just before the Global Financial Crisis (GFC) in 2006 (near -$218B). I consider this a very clear sign that the US economy, inflation, consumer engagement, and asset values have continued to hyper-inflate since the COVID-19 virus event.

The chart below highlights the US Current Account data and the Dow Jones Industrial (DJI) Average price data. Notice how the lowest level of the US Current Account data reached a deep trough (September 2006) about 12 months before the absolute peak in the DJI (September 2007). This time, the US Current Account trough formed in September 2021, and the peak in the DJI happened in December 2021 – only 3~4 months later.

US current account data and Dow Jones Daily chart

The global markets have continued to consume cheap US Dollar liabilities over the past 10+ years as the US Fed kept interest rates very low for an extended period. Not only did this feed an extreme global speculative phase, but it also created an extreme credit/debt liability issue throughout the globe as rates increased. Debt holders are forced to roll debt forward at higher rates if they cannot pay off these liabilities completely – being over-leveraged. This same scenario is very similar to how the Global Financial Crisis started. Over-leveraged speculative trading in Mortgage-Backed Securities and other global assets.

Skilled Traders Saw This Problem Many Years in Advance

I’ve been informing my subscribers that an event like this was starting to take place throughout 2020 and 2021. Below, I show one example posted in our blog warning traders that the global markets were transitioning away from the endless bullish price trends from 2011 through 2021

November 25, 2020: HOW TO SPOT THE END OF AN EXCESS PHASE – PART I

NASDAQ May Fall To $9,750 Before Attempting To Find Any Support

The Technology Sector is leading the downward price trend in the US major indexes. The NASDAQ could fall to levels close to $9,750~10,750 before attempting to find any real support.

Ultimately, the NASDAQ may fall to levels near the COVID-19 lows, near $6,500. But right now, the most logical support level exists just above the COVID-19 2020 highs.

NASDAQ E-Mini Futures Weekly Chart

I expect this new global price revaluation may last throughout the rest of 2022 and possibly carry into early 2023. It depends on what the US Fed does and how this event unfolds. If there is an orderly unwinding of excesses in the markets, we may see an extended decline as global expectations transition to new normal economic expectations. If a new crisis event blows a massive hole in the global economy, like in 2008-09, a very sudden decline may occur – shocking the global markets.

My research suggests the US Fed is far behind the curve and has allowed the excess speculative rally to carry on for too long. Global Central Banks should have been raising rates to moderate levels near the end of 2020 and in early 2021. Now, we have an excess phase bubble similar to the DOT COM and GFC events merged. We have an extreme Technology Bubble and an excess global credit/liability bubble.

If you have not already adjusted your assets to protect from downside risks, it’s time. When doing so, please consider the long-term risks of trying to ride out any extended downtrend in price. Are you willing to risk another -25% to -40% of your assets, hoping the global markets find a bottom soon?

What Strategies Can Help You Navigate the Current Market Trends?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors. Also, learn how we identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market. The markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies which include a real estate ETF. We can help you protect and grow your wealth in any type of market condition. Click the following link to learn more: www.TheTechnicalTraders.com

For a look at all of today’s economic events, check out our economic calendar.

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Higher Bond Yields Keep the Pressure on Stocks

Bulls want to believe that the worst of the recent downturn is over with some pointing to the fact that stocks didn’t sell off yesterday in spite of yields on 10-year Treasuries surging back above +3%.

Bond yields

At the same time, Wall Street insiders warn that it may be hard for stocks to mount any meaningful rallies if bond yields much over +3% are sustained. Theoretically, the guaranteed, risk-free returns of bonds could start to more seriously compete with stocks for investor money, keeping a lid on any big upswings.

Higher bond yields are also likely to keep the pressure on stocks of high-growth companies that dominate the tech sector. With many of these fast growing, profitless companies, their valuations are largely based on the future profits that today’s debt-fueled growth is supposed to be paving the way for.

Higher bond yields and interest rates make those profits less valuable in the long run, meaning those companies aren’t as valuable anymore. This is a key reason why bears believe there is more stock market “excess” left to shake out, especially with the Federal Reserve expected to aggressively tighten policy in the months ahead.

Fed officials have signaled rate hikes of 50-basis points for both the June and July policy meetings. There have also been hints that a 75-basis point hike could be justified in the second half of the year – perhaps September – if inflation shows no signs of easing. It’s hard to see where that relief might come from in the near-term especially with oil and other energy prices flying.

Saudi Arabia hiked prices on its crude oil for Asia, Europe, and the Mediterranean yesterday. What’s more, the hike for Asia was substantially higher than expected at +$2.10 versus +$1.50. Higher oil prices for Asia means higher manufacturing and transportation costs, which will likely end up being passed on to consumers in importing countries like the U.S.

