U.S. Equity Markets finished Friday higher after a quiet end to the week, led by the 0.59% gain in the Dow. Markets finished higher following a late rally, albeit it was an uneventful Friday. No major economic highlights were reported. Fedspeak was rather calm as well with the only notable news coming from Collins who said services inflation is still too high. Existing Home Sales fell for a ninth straight month in October. This week is a holiday shortened week, with only a few economic indicators coming on Wednesday and the end of the earnings season. FOMC minutes will also be released on Wednesday. The American economy is deteriorating rapidly. We know this because households are sacrificing future stability – through the use of their savings and credit – to cope with high inflation. Since late 2021, the Federal Reserve has told us it is worried about inflation growth. After all, the U.S. Bureau of Labour Statistics’ Consumer Price Index has risen from a low of 0.1% year-over-year growth in May 2020 to a 7.7% increase this past October. As a result, the Fed is trying to stabilise prices by strengthening the Dollar. Over the past year, the Federal-Funds Rate target has jumped from a range of 0% to 0.25% to a new range of 3.75% to 4% – a much faster pace than previous rate-hike cycles. Last Thursday, St. Louis Fed President James Bullard said that rates need to keep rising. He said they need to reach a minimum target range of 5.00% to 5.25% – which means that the fastest rate-tightening cycle still has runway left. But, considering interest rates are already around 4%, that means we only have between 1% to 1.25% left to go. In other words, the central bank’s rate-hike cycle may be nearing its end. This would support a steady long-term rally in the S&P 500 Index. As I have said before, the Fed is determined to crush rising inflation by killing economic growth. In the process, it is going to squash American households. While families have weathered high inflation for much of the year, signs are now clearly showing that consumers are losing ground against the rising cost of living. You see, over the past couple of years, most Americans have been buoyed by the financial security of government handouts, such as stimulus payments, loan forbearance, and tax credits, among others. This led to a high pandemic-era savings rate. But all that financial security is drying up. The trillions of dollars saved by Americans while they were stuck at home are fading fast. Last week, the government reported that Retail Sales rose 1.3% from September to October. Many outlets touted this as a sign that consumers are not doing all that bad. However, new data shows that Americans are making major sacrifices to maintain their current level of daily living expenses – meaning they are spending more on items they need instead of things they want. On Tuesday, the Federal Reserve said that households increased debt during the third quarter at the fastest pace in 15 years. In other words, Americans are increasing their use of credit to stay afloat. And one-way households are surviving is by reducing future savings. According to a new survey by Wells Fargo, one in four retail investors is putting less earned income into stock market investments so they can cover living expenses. Sentiment is so low that 42% of adults would choose to cash out their investments. Plus, nearly a third would withdraw funds from retirement accounts if there were no penalties, just so they could feel better about their current financial situation. Even worse, Americans are turning to credit cards to bridge the cash-flow gap. Credit-card debt is surging to pre-pandemic highs, with total card balances in the U.S. hitting $916 billion in September. Outstanding balances are up 9% year to date and are now 23% higher than the pandemic low in April 2021. Plus, according to the U.S. Bureau of Economic Analysis, the personal savings rate as a share of disposable personal income fell to 3.3% in the third quarter. This is one of the lowest readings on record dating back to the 1940s, which is also a far cry from the 26.4% savings rate set at the height of the pandemic in 2020. So, while more spending and account openings create the near-term optics of a healthy consumer, longer term, the dynamic will destroy disposable income at an even faster rate. In other words, families must maintain basic spending habits regardless of what happens. All of this points to economic conditions deteriorating further. But that is exactly the outcome the Fed is seeking. And fortunately for us, based on what we are seeing, it appears the central bank may have limited runway left to raise rates even higher. That means a slowdown in rate hikes may be coming soon. When it does, it will serve as a tailwind for investors to jump back into riskier assets like stocks, as well as provide a rebound for consumers’ financial health. Within the S&P 500 Index, nine of the 11 sectors finished higher. European Markets closed positive on Friday. Markets ended higher despite little change in the market narrative heading into the weekend. Positive sentiment gained momentum as a multitude of Fed and European Central Bank officials hinted at a slower pace of rate hikes ahead. ECB President Christine Lagarde maintained her tough rhetoric on curbing inflation, emphasising that rates will continue to rise until inflation returns to its neutral target. Finally, U.K. Retail Sales rebounded in October with the U.K. GfK Consumer Confidence inching higher despite sitting near record lows still. In Asia, Markets ended mixed after a quiet day of trading. Overarching themes continue to influence investors – highlighted by the recent moves by China to ease COVID-19 restrictions, declining global demand affecting manufacturing output, and central bank rate hikes that are expected to continue. But China’s daily COVID-19 inflections continue to surge, with a new high of 25,000 reported. Japan’s October core inflation rose to a 40-year high of 3.6% year over year – putting more pressure on current monetary policy decision by the Bank of Japan. In other news, Chinese President Xi Jinping and Japanese Prime Minister Fumio Kishida agree to improve dialogue following tensions over Taiwan. Elsewhere, Oil fell1.68% while a stronger Dollar saw Gold close lower by 0.66%.
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The S&P 500 closed 0.48% higher at a price of 3965.
The Dow Jones Industrial Average closed 199 points higher for a 0.59% gain at a price of 33,745.
