Farrish on Economy - BOOM!!!

 

PRICES RISE AND STOCKS FALL

The markets spent four days rallying off the lows on the belief that inflation had peaked… oops! Food and services jumped higher than energy fell showing more inflation than expected last month. That sent the markets lower during premarket hours. The S&P 500 index opened down more than 2% and closed down 4.3% for the day. The four-day rally gained 5.1%… thus, we gave up most of the bounce. The ten-year bond rose to 3.42%. The dollar was up 1.4% and the volatility index jumped 14.2%. It was quite the day for the downside. I hate to remind you we have been talking about the unrealistic view that inflation was done and that the Fed was done. We may see a relief bounce but the downside is likely to continue as the reality of the global economic situation sinks in. We have not seen the worst of food inflation yet. The Fed is likely to push rates to 4.1-4.5% for the Fed Funds Rate. That would have quite a slowing effect on the economy. All said, the downside is still in play and the rally is muted for now. Watching how Wednesday unfolds and looking for opportunities in the move.

Things to Watch on Wednesday: 1) PPI Final Demand August (-0.5% previous. -0.1 expected). 2) The Buyers response to Tuesday? 3) Energy isn’t done… watch for upside moves. 4) Mortgage demand falls 29% Y/Y. Mortgage rates move above 6%. ITB/XHB falling.

This Week’s Data Reports:

Tuesday: 1) CPI (0.1% August versus 0% previous. -0.1% expected) Core CPI (0.6% August versus 0.3% previous. 0.3% expected) CPI Y/Y (8.3 August versus 8.5% previous. 8% expected). CPI Core Y/Y (August 6.3% versus 5.9% previous. 6% expected). Expectations were for inflation to decline based on energy prices falling. They would have except food and services rose much more than expected. +0.8% for food… +11.4% Y/Y largest increase since May 1979. End results markets fell more than 4% on the news.

Monday: NONE.

Quote of the Day: “There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.”― Mary Renault.

The S&P 500 index closed down 177.7 points to 3932 it was down 4.32% with above-average volume. The index gapped lower and closed near the lows of the day. The reality of inflation hit the markets as investors figured out inflation isn’t just energy prices. We were predominately in cash and short positions so it was a simple day to manage. We added to short side positions and now we let this all play out. Eleven of eleven sectors closed lower on the day with energy the best sector on the day down 2.5%. The downside was led by technology off 5.5%. The VIX index closed at 27.2 rising along with the market. Watching the aftermath on Wednesday.

Sector Rotation and the S&P 500 Index:

Tuesday: Finished the day on the downside as buyers leave the market. Watching how this unfolds near term how the optimism responds to the selling… do they see this as another buying opportunity? The index is testing the September lows on the move and if they break the June lows will come into play. The focus of late was investors believing the worst case is priced into stocks. They found out that was not the case and looking forward things could get worse before they get better. Plenty to ponder as we manage our risk and adjust stops.

XLB – Basic Materials bounced at the near-term lows and back above the 50 DMA. The sector was up 4.9% for the week. Erased 3.6% of the gains.

XLU – Utilities Tested the $74.25 support and held for now. The sector was up 2.6% for the week and still in an uptrend. Moved above the August highs… fell 2.6%.

IYZ – Telecom moved to the June lows and bounced. Still not looking healthy on the chart. The sector was up 0.4% for the week. Erased all the gains of the last four days… down 4.4%.

XLP – Consumer Staples moved back to the 50 DMA after testing support at the $72.16 level. The sector was up 0.6% for the week. Erased all the gains of the last four days… down 3.4%.

XLI – Industrials bounced at support and moved back above the 50 DMA. The sector was up 2.4% for the week. Erased all the gains of the last four days… down 3.7%.

XLV – Healthcare moved to support at $125 and bounce back above the 50 DMA. The sector was up 2.9% for the week. Hit the 50 DMA and fell back… down 3.3%.

XLE – Energy tested the $76.80 support and bounced to close the week. The sector was up 2.6% for the week. Watching crude prices which tested lower all week but bounced on Friday. Gave up 2.5% remains in a trading range.

XLK – Technology added to the downside and remains below the 50 DMA. Semiconductors have been the drag on the sector. The sector was up 1.9% for the week. Erased all the gains of the last four days… down 5.3%.

XLF – Financials closed above the 50 DMA and bounced off support at the $32.50 level. The sector was up 3.6% for the week. Moved lower selling off 3.7%.

XLY – Consumer Discretionary back above the 50 DMA and cleared $162.30 resistance. The sector was up 1.9% for the week. Moved lower selling off 5.1% to the 50 DMA.

IYR – REITs bounced at support and back above the 50 DMA. The sector was up 3% for the week. Sold lower giving up 3.7%.