Data to watch

The next read on U.S. inflation comes on Friday with the Consumer Price Index, which is also the final report before the Fed’s policy meeting next Tuesday and Wednesday (June 14-15). It’s hard to imagine a big bull rally between now and then considering the extreme degree of uncertainty surrounding energy prices and the impact on inflation. It’s also hard to imagine the central bankers have much insight to offer as far as when inflation might start to ease.

Part of the Fed’s job now is not only trying to keep a lid on prices but it also needs to manage consumer and investor expectations for inflation. If business and consumers anticipate substantially higher prices ahead, they could in theory pull back on investing/spending enough that it ends up creating a self-induced economic downturn. A slowdown would be welcomed by the Fed but it can be a fine line between slower growth and an outright recession. This is a “thread the needle” part of the equation that investors are not entirely confident that the Fed can successfully navigate.

Today, economic data is light with just the Trade Balance and Consumer Credit on the calendar. Earnings highlights include Advantest, Casey’s General Stores, and J.M. Smucker.

Growth Cycle Outlook: Sell The Rally

Summary & key takeaways

  • According to the leading indicators of economic growth, the business cycle looks set to enter a period of material deceleration in the months ahead. This growth downturn is a continuation of the slowdown that began in the latter half of 2021.
  • Combined with this downturn in growth, the liquidity and earnings cycles remain significant headwinds for pro-cyclical equities and risk assets for the time being.
  • Investors will do well to continue to maintain an underweight exposure to risk assets.

Sell The Rally

Before we assess the leading indicators of the growth cycle, let us first assess where the economy resides at present. In order to determine where we lie currently in the business cycle, one of the most valuable and most popular coincident indicators of economic growth is the Institute of Supply Management’s Manufacturing Purchasing Managers Index (PMI). The manufacturing PMI provides us with an up-to-date view of where we are now in the growth cycle and where we have been. Whilst the forward-looking indicators of growth provide the most value in terms of asset allocation and investment making decisions, it is the coincident measures of growth that define the trend.

As we can see below, this growth cycle peaked last year near the highest levels in decades and have been slowly decelerating since.

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On an absolute basis a PMI reading of above 55 is indicative of a robust economy. However, it is the direction of growth that matters most for asset prices and financial markets. Should the PMI continue to move toward 50, most equity markets and risk assets should continue to struggle. This is where the leading indicators of growth provide much value.

Indeed, if we assess the long leading indicators of the business cycle (those that provide an insight as to what can be expected over the next six to 12 month), the situation continues to be far from rosy (an outlook I have been opining for some months now). Central to this thesis is the significant tightening of financial conditions that has occurred in recent months, headlined by inflation.

This includes both policy and non-policy tightening of financial conditions to such a degree that prior to the Fed’s initial rate hike or balance sheet tapering what we have witnessed is perhaps the most significant level of tightening of financial conditions in decades. Prices have gone up dramatically for both corporations (PPI) and consumers (CPI) and have thus completed destroyed demand. We are already seeing signs of this flowing through to corporate profits.

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The biggest increase in prices for both households and corporations in decades was always going to destroy growth.

Particularly when borrowing costs adjust to reflect these higher prices.

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As well as mortgage rates.

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If we combine the conditions of increasing borrowing costs with the recent moves higher in the dollar and energy prices to form a ‘growth tax’ composite, we are able to gain a solid understanding of what lies ahead for the growth cycle over the next 9-12 months. Clearly, the outlook for growth is challenged.

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When you increase borrowing costs for households and corporations, input and energy prices and throw in a strong dollar, this becomes too much for the economy to bear.

Another excellent long leading indicator of the economy in the housing market, this too continues to point to slower growth over the next 12 months. Housing is one of the most important areas of the economy and a strong cyclical driver of the growth cycle. I wrote about the current situation within the housing market in depth recently here, and put simply, such an unprecedented move higher in rate-of-change terms in mortgage costs was always going to cyclically challenge house prices.

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As we can see, many the longer leading indicators for the economy continue to tell us we are yet to find a bottom in this cyclical downturn. As such, a sub-50 PMI could well be on the cards at some stage this year.

From a liquidity perspective, the outlook is perhaps worse than the growth outlook. Whilst liquidity and growth are very much intertwined, liquidity, or perhaps better termed as excess-liquidity, is a more important consideration when assessing the outlook for financial markets and asset prices.

There are a number of ways to examine excess liquidity, with my preferred measure being the rate-of-change in real broad money growth (i.e. real M2) less economic growth (i.e. industrial production). This measure provides us with a solid 9-12 month forward looking outlook on what we can expect from both asset markets and the economy (via the wealth effect).

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Much like what the long leading indicators of the growth cycle are signaling, excess liquidity is clearly suggesting that a cautious stance towards risk assets is warranted for the foreseeable future.

The longer-leading indicators of the economic growth and liquidity cycles are suggesting we are likely to see a material deceleration in growth for the remainder of 2022. However, it is important to remember than such indicators have little bearing for active risk management in the short-term, but instead give us a solid idea of what might occur going forward.