The NASDAQ 100 closed 0.001% higher at a price of 11,677.
The Stoxx Europe 600 Index closed 1.16% higher.
Yesterday, the MSCI Asia Pacific Index fell 0.2%.
Yesterday, the Nikkei closed 0.11% lower at a price of 27,899.
The Bloomberg Dollar Spot Index closed 0.1% lower.
The Euro closed 0.4% lower at $1.0319.
The British Pound closed 0.2% higher at 1.1883.
The Japanese Yen fell 0.2% closing at $140.37.
Germany’s 10-year yield closed 1 basis points higher at 2.03%.
Britain’s 10-year yield closed 4 basis points higher at 3.24%.
U.S.10 Year Treasury closed 5 basis points higher at 3.82%.
West Texas Intermediate crude closed 1.68% lower at $80.32 a barrel.
Gold closed 0.66% lower at $1750.10 an ounce.
This morning on the Economic Front we have German PPI at 7.00 am. The only other data of note is U.S. Chicago Fed National Activity Index at 1.30 pm.
Cash S&P 500
We have a tricky week coming up. While seasonality is strong I am seeing a number of negative divergences in the $BPSPX (S&P Bullish Percentage Index) and $NYMO while the small cap Russell 2000 is testing a trendline that held in June before the market subsequently flushed lower. The Stochastics are max overbought again which was also a great sell signal in the summer. However, it is worth bearing in mind that these overbought readings can hang around for a few weeks which is important given the seasonality. The only two Decembers that saw the market get hit hard occurred in 2000 and more recently in 2018 when the S&P bottomed on December 26 before surging in 2019. The S&P has strong resistance from 3998/4015 where I will be a strong seller with a tight 4031 ‘’Closing Stop’’. I am reluctant to chase the S&P higher, but conscious that every dip is being bought as short positions are forced to cover while under invested traders are not getting a chance to go long. I will now raise my buy level to 3915/3935 with a higher 3899 ‘’Closing Stop’’.
No Change. The Euro fell shy of Friday’s sell range and I am still flat. Today, I will lower my sell level slightly to 1.0390/1.0460 with a lower 1.0515 ‘’Closing Stop’’.
March Dollar Index
The Dollar just missed my 106.10 buy level by 10 points before spending the rest of Friday’s session testing the 107 area. After falling over 900 points since the mid-October high, the Dollar is oversold and due to bounce. The neckline breakdown is at 109.63 and any rally to this area will sell me be an aggressive seller. Short-term the Dollar has support from 105.70/106.40 where I will be a strong buyer with a 104.95 higher ‘’Closing Stop’’.
The rally in the DAX has been incredible. Against a worsening economic background, the DAX has ignored all bearish news to surge higher. I am now seeing some negative divergence which is no surprise with a 14-Day RSI near 80. The DAX has resistance from 14580/14680 where I will be a small seller with a wider 14805 ‘’Closing Stop’’. My only interest in buying the DAX is still on a dip lower to 13920/14020 with the same 13855 ‘’Closing Stop’’.
The boring action in the FTSE continues. It has spent most of the past 12 months trading between 6980 on the downside and 7690 on the high end. This narrow range is amazing when you consider the political nightmare the UK is. Add into the mix the extreme volatility in both Sterling and Gilt Yields, it is remarkable how stable the FTSE has been. On Friday, my FTSE plan worked well with the market trading higher to my 7420 sell level before a late sell-off saw the market hit my 7370 T/P level and I am now flat. With the FTSE trading near the top of its 12-month range it is no surprise we are encountering resistance. The real resistance is from 7550/7650 which will see me put on a more macro short position if tested over the coming days. Today, I will be a small seller from 7425/7485 with a 7531 ‘’Closing Stop’’. I do not want to be long the FTSE at this time.
Dow Rolling Contract
I am still flat the Dow. The price action in the Dow has been incredibly bullish with the Dow having risen by over 5000 points since the October CPI was released. As a result, the Dow is only down 7% for the year-to-date which is incredible when you see the NDX lower by 28% on the year. Despite the overbought nature of the Dow and serious negative divergences there is just no point in being short not when we have Thanksgiving on Thursday. I will now raise my buy level to 33200/33450 with a wider 32995 ‘’Closing Stop’’.
Cash NASDAQ 100
My NDX plan again worked well with the market trading lower to my 11580 buy level. As I wanted to be flat over the weekend, I emailed my Platinum Members to exit any long position at 11675. The 50-Day MA for the NDX comes in at 11400 and as long as we do not break and close below here, I will continue with my strategy of buying dips. Today, my buy level will be from 11410/11560 with a tight 11295 ‘’Closing Stop’’.
The idea of buying dips in the Bund continues to be rewarded. After the Bund hit my initial 139.20 buy level, we rallied to my revised 139.75 T/P level and I am now flat. Today, I will again be a buyer from 138.50/139.30 with the same 137.65 ‘’Closing Stop’’.
Gold Rolling Contract
I am still flat. Gold has traded in a narrow range over the past few days. I have no interest in chasing the market higher, leaving 1717/1732 buy level unchanged with the same 1699 wider ‘’Closing Stop’’.
Silver Rolling Contract
No Change. I am still long at 21.10 with the same 21.75 T/P level. I will add to this position at 20.40 with no stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.