Summary: The index started the week higher adding to the bounce off the lows. Then came the CPI data and the markets gave up nearly 80% of the gains from the previous four days. Taking what is offered but not making any assumptions as the data remains on the negative side. Geopolitics remains a big headline for the markets as winter approaches and Europe remains cut off from Russian energy. Interest rates rose on the 10-year bond. Fed still talking about rate hikes at September 20th meeting. Thus, the markets rallied ignoring everything reported. We have remains in cash and holding short-side positions. We will manage this moving forward and take the opportunities presented. Plenty of challenges on the horizon as we proceed with caution and take what the market gives us. Remember two things currently; first, the trend is your friend, and second, don’t fight the Fed.

(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

The NASDAQ index closed down 632.8 points to 11,633 as the index was down 5.1% for the day. The index moved lower and back below the 50 DMA. The technology sector led the downside with semiconductors off 6.2% erasing the move over the last four days. Managing our positions and letting this unfold… Wednesday’s response will be of interest… won’t be surprised to see some buying into the selling, but the sellers are likely to take control near term.

NASDAQ 100 (QQQ) was down 5.48% with the large caps selling on the day. The sellers controlled the day with 100 of the 100 stocks closing in negative territory. The technology sector led the downside with semiconductors showing the worst performance. Watching how it unfolds moving forward relative to sentiment and activity. Volume was above average on the selling.

Semiconductors (SOXX) bounced off support at the $353.13 level. Closed the week with a solid gain. The sector was up 3.5% for the week. Bounced but not leading? Erased all the gains fell 6.2%.

Software (IGV) The sector moved back above the 50 DMA with a solid upside move to close the week. The sector was up 4.8% for the week. Showing some leadership? Gave up 4.6% and back below the 50 DMA.

Biotech (IBB) The sector tested the $119 support and bounced back above the 50 DMA. The sector was up 4.2% for the week. Stalled on Monday, sold on Tuesday down 4.5%.

Small-Cap Index (IWM) The sector moved back above the 50 DMA bouncing off support. The sector was up 3.2% for the week. Gave up 3.9% and back below the 50 DMA.

Transports (IYT) held support as the sector closed above the 50 DMA. The sector was up 2.5% for the week. Fell 3.7% and back below the 50 DMA.

The Dollar (UUP) The dollar faded for the week on talk of the Fed resting follow the next hike. The dollar was down 0.61% for the week. Regained all the previous losses.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 3.32% up from 3.19% last week. Fed talk all week pushed rates higher. TLT was down 1.2% for the week. Moved to 3.42%.

Crude oil (USO) volatility in oil prices as clarity on consumption is still a challenge. China’s economic data isn’t helping the cause. The close Friday was $84.91 down from $87.26 last week. Crude closed down 2.7% for the week. Watching inventory data near term. Lower to $87.63 no big reaction from CPI.

Gold (GLD) The commodity found some buyers on after testing $157.29 support, but is still in bottoming pattern. The downtrend remains in play as gold gained 1.2% for the week. Dollar rallied… Gold fell.

OTHER SECTOR NOTES & DATA:

Put/Call ratio was 1.15 Tuesday… short side and hedging activity.

Energy: The Biden Administration in the first 21 months issued the fewest oil and gas leases since the 1940’s. Take that along with the pander to other countries for oil? Throw in the fact that they have removed and sold 8.54 million barrels from the Strategic Petroleum Reserves putting it at the lowest level since 1984. And, gasoline is 76% higher than when he took office.

Railroads: Workers are preparing to go on strike… which will not help supplies move throughout the country.

Breakouts of Note:

Questions to Ponder: Navigating Uncertainty

Uranium (URA) moving higher on the news that Japan is opening more of its nuclear power plants. Up 7.5% for the week. Hit stops on Tuesday.

FINAL NOTES:

Tuesday: The indexes gapped lower as the inflation data rocked the optimism of the last four days. The selling was across the board with interest rates and the dollar moving higher. All of the eleven sectors closed in negative territory on above-average volume. The one thing we have discussed plenty over the last four or five months is the price of food rising due to weather hampering production along withe the war in Ukraine. We have not seen the worst of this yet. Food inflation is going to be the biggest challenge looking forward. The energy issues in Europe will be real as well impacting imports to the US. All of this has been put on the backburner… but the reality is staring to show up in the data. That will likely create volatility as we have seen in the ups and downs of late. Follow the money. The last four days the buyers were in charge, now we see if that has shifted to the sellers, or was it a one-day event? Watch for the volume, direction, sentiment, and volatility levels to lead you to what takes place. CPI data was not great, but it can get worse before it gets better. There are plenty of moving parts, we have to understand that truth/reality eventually plays out in the markets. Until then we will continue to take what is offered and manage the risk that is.

As stated above we continue to watch and take what is offered. Our longer-term view is still negative, but nothing goes straight down or up… there are always positive and negative swings in a longer-term trend. Recession talks are alive and well. Inflation will continue for some time regardless of the peak inflation talks. We remain focused on short-term trades until there is directional clarity. This strategy has worked very well over time. Know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The key now is to manage the risk of positions, take what is offered… short or long, and then manage the risk.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develops based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.