This is where the shorter-leads of the growth cycle provide are of value, as they allow us to more accurately determine with greater confidence the immediate trend in growth and whether this aligns with the trajectory of the longer leads.

Indeed, if we look at the shorter and timelier leading indicators of the growth cycle, we can gauge more accurately where the economy is headed over the near term, allowing us to more effectively managed risk within our portfolios.

One of the best leads on the growth cycle over a three-to-six month time frame is the rate-of-change in household net worth. Given the ever-increasing financialization of the economy, this allows us insight into how the wealth effect will boost or curtail growth.

Currently, the wealth effect is a headwind to growth and suggesting the PMI could fall to the low 50s sooner rather than later.

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Digging further into the shorter leads within the manufacturing sector, several of the sub-components of the US ISM manufacturing survey can help to inform the direction of the manufacturing sector in the near term. Whilst the manufacturing sector no longer makes up as much of the overall economy as it once did, it is still a large cyclical driver of the growth cycle given manufacturing’s link to the consumption of durable goods, thus providing a real time insight into the supply and demand dynamics of the economy.

Firstly, if we look at demand through the lens of the New Orders subcomponent of the ISM manufacturing survey, we can see how much this contraction in demand is becoming a headwind for growth. New Orders are highly demand sensitive and have rolled over significantly.

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Inversely, if we look at the Inventories subcomponent of the ISM manufacturing survey, the opposite is occurring. We saw a huge build-up in inventories throughout the latter stages of 2021, a dynamic that is now a headwind for growth.

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Taken together, the spread between ISM New Order and Inventories is one of the more reliable short-leads for the growth cycle. Supply has now caught up with demand, which in turn means less manufacturing and production, less need for workers and thus less wages.

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This message is being confirmed via the Census Bureau’s own manufacturing inventory/sales data.

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Indeed, by looking at the mentions of weak demand by corporations, we can clearly see waning consumer demand is becoming central to this slowdown.

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Source: Bofa Global Research

This level of demand destruction should hardly be surprising given the aforementioned increases in inflation and borrowing costs over the past 12 months. Indeed, when wages have not increased at a fast enough pace to compensate consumers for these increases in costs, real incomes fall. Not only is real income growth negative, but to a significant degree.

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When real income growth is negative, consumers have no choice but to spend less and/or turn to credit to support their cost of living. The problem is that credit is a finite resource at the best of times, let alone when the cost of borrowing is rising. As a result, consumer sentiment is getting crushed.

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And with it economy activity is stalling. We can see this by looking at the rate of change in Rail Freight Carloading’s.

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And freight shipments.

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Along with global export activity, all of which are suggesting an immediate material slowdown in growth is a significant probability.

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Furthering these dynamics is the recent strength in the dollar. A meaningful move higher in the dollar that we have seen in the past 12 months is akin to a weapon of mass destruction for global growth. Regardless of your long-term view of the dollar, it remains the world’s reserve currency and be the ultimate barometer for global growth, a dynamic particularly painful for many emerging market economies. A strong dollar is a significant drag on corporate profits, net exports and thus growth.

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We can see that as a result of these dynamics financial conditions are becoming increasingly tighter, a measure which in itself tends to provide a solid short-term lead on the growth cycle (proxied below by the Goldman Sachs financial conditions index). Once again, the outlook for growth in the short-term is clearly challenged.

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Source: Frederik Ducrozet

And finally, the Economic Cycle Research Institute Weekly Leading Index also continues to move lower in rate-of-change terms, an indicator that tends to lead the business cycle by two to three months.

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What we can ascertain from both the direction of the longer and shorter leading indicators is there is still much further potential downside ahead for both the business cycle and risk assets in the months ahead. These trends are very much being confirmed by the price action of financial assets.

Indeed, we can see both the cyclicals vs defensives and high beta vs low beta stock ratios confirming market participants are very much beginning to price in a significant slowdown.

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Whilst both ratios are clearly indicating the PMI is set to fall significantly in the months ahead, the concern here is these type of pro-cyclical ratios tend to remain suppressed until we see an upturn in growth itself, of which none of the leading liquidity or growth indicators are suggesting is imminent. Accordingly, risk-off remains the message of the business cycle for investors in the months and quarters ahead.

Turning now to inflation, we continue to see signs that not only has inflation peaked but a deceleration in the rate-of-change in inflation is becoming increasingly likely in the second half of 2022. The ISM New Orders and Inventory spread has been signaling this for some months now.

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As is the recent weakness of the Chinese yuan, an important consideration as this will help alleviate manufacturing input price pressures and allow the US to export some of their inflation, at least to some extent.

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This is being echoed by the price movements of industrial commodities, being one of the areas of the commodity market most closely tied to the growth cycle and whose price movements of late are less subject to supply side constraints but rather economic activity.

