U.S Equity Markets closed lower across-the board on Friday led by the 1.11% fall in the S&P 500. Despite the aggressive selling on Friday, the VIX continues to trade differently, closing lower by 1% at a price of 22.92. I have never seen such divergences between the American Indexes and VIX in the 30 years I have been trading Equity Markets. Investors are increasingly worried about the damage being done to the domestic growth outlook by interest rate hikes as recent economic data point to slowing activity. But Powell apparently sees nothing to be worried about. He was dead set on raising interest rates. He said the central bank was a long way from being finished with rate increases. This is causing investors a huge problem as they keep sending a message to the Fed through the Bond Market: Stop raising rates’’. I remember December 2018 when rising rates and a trade war were not good for economic demand. The stock market got pummelled until China bowed out of the trade fight and Powell caved at the start of January 2019. Fast-forward to today. Powell is in a similar mindset in his fight against inflation. Last year, when prices started surging, he said it would be “transitory.” (We all know how that turned out.) And now, with economic growth beginning to crumble, he is saying he would rather overstay his welcome by raising interest rates than change course and halt rate hikes too soon. So now, much like in late 2018, the same thing is going to happen. Investors will send the Fed chair a message. Stop raising rates or the stock market is going yo pay the consequences as we have seen over the past few days. While this could play out in the form of a nasty drop for the S&P 500 in the first quarter of next year, the dynamic will eventually force the Fed to listen and stop raising rates. But don’t take my word for it. Look at the data. This past week was huge for domestic equity and bond markets from an economic-data perspective. On Tuesday, we received an inflation update from the U.S. Bureau of Labour Statistics (“BLS”). The Consumer Price Index (“CPI”) rose 7.1% year over year in November. This was the slowest pace of price growth we have seen since the end of last year. If we were to project November’s month-over-month increase of 0.1% out over the next 12 months, that would mean inflation growth of 1.2%. These numbers are a far cry from the 9.1% annualised growth experienced this past June. Numbers we received on Thursday point to this trend continuing. The Federal Reserve Banks of New York and Philadelphia released their manufacturing surveys for December. They send questionnaires to businesses in their regions asking about different levels of activity. These two surveys are important because New York and Pennsylvania combined account for roughly 11.5% of national economic output. We look at the prices received for goods because this is what manufacturers are charging for finished products. So, it is akin to the CPI. The results in the manufacturing surveys tend to be a leading indicator of inflation growth because the BLS data has a lag. Thursday’s numbers point to further drops in inflation. Each of these regional surveys saw the overall reading continue its downward trend. The New York Fed’s general business activity reading of -11.5 compares with this year’s average of -0.2. It also marks the fourth time it was in contraction territory in the past five months. Meanwhile, the Philadelphia Fed’s general business activity reading of -13.8 showed growth has declined since the end of August. Yet there is a reason why these numbers are still sliding. Overall demand is slowing because the economy is returning back toward pre-pandemic levels of activity. Between Congress and the Fed, over $10 trillion worth of stimulus was thrown at the economy. Shockingly, the recipients of those funds spent it. As evidence, we can look at data from the U.S. Bureau of Economic Analysis on personal savings as a percentage of disposable income. It measures the amount of money people have left after paying taxes and spending. October’s rate of 2.3% is far below the pandemic high of 33.8%. It is also less than the December 2019 (pre-pandemic) figure of 8.3% and the lowest number we have seen since July 2005 when it was at 2.1%. That brings us back to the current problem. In 2021, domestic economic output grew 5.7% compared with the pre-pandemic average of 2.3% between 2010 and 2019, which is around 2.5 times above normal. This excess demand created runaway inflation growth because supplies could not keep up. These are not sustainable numbers. Yet so far this year, economic output is running right around breakeven. That is because all of last year’s cash reserves are being sucked out of the system by rising costs and interest rate hikes. The Fed has told us it must kill the domestic economy to bring the supply and demand picture for everything back into balance. That way it can get inflation back under control. Signs are clearly emerging that economic output is fading fast. We need look no further than the economic data above. Look, I still believe we are setting up for a longer-term rally in stocks. A lot of the metrics and data I am looking at point to exactly that. But it’s not going to happen until the Fed gets the message. It needs to halt interest-rate hikes and let the economy breathe. That does not mean it has to cut rates immediately, just stop raising them. Then, if inflation starts to take back off again, more rate hikes might be a necessary evil. But until the central bank’s direction changes, the start of next year is likely to see institutional investors send a similar message to the central bank as they did in late 2018. Elsewhere, Oil fell 1.70% while Gold closed higher by 0.80%.
To mark my 2675th issue of TraderNoble Daily Commentary I am offering a special 2-Year Rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day to demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoble.com for details
For anyone following my Platinum Service it lost 660 points on Friday and is now ahead by 705 points for December after closing November with a gain of 4789 points, while finishing October with a record gain of 9619 points, making 6660 points in September, after closing August with a gain of 2228 points, having made 2660 points in July, following a gain of 3371 points in June. The Service made 3651 points in May, after making 762 points in April, following a gain of 5883 points in March. The Platinum Service made an impressive 5324 points in February, after ending January with a gain of 3878 points, more than making up for December’s 932 points loss. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points. I have a YouTube Channel which contains recent interviews I have given This can be viewed by clicking HERE Please subscribe to this for new interview notification
Equities
The S&P 500 closed 1.11% lower at a price of 3852
The Dow Jones Industrial Average closed 281 points lower for a 0.85% loss at a price of 32,920.
