European Equity Markets closed lower but well off their morning lows after the announcement late Friday that Russia was cutting off all gas supplies to Europe. Another forward-looking indicator shows inflation growth is dropping. Federal Reserve Chairman Jerome Powell has told us the central bank is dead set on bringing down inflation growth to its 2% target. And while he recently noted incoming data point to easing costs, he feels it is still too early to arrive at a conclusion. Last Thursday, we received another indicator when the ISM released its Manufacturing PMI data for August. The reading showed domestic business activity continued to expand with a reading of 52.8 compared with the expectation of 51.9 and July’s reading of 52.8. The data is important because it surveys the manufacturing sector on a national basis compared with separate Federal Reserve districts producing reports on a regional basis. The Prices Paid Index showed costs are in a steady decline. The trend appears to be sustainable. And if it persists, that will support the central bank easing up on its aggressive rate-hike path. That would bode well for the long-term outlook for the S&P 500… ISM has roughly 50,000 members worldwide in over 90 countries. Its clients are responsible for obtaining around $1 trillion in corporate and government supply-chain goods annually. So, it represents a sizeable amount of business activity. Every month, ISM sends out questionnaires to purchasing and supply executives. It covers a wide swath of industries and weights their responses based on each sector’s weighting in the U.S. Bureau of Economic Analysis’ gross domestic product (“GDP”). Those companies are asked to detail the change in their business over the past month across a broad array of topics including new orders, new export orders, production, backlogs, imports, deliveries, inventories, employment, and prices. The number 50 is key as it delineates the difference between economic expansion (above) and contraction (below). As we said previously, the number is still indicating economic expansion… However, it is worth noting that August’s activity level is below the 55.8 average we have seen over the last six years. This continues a trend we’ve seen since March 2021 and is likely a function of the outsized growth experienced after the introduction of Congress’ COVID-19 stimulus. We point this out from a growth perspective… The stock-market shorts are going to argue the overall index number is a negative from an economic output perspective. They are going to say economic activity is not slowing enough for the Federal Reserve to reduce the pace of interest rate hikes in its fight against inflation growth. That argument is understandable. But the trend we’ve been seeing for the last 18 months points to activity steadily dropping off. And, more importantly, for a better reading on inflation potential, we need to look at the pace of growth in business costs. And ISM’s Prices Paid Index just hit the lowest level since June 2020. The reading for August was 52.5 compared with July’s 60. And it is well below the six-year average of 65.3 and the June 2021 peak of 92.1. Now, let’s look at the number as a function of domestic inflation. Prices paid is important because it tells us what manufacturers are paying to produce goods. So, we can think of it relative to the U.S. Bureau of Labour Statistics’ Producer Price Index (“PPI”). And if manufacturing costs are dropping, they should eventually get passed onto consumers in the form of lower prices for goods. So, let’s look at the same number relative to the U.S. Bureau of Labour Statistics’ Consumer Price Index (“CPI”). But what does it mean for the stock market?
Well, let’s go back to the 1970’s for an example. That is the last time we experienced this type of hyperinflation growth. We can see that inflation was a problem for the stock market. As it rose from the trough in June 1972 to the peak in December 1974 (30 months versus the 26-month run to the current June peak), the S&P 500 lost 30% (total return). But then, as CPI peaked and rolled over, the stock market rallied just over 70% until peaking in December 1976. The next big run began in March 1980 when CPI peaked at 14.8%. From that point until the crash in the fall of 1987, the S&P rallied another 341%. And if you look further out to the top of the tech bubble in early 2000, the gains are even greater at 2,500%. Look, I’m not saying inflation has peaked. It is still too early to make that call. But the data are starting to lean in that direction. So, as we see cost growth ease, the change should start to play out all across the economy. And, as the changes began to materialise, it should make the central bank feel more comfortable and back off its aggressive rate-hike path. As businesses and households get a sense that inflation and interest rate growth are peaking, they will feel more optimistic about their income and spending potential. They will feel more certain about their disposable income potential going forward. So, as long-term investors, we need to keep our eyes on the horizon. History points to outsized stock market gains once peak inflation is behind us. And that should support a steady rally in the S&P 500. Elsewhere, Oil was closed while Gold closed unchanged.
To mark my 2600th issue of TraderNoble Daiy 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 made 150 points yesterday and is now ahead by 930 points for 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 1.07% lower at a price of 3924.
The Dow Jones Industrial Average closed 337 points lower for a 1.07% loss at a price of 31,318.
The NASDAQ 100 closed 1.44% lower at a price of 12,098.
The Stoxx Europe 600 Index closed 0.60% lower.
This morning, the MSCI Asia Pacific Index rose 0.3%.
This morning, the Nikkei closed 0.064% higher at a price of 27,637.
Currencies
The Bloomberg Dollar Spot Index closed 0.1% lower.
The Euro closed 0.1% higher at $0.9932.
The British Pound closed 0.3% higher at 1.1516.
The Japanese Yen fell 0.1% closing at $140.52.