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Even if energy and food prices continue higher, it is the rate-of-change that matters from a CPI perspective and the base effects are now firmly working in reverse, given the huge year-over-year changes we saw in Q2-Q4 of last year.

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This is now very much beginning to be priced in by equity markets, as we see by again looking at the cyclicals vs defensives ratio.

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However, we are unlikely to see a material move lower in CPI at any stage this year that could prompt the Fed to reverse course in their own tightening agenda. A Fed pivot in the near term is more likely to come as a result of a significant move lower in risk assets and a slowdown in the economy. Perhaps a deceleration in inflation could be the impetus for move higher in bonds.

From an asset allocation and risk management perspective, the message from the continued deceleration in growth on both a short and medium-term basis is clear. Investors will do well to be cautious buying tips with such an unfavorable macro backdrop in front of us. Indeed, depending on one’s risk tolerance and time frame, hedging your long positions or tactically adding short exposure continues to be a prudent strategy, as does taking profits on any rallies that ensue which are not supported by growth or liquidity. A continued underweight exposure to high-beta and pro-cyclical companies (i.e. retail, consumer discretionary, financials, small caps etc.) seems sensible for now.

The time to increase risk will come when the growth and liquidity cycles begin their next leg up. For now, risk management is key. This is the part of the cycle where investors should look to preserve capital.

For now, fade the rally.

What Do Traders Need to Watch This Week?

China

Stock bulls are hoping a “China reopening trade” might begin to develop as lockdowns in Shanghai and other cities are lifted this week. It will take a while for economic activity to ramp back up and quarantine zones are still in place for new cases, but economists are hopeful it is a major step toward finally improving global supply chain dislocations.

Unfortunately, the prospect of China manufacturing coming back online combined with a deal to cut Russian oil imports in the EU is sending oil prices skyrocketing again. Brent crude futures topped +$120 per barrel yesterday, the highest in two months. China’s oil consumption plunged by about -1.2 million barrels per day in May under the country’s extreme Covid lockdowns which experts say helped offset the loss of Russian supplies that buyers in the West have either banned or are trying to avoid.

China has actually boosted its Russian crude buying as those supplies are still available at a steep discount, which is also offsetting some of the demand for non-Russian supplies. China refiners aren’t all set up to process China’s Urals crude grade, though, which oil insiders say could limit how much more it buys from Russia. Meaning China will be turning back to the same supplies that the West may now need more of if the EU successfully implements a ban on Russian crude cargoes.

EU ban

EU officials this week are expected to finalize the ban that will also block EU insurers from covering vessels carrying Russian crude. The tricky part there is that EU companies are responsible for insuring 95% of the world’s oil trade, so that move could have implications far beyond the EU if it impacts ships carrying Russian oil anywhere in the world.

Russian oil that is supplied to the EU via pipeline will not be impacted by the new restrictions. There is some talk that OPEC may be preparing to increase production based on recent moves by the group to exempt Russia from production targets but it’s too soon to know if that will materialize.

Bottom line, the oil market’s supply-demand dynamics are again in flux and pressuring oil prices higher, which is obviously bad news for inflation as elevated energy costs ultimately lift prices for pretty much everything else.

Finally, the Fed’s Beige Book is due out today, and on the earnings front, today’s highlights include Chewy, GameStop, and Hewlett Packard.

Can Fed Help the Economy to Avoid Recession?

FED in the spotlight

The Fed’s “minutes” are due out at 1 p.m. CST today and most expect they will indicate additional 50-basis point rate hikes coming up in both the June and July meetings. The minutes could also offer more details on the Fed’s balance sheet reduction plan. There are some worries about liquidity in the bond markets later down the road as the Fed’s monthly reductions increase, so insiders will be looking for clues as to how they might accommodate that.

U.S. Fed Chair Jerome Powell yesterday noted that high inflation and economic weakness overseas could derail the central bank’s efforts to avoid a recession.

Powell has been promising that the Fed will be able to tighten financial conditions enough to cool inflation without significantly denting growth or causing unemployment to go up, aka deliver a “soft landing.” In an interview yesterday, however, Powell said economic woes in the EU and China in particular will make it much more difficult to deliver that result. Powell also said that if inflation fails to ease in coming months, “we’re prepared to do more,” which some Wall Street insiders take to mean that a 75-basis point hike is a possibility.

Economic data

Investors are extremely anxious to see the PCE Prices Index on Friday. The Core PCE, one of the Fed’s favorite inflation gauges, dropped back to an annual rate of 5.2% in March versus 5.3% previously .

Stock bulls overall are having a tough time finding a major upside catalyst especially as the multiple headwinds have begun to inflict damage on corporate earnings.

Weaker retailer outlooks the last couple of weeks have also been underpinning concerns that the U.S. economy is headed toward a recession. Most retailers are walking back forward guidance as they struggle against hire costs for wages and transportation, ongoing supply chain fallout, and changes in spending habits as consumers adjust to inflation.