The NASDAQ 100 closed 0.89% lower at a price of 11,244.
The Stoxx Europe 600 Index closed 1.20% lower.
This morning, the MSCI Asia Pacific fell 0.3%.
This morning, the Nikkei closed 1.05% lower at a price of 27,237.
Currencies
The Bloomberg Dollar Spot Index closed 0.3% higher.
The Euro closed 0.2% lower at $1.0605.
The British Pound closed 0.1% higher at 1.2192.
The Japanese Yen rose 0.6% closing at $136.35.
Bonds
Germany’s 10-year yield closed 7 basis points higher at 2.16%.
Britain’s 10-year yield closed 8 basis points lower at 3.33%.
U.S.10 Year Treasury closed 5 basis points lower at 3.51%.
Commodities
West Texas Intermediate crude closed 1.7% lower at $74.70 a barrel.
Gold closed 0.8% higher at $1790.10 an ounce.
This morning on the Economic Front we have the German IFO Business Survey at 9.00 am, followed by Euro-Zone Construction Output at 10.00 am. Finally, we have U.S. NAHB Housing Market Index at 3.00 pm.
Cash S&P 500
Historically, December Quadruple Expirations are positive. I have made some nice points over the past few years by being long into the December Expiration. However, this view was clearly wrong on Thursday and Friday as my Platinum Service suffered its worse two-day losing streak of the year. As I said on Friday that I should have paid more respect to the S&P finding major resistance at its 200 Day Moving Average following the benign CPI Report. I have certainly paid for that mistake over the past two trading sessions. The there is absolutely no volatility in the VIX which makes no sense given the level of the sell-off since last Tuesday’s CPI was released. The S&P now has five ‘’Open Gaps’’ above while the NDX has seven. Markets do not like imbalances of this magnitude and is the main reason why I will continue to be a buyer of dips. The Bond Market is clearly ignoring the Fed’s aggressive tightening strategy as shown by 10-Year Treasuries have fallen 0ver 100 Basis Points from its October high despite the Fed increasing rates by 1.25% during this period. The S&P has now fallen to my aggressive buy range. I am now long at an average rate of 3857 with no stop. I will have a T/P level at 3892 on this position. If anything changes I will come back with an update for my Platinum Members.
EUR/USD
No Change. The Euro is struggling to sell-off as every dip below 1.06 is being aggressively bought. The Euro is overbought and due a correction. Today, I will continue to be a seller on any further rally to 1.0700/1.0770 with the same 1.0835 ‘’Closing Stop’’. I will continue to be an aggressive buyer from 1.0370/1.0440 with the same 1.0295 ‘’Closing Stop’’.
March Dollar Index
No Change. We have short-term support from 103.10/103.80 where I will again be a buyer with a 102.45 ‘’Closing Stop’’.
Cash DAX
The DAX traded lower to my 13860-buy level before spending the rest of Friday’s session trading in a narrow range. As I want to reduce the points lost on Friday, I have now exited this long position here at 13975 and I am now flat. Today, I will again be a buyer on any further dip lower to 13730/13830 with a 13655 ‘’Closing Stop’’. If I am taken long I will have a T/P level at 13910.
Cash FTSE
We finally saw some selling in the FTSE on Friday. This move lower saw my 7340 buy level triggered. I am still long with a now lower 7400 T/P level. I will add to this position at 7280 while leaving my 7235 ‘’Closing Stop’’ unchanged.
Dow Rolling Contract
Although the Dow was the strongest of the American Indexes on Friday, I was still stopped out of Thursday’s 33615 average long position at 32975 and I am now flat. With the McClellan Oscillator closing at -158 on Friday I will continue to be a buyer of dips. The Dow has short-term support from 32600/32850 where I will be a buyer with a 32395 wider ‘’Closing Stop’’. If I am taken long I will have a T/P level at 33100.
Cash NASDAQ 100
No Change. I am still long the NDX from last Thursday at an average rate of 11565. I will add to this position on any further move lower to 11200 with a now lower 10995 ‘’Closing Stop’’. The NDX has resistance at its 50 -Day Moving Average (11403). I want to see how the NDX trades on any test of this area before making my next decision. For now, I will have no T/P level on this long position. With Bond Yields soft I am expecting a large rally in the NDX over the coming days.
March BUND
Wrong! I was stopped out of my 139.00 latest long position at 137.65 and I am now flat. Given the level of debt in the system, the ECB cannot afford Bond Yields to rise further. The Bund has further support from 136.40/137.20 where I will again be a buyer with a 135.75 ‘’Closing Stop’’.
Gold Rolling Contract
I am still flat. I will now raise my buy level to 1657/1772 with a tight 1645 ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long from last Thursday at 23.20. I will add to this position at 22.40 with no stop. I will now lower my T/P level to 23.60 on this position. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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