Bonds
Germany’s 10-year yield closed 4 basis points higher at 1.56%.
Britain’s 10-year yield closed 3 basis points higher at 2.94%.
US 10 Year Treasury closed 4 basis points lower at 3.20%.
Commodities
West Texas Intermediate crude closed 0.30% higher at $85.98 a barrel.
Gold closed 0.02% higher at $1711.90 an ounce.
This morning on the Economic Front we already had the release of German Industrial Orders for July which fell 1.1% versus -0.5% expected. Next, we have U.K. Global Construction PMI at 9.30 am, followed by U.S. Services PMI at 2.45 pm. Finally, we have the ISM Survey at 3.00 pm.
Cash S&P 500
Bank of America came out with an interesting forecast over the weekend. As almost everyone is expecting a sell-off in September including BoA with their year-end forecast of 3600 for the S&P. I was really interested to read their latest bulletin which stated that in a year that has Mid-term Elections, stocks tend to rally even more after an initial slump. Maybe, this is the September that confuses everyone and rallies hard. Certainly, both the $NYMO and McClellan Oscillator are suggesting this scenario. This is the main reason why I have no interest in pressing the downside especially as the S&P has fallen over 400 HANDLES in the past three weeks. For investors who have the 60/40 Portfolio of stocks and Bonds, this is the worst year ever for this combination. Overnight, the S&P rallied to my 3945 T/P level on Friday’s 3936 average long position and I am now flat. I am seen plenty of positive divergence on the latest 100 Handle sell-off and is the main reason why I continue to be a buyer on dips. The S&P has support from 3910/3930 where I will be a buyer with a lower 3899 ‘’Closing Stop’’.
EUR/USD
No Change. I am still long from last week at .9990 with the same 1.0030 T/P level. I continue to hold this position with No Stop.
March Dollar Index
The Monthly RSI for the Dollar Index is at an unstainable 78.9. This shows how overvalued the Dollar is currently trading as it continues to press a major trendline with no sustained break as yet. The Dollar made new highs yesterday on further negative divergence on the Weekly Charts. The Dollar is trading lower at 109.35 this morning despite the negative news backdrop. on the back Gazprom oil leak and 2% fall in the DAX yesterday. My overall view on the Dollar has not changed: The last time the Dollar was this overvalued, at the end of 2016, we quickly saw a 10% decline in the Dollar over the following 12 Months. I am expecting a similar outcome, I just do not know what the catalyst will be. Based on a longer-term outlook, the risk/reward is skewed to the downside. In my view, a key source of prior support has disappeared (strong economic growth) and another is fully discounted and may be on the verge of reversing which of course is a divergence in Central Bank rate hike expectations. I am still short the Dollar at an average rate of 107.50. Given how overbought the Dollar is trading I will have no stop on this position, fully believing that we are close to a reversal in the Greenback. I will continue to leave my T/P level unchanged at 106.80.
Cash DAX
No Change. I am still flat the DAX as the market never came close to yesterday’s buy range. This morning, I will raise my buy level slightly to 12530/12610 with a higher 12465 ‘’Closing Stop’’.
Cash FTSE
I am still flat the FTSE as the market never came close to yesterday’s buy range, trading 100 points higher from where I marked prices 24 hours ago. Remember a market that cannot fall on bad news has to be respected. The Economic and Inflation news out of Britain has been dreadful over the past six weeks, yet the FTSE will not sell-off. This ties in with my S&P view that maybe September will confound everyone and rally this month. Today, I will again raise my buy level to 7190/7250 with a higher 7135 stop.
Dow Rolling Contract
The Dow just missed my 31300 buy level by a few points yesterday before having a small 100 point rally and I am still flat. The 50-Day MA for the Dow comes in at a price of 32170. The Dow needs to break and close above this level for the Bulls to regain control. It needs to break this key resistance level this week before the seasonal strong period ends as we wait for the weak mid-Sept/October time frame. However, with the MO still at -305 I will not press the downside, preferring to keep my strategy of buying dips. This morning, I will leave my 31100/31300 buy level unchanged with the same 30895 wider ‘’Closing Stop’’.
Cash NASDAQ 100
My latest 12150 long NASDAQ position worked well with the market rallying to my 122210 T/P level overnight and I am now flat. The NDX has support from 11930/12130 where I will again be a buyer with a lower 11795 ‘’Closing Stop’’ unchanged.
December BUND
Yesterday, the BUND sold off to my 145.00 buy level. I am still long with a now lower 145.45 T/P level. I will add to this position at 144.30 while leaving my 143.75 ‘’Closing Stop’’ unchanged. If any of the above levels are hit I will be back with a new update for my Platinum Members.
Gold Rolling Contract
No Change. Gold has support from 1680/1695 where I will again be a buyer with the same 1669 stop.
Silver Rolling Contract
No Change. I am still long and wrong for now at 18.80 with the same 19.25 T/P level. Given how oversold Silver is trading I will continue to hold this position with no stop.
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