Even some of the biggest names like Walmart and Target are struggling. In fact, there are report circulating that Amazon is talking about sub-leasing +10 million sqft. of its retail space. Keep in mind, Amazon stock has given back all of its pandemic gains. While the US consumer has seen -$9 Trillion of US household wealth vanish in the past few months. At the same time we are starting to see new home sales fall off a cliff.

Data released yesterday showed the sales of new US homes plummeted last month by the most in nearly nine years, dented by the combination of high prices and a steep climb in mortgage rates. Purchases of new single-family homes decreased -16.6% to an annualized 591,000 pace, the weakest since April 2020, basically the height of the covid scare. The median new home price soared nearly +20% from a year ago to a record $450,600. There were 444,000 new homes for sale as of the end of the month, the most since 2008. However, very few of those had yet to be completed. Of the total 444,000 new homes on the market in April, just 38,000 were finished.

Houses under construction made up +65% of the inventory, with homes yet to be built accounting for about 27%. The backlog of homes waiting to begin construction is at an all-time high thanks to material shortages and higher input costs. Bottom line, new home sales declined in all four US regions, including by double digits in three.

I should note, new-home purchases account for about 10% of the overall market and are calculated when contracts are signed. They are considered a timelier barometer than purchases of previously owned homes, which are calculated when contracts close.

As for today’s corporate earnings, Dick’s Sporting Goods, NVIDIA, Snowflake, Stellantis, and Williams Sonoma are scheduled to report.

Top 5 Things Traders Have to Watch This Week

Earnings

Disappointing earnings results last week from the likes of Walmart, Target, and others revealed that supply chain dislocations and skyrocketing labor costs have delivered deeper-than-expected damage to company balance sheets as changing consumer habits and higher prices begin to crimp sales.

The headwinds have forced cuts to full-year forecasts that some insiders fear may need to be lowered further, especially if the economy slips into a recession as many bears expect.

Retailers reporting this week include Advance Auto Parts today, followed by AutoZone, Best Buy, and Nordstrom on Tuesday; Dick’s Sporting Goods and Williams Sonoma on Wednesday; American Eagle, The Buckle, Burlington Stores, Costco, Dollar General, Dollar Tree, The Gap, Macy’s, and Ulta Beauty on Thursday.

Investors are also nervous ahead of some key tech earnings this week, including Zoom today; Intuit Tuesday; NVIDIA and Snowflake on Wednesday; and VMware on Thursday.

Federal Reserve

Turning to the Federal Reserve, there are only a couple of speakers scheduled this week, though one of those is Fed Chair Jerome Powell, who delivers opening remarks at an economic conference in Vegas tomorrow.

The speech is expected to be pre-recorded, however, and he won’t be taking questions, so it may not provide much in the way of new insight.

Wednesday brings the “minutes” from the Fed’s May FOMC policy meeting which could provide clues as to the size of upcoming rate hikes. Wall Street widely expects the Fed will lift its benchmark rate by 50-basis points at both its June and July meetings.

From perspective, the stock market is trading poorly because of Fed uncertainty, the market is trading poorly because investors are nervous and uncertain about how companies are going to perform in the wake of the shift in Fed policy. In other words, I think the market might still be too overly optimistic considering the underlying landscape and shift in Fed rhetoric from easing to tightening.

Economic data

The economic data highlight this week will be the Core PCE Prices Index on Friday. The Core PCE Index, which strips out food and energy, is one of the Fed’s preferred inflation gauges. The year-over-year headline rate rose +6.6% in March, while the Core rate actually pulled back a tenth of a percentage point to +5.2%.

Bulls are hoping to see more meaningful signs that consumer prices are starting to moderate in April’s numbers. Inflation hawks warn that even if price gains slow or stall, that still leaves it running at more than double the Fed’s target +2% rate and question where real price declines are even possible in the near-future.

War in Ukraine

Russia’s war in Ukraine complicates the outlook even further as it has such extreme repercussions for commodities.

As long as upward pressures remain on energy, food, fertilizers, metals, and other key materials, inflation will be hard to reverse. And as many commodities and supply chain experts continue to warn, even if the war ended tomorrow, the fallout could be felt for several years considering the massive infrastructure destruction, the seasonality of crops, a loss of workers, etc.

The war in Ukraine and global inflation pressures will be key topics at the annual World Economic Forum in Davos, Switzerland, this week. The conference is usually held in January but this year’s event was rescheduled for May 22 to May 26, marking the first in-person version of the conference in over two years. There are only a handful of U.S. officials attending and no big Fed names, at least none that have been announced.

The conference typically generates a lot of financial headlines as attendees usually include leaders from many top global companies as well as political leaders and central bankers from across the world.

Monkeypox

It’s also worth noting some growing talk concerning outbreaks of “Monkeypox” in 15 countries, including here in the U.S. While some cases have been linked to travel from Africa, where the disease is generally found, more recent infections are thought to have spread in the community. However, scientists stress that the root cause of the recent spike in cases remains very much unclear at this point.

The disease is from the same family as smallpox but typically less severe. It requires close contact with an infected person for the virus to spread and health authorities say the risks to the general public remain very low. However, there is always a concern that a disease outbreak will prompt the media to go nuts with the headlines and perhaps spook the consumer at a time when some fear the economy is already experiencing a slowdown.

Stock Market Bottom Or Bull Trap? The Wyckoff Method Reveals Insights

Last week S&P 500, Dow Jones, Nasdaq and Russell 2000 all broke below the major support and dropped sharply into an oversold condition. This sharp move was anticipated just right before it happened based on the bear market leading indicator as I discussed in the video at the bottom of the post.

Using Stock Market Breadth As Market Timing

On Friday all the 4 indices had a strong rebound off the oversold condition. This is significant not because of the magnitude of the rally, but the market breadth because the difference between the number of stocks hit 52 Weeks High and 52 Weeks Low spiked from -1600 to -160. This is a sharp turn from a very bearish market breadth to almost neutral as majority of the stocks participated the reversal. Refer to the market breadth chart below:

From the chart above, the spike of the market breadth after 24 January 2022 and 24 February 2022 (circled in orange) corresponded to a swing low in S&P 500. A market rally can be expected based on the current market breadth. Next, we need to determine the quality of the potential rally to anticipate how far it can go.

Wyckoff Method To Identify Bear Market Bottom

Let’s apply the Wyckoff method to find out if this is likely a stock market bottom or a bull trap by focusing on the price action and the volume. Refer to the chart of S&P 500 Futures below:

The bearish bias of S&P 500 was formed after the selloff happened in January 2022. Subsequently, a Wyckoff re-distribution pattern was formed (as highlighted in orange). After the upthrust after distribution (annotated as UTAD), the rallies were of poor quality and the down swings were impulsive and volatile with increasing of supply. These are the key characteristics of a bear market leading to a sign of weakness (annotated as SOW).

The confirmation of the strong down swing was identified after the weak rally on 18 April 2022 (annotated as LPSY 0) where I explained in detail about the bearish signal detected from the Wyckoff distribution pattern in the video.

Last week S&P 500 broke below the major support at 4100 followed by a sharp move down below 3900 within 4 days, which marked a sign of weakness from the re-distribution structure. Despite the sharp move down, climatic price action and volume did not show up, suggested pending institution capitulation. This is a key difference when comparing to the selling climax low formed on 24 January 2022.

There was presence of demand on last Thursday as reflected on the demand tail and the slight increase of volume while the price hit the oversold of the down channel. This was confirmed by Friday’s price action. This is likely the relief rally to test the axis line near 4050-4100 where the support-turned-resistance.

The resistance zone coincides with the supply line of the down channel, which could potentially form the last point of supply (annotated as LPSY 2) where the supply will be attracted for institutions to sell into strength (as annotated in green arrow) followed by lower price target at 3600 (and lower). This could be similar to the bear market in 2008 from the price structure to the market rotation sequence as discussed in the video 2 weeks ago.

The Leading Indicator In Bear Market

As mentioned earlier, watch the video below find out how to use this leading indicator in the bear market as early warning before the sharp move happened last week (and beyond) in S&P 500.

Based on the characteristics of the price action and volume, selling into strength to avoid bull trap is a better bet. Under a more bullish scenario where the current rally is strong enough to test 4200, a trading range could be anticipated rather than a continuation of the selloff to test 3600 in the short-term. Visit TradePrecise.com to get more stock market insights in email for free.

Sell And Go To Cash Position Or Hang On By Your Fingernails

As professional traders, we spend a lot of resources determining whether we are in a bull-up market or a bear-down market. The follow-up to this is our additional efforts in finding the right places to buy or sell in either of these scenarios.

As traders, we also have different styles or time frames that we trade. For instance, longer-term trend traders may utilize the daily, weekly, or even monthly charts. In comparison, shorter-term swing traders may utilize the 4-hour or 1-hour charts.

Much emphasis and resources are committed to these efforts. However, we have learned that going to cash or having a cash position is just as important, if not more important, than having an actual position in the market.

The beautiful thing about trading is that the trader is in control. We do our research, and then after weighing the evidence, we have the edge in that we have complete flexibility in determining whether we buy, sell, or do nothing.

Cash Position vs Invested in the Markets

Taking a position and making +20, +30, or +40% is great. But going to cash and avoiding a -20, -30, or -40% drawdown is just as important. We could even say that having the ability to go to cash is even more important as it protects our attitude and our health. There is nothing enjoyable about worrying about a position 24-hours a day, 7-days a week.

A trader should ask themselves: Is holding onto this position worth the stress and worry about whether the market is going to rally; or will the market give me back a small portion of my hard money losses; or will the bottom completely fall out of the market which will destroy my account?

Age is a defining factor in answering this question. Depending on our age, do we have the time or the energy to make back losses if the unthinkable happens? Successful traders have learned the hard way that retreating (going to cash) may be the best option as you live to fight another day.

CARVANA -91%

Carvana CVNA NYSE is the perfect example of the bottom falling out unexpectedly. The rallies were short-lived, ranging from 4-to 14 days. After CVNA had dropped about -25%, it only rallied back about 14-days before it started a steep but steady decline. CVNA is a textbook example of the importance of accepting a loss and going to cash.

As technical traders, we exclusively follow price. This too is an important concept to grasp. Following and trading price simply means that the market tells the trader what to do and not the other way around. Being one with price will deposit money into your trading account. Fighting price will withdraw money out of your trading account. The market (or price) does not care what a trader’s opinion or bias is.

Managing and protecting our hard-earned capital is our individual responsibility and should be the top priority.

Carvana CO. • CVNA • NYSE • Daily Chart

CVNA - when to sell to a cash postion

US Dollar – A Strong Buy

If a trader doesn’t trade currencies, why should they even care about what is happening to the USD?

Think about the world economy. Whether a stock, ETF, bond, or commodity, everything is affected by the currency it is traded in. Currency is part of the fundamental make-up of each market. Tracking and understanding global money flows provides us with the big picture.

Armed with that information, a trader can make better decisions about the markets they trade or how they manage their cash position. In other terms: risk-on, risk-off, trade-on, trade-off, capital invested, capital not-invested, etc.

The US Dollar continues to attract capital from investors all over the world. But could this be a double-edged sword for US stocks? As capital flocks to the USD, this, in turn, hurts US multinationals as they need to convert their weak foreign currency profits back into USD.

The USD safe-haven trade may eventually trigger a broad and deep selloff in US stocks. As the USD continues to strengthen, corporate profits for US multinationals will shrink or disappear.

US Multinational $1 Billion Revenue Example

  • $1 billion in revenue-generating a 15% net profit with a net neutral 0% currency translation equals a $150 million profit.
  • $1 billion in revenue-generating a 15% net profit with a negative -15% unfavorable currency translation expense equals a $0 profit!

In addition, the impact of inflation on the global consumer will lead to a pullback in consumer spending which will further reduce corporate revenues and profits. Combining the global currency dislocation and the economic cool off will bring on a global recession.

Wisdom Tree Bloomberg • U.S. Dollar Bullish Fund ETF • USDU • ARCA • Daily Chart

US dollar bullish fund chart

RUSSELL 2000 SMALL CAPS -29.96%

The Russell 2000 stock index is considered the bellwether of the US economy. The index measures the performance of 2,000 smaller companies whose focus is on the US market. Tracking this index gives us a broad overview of the health of the overall stock market.

Since bottoming in March of 2020, the IWM has more than doubled. But in November 2021, the IWM put in its final top. Upon completing and then breaking out of a distribution wedge, the IWM is now solidly in a bear market.

Knowing this information tells us that we should seriously consider we are in a period of risk-off, no-trade, and cash as a position.

For experienced traders, they may consider buying non-leveraged inverse index ETFs on days when the market has a sharp spike rally up.

iShares • Rusell 2000 ETF • IWM • ARCA • Daily Chart

Russell 2000 ETF chart

Learn From Our Team of Seasoned Traders

In today’s market environment, it’s imperative to assess your trading plan, portfolio holdings, and cash reserves. Experienced traders know what their downside risk is and adapt as necessary. Successful traders manage risk by utilizing stop-loss orders, rebalancing existing positions, reducing portfolio holdings, liquidating investments, and moving into cash.

Successfully managing our drawdowns ensures our trading success. The larger the loss, the more difficult it will be to make up. Consider the following:

  • A loss of 10% requires an 11% gain to recover
  • A 50% loss requires a 100% gain to recover
  • A 60% loss requires an even more daunting 150% gain to simply return to break even.

Recovery time also varies significantly depending upon the magnitude of the drawdown. A 10% drawdown can typically be recovered in weeks or a few months, while a 50% drawdown may take several years to recover.

Depending on a trader’s age, they may not have the time to wait on the recovery or the patience. Therefore, successful traders know it’s critical to keep their drawdowns within reason, as most of them learned this principle the hard way!

How We Can Help You Learn to Invest Conservatively

At TheTechnicalTraders, my team and I can do these things:

  • Reduce your FOMO and manage your emotions.
  • Have proven trading strategies for bull and bear markets.
  • Provide quality trades for investing conservatively.
  • Tell you when to take profits and exit trades.
  • Save you time with our research.
  • Provide above-average returns/growth over the long run.
  • Have consistent growth with low volatility/risks.
  • Make trading and investing safer, more profitable, and educational.

Sign up for my free trading newsletter so you don’t miss the next opportunity!

We invite you to join our group of active traders who invest conservatively together. They learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

Daily Gold News: Thursday, May 5 – Gold Price is Close to $1,900 Again

Gold Price Recap

The gold futures contract lost 0.1% on Wednesday, May 4, as it extended a short-term consolidation following the recent declines. Gold bounced after the FOMC interest rate decision announcement but then it retraced the whole advance. This morning the yellow is trading higher again, as we can see on the daily chart (the chart includes today’s intraday data):

Precious Metals Price Action

Gold is 0.9% higher this morning, as it is trading close to the $1,900 price level. What about the other precious metals? Silver is 0.1% lower, platinum is 0.7% lower and palladium is 0.3% lower. So the main precious metals’ prices are higher this morning.

Fundamentals

Yesterday’s ADP Non-Farm Employment Change release has been lower than expected at +247,000 (vs. the expected +382,000). Today we will get the Unemployment Claims release, among others. The market will be waiting for tomorrow’s monthly jobs data announcement.

The markets will continue to react to the ongoing Russia-Ukraine war news.

Where Would the Price of Gold Go Following Yesterday’s Fed Release?

We’ve compiled the data since January of 2017, a 62-month-long period of time that contains of forty three FOMC releases. The first chart shows price paths 5 days before and 10 days after the FOMC release. The latest FOMC Statement release came out on March 16. Gold price was 1.6% higher 10 days after the release.

The following chart shows average gold price path before and after the FOMC releases for the past 43 releases. The market was usually declining ahead of the FOMC day. Then it was going up for a week-long period. We can see that on average, gold price was 0.68% higher 10 days after the FOMC Statement announcement.

Economic News Schedule

Below you will find our Gold, Silver, and Mining Stocks economic news schedule for the next two trading days.

Thursday, May 5

  • 7:00 a.m. U.K. – BOE Monetary Policy Report, MPC Official Bank Rate Votes, Monetary Policy Summary, Official Bank Rate
  • 7:30 a.m. U.S. – Challenger Job Cuts y/y
  • 8:30 a.m. U.S. – Unemployment Claims, Preliminary Nonfarm Productivity q/q, Preliminary Unit Labor Costs q/q
  • 9:30 p.m. Australia – RBA Monetary Policy Statement
  • All Day – OPEC-JMMC Meetings

Friday, May 6

  • 8:30 a.m. U.S. – Non-Farm Employment Change, Unemployment Rate, Average Hourly Earnings m/m
  • 8:30 a.m. Canada – Employment Change, Unemployment Rate
  • 9:15 a.m. U.S. – FOMC Member Williams Speech
  • 3:00 p.m. U.S. – Consumer Credit m/m

For a look at all of today’s economic events, check out our economic calendar.

Paul Rejczak
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

Disclaimer

All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor.

By reading Paul Rejczak’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Buyers’ Strike Ahead of Snap Report

Snap Inc. (SNAP) reports Q1 2022 results after Thursday’s closing bell, with analysts forecasting a profit of $0.01 per-share on $1.07 billion in revenue. If met, earnings-per-share (EPS) will mark a slight improvement compared to the $0.00 reported in the same quarter last year. The stock rallied 58.2% in February after beating Q4 expectations and raising Q1 guidance but the uptick followed a one-day 24% plunge to a 16-month low. Price action has made no progress since the buying spike, grinding sideways in the 30s.

 User Growth Outside the States

Some analysts see “compelling pockets of user growth opportunity” outside of the United States, where a saturated social media market and iOS privacy changes have weighed on profit margins. Piper Sandler’s Thomas Champion is looking to Japan, Mexico, Brazil, and Italy for growth, tapping into an estimated 800+ million addressable monthly users in the top 15 GDP countries. As he sees it, Snap has 2% to 31% penetration in those targeted nations, offering fresh eyeballs to build market share.

Bullish fervor is growing ahead of the report, even though the stock has fallen 22% in the last two weeks. Citigroup, Rosenblatt, Benchmark, and Deutsche Bank have all issued ‘Buy’ ratings since March while legendary hedge fund manager Stanley Druckenmiller bought 1.4 million shares in February. Even so, accumulation remains stuck near an 18-month low, reflecting risk aversion for social media stocks after Meta Platform Inc.’s (FB) 50% haircut since September.

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 29 ‘Buy’, 3 ‘Overweight’, and 10 ‘Hold’ recommendations. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $39 to a Street-high $88 while the stock will open the session nearly $8 below the low target. This dismal placement highlights a major disconnect with Main Street investors, who incurred major losses when Snap gapped down and sold off nearly 70% in reaction to the disastrous Q3 2021 report.

Snap broke out above 2017 resistance in the mid-20s in October 2020, entering a strong uptrend that hit an all-time high at 83.34 in September 2021. It completed a bearish island reversal in October, entering a painful decline that wiped out more than 50 points into the February 2022 low. A post earnings bounce failed three attempts to mount 50-day moving average resistance, yielding sideways action that could easily test February support following an earnings shortfall.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication.