U.S. Equity Markets finished Wednesday lower as the S&P and NDX closed lower for a fifth consecutive session. The NDX led yesterday’s decline with a loss of 0.45%, helping the VIX to again close higher by 2.30% at a price of 22.68. Markets continued to decline, with headlines still dominated by the Federal Reserve’s interest-rate policy decision this week. Investors continue to look for economic indicators that Friday’s Producer Price Index reading, and next week’s Consumer Price Index reading, will remain on a downward path. News today from the Manheim Used Vehicle Value Index showed some optimism, with a 0.3% month-over-month decline in prices. Investors will also be looking for a further rebound in Consumer Confidence on Friday when the University of Michigan Survey of Consumers is released. Investors are worried about a recession once again. As we have discussed all year, the Federal Reserve is seeking to kill domestic economic growth. Fed Chairman Jerome Powell, New York Fed President John Williams, and Minneapolis Fed President Neel Kashkari all told us in early May that the central bank needed to raise interest rates to bring supply and demand back into balance. The trio said savings and household disposable income had risen too far. So, they needed to raise rates to reduce the available spending of households. Part of that plan was to kill housing prices to bring down the shelter component of inflation – further reducing available sources of money for individuals. Now, I don’t know where you live, but where I live, most people have the bulk of their wealth tied up in the value of their homes. And if the central bank’s game plan is to kill everyone’s net worth, then, of course, economic output will suffer. The media and some big bank CEOs – notably JPMorgan Chase (JPM) CEO Jamie Dimon and Bank of America (BAC) CEO Brian Moynihan – seem to be catching on to this outcome. The dynamic is weighing on the S&P 500 Index as a result. However, slowing economic growth will weigh on inflation and that should boost the long-term outlook for risk assets like stocks. Since commencing with the first interest-rate hike of 25 basis points in March, the Fed has increased the Federal-Funds target from a range of 0% to 0.25% to the current level of 3.75% to 4%. Based on recent comments from Powell, another increase of 50 basis points is all but certain at the monetary-policy meeting on December 13 and 14. That means the Fed will have raised interest rates by 4.50% this year, far outpacing any of the other major global central banks. Since 1980, this has been the fastest tightening cycle by the Fed. But as I said earlier, those changes come at a cost, it is more expensive to borrow money. In other words, there will be less money floating around in the financial system to spend. Now, there are two important outcomes. The first is that households will have less disposable income because of the increased costs for items like credit card debt, home loans, and car payments. So, there won’t be as much money available for discretionary items like electronics or clothes. The second outcome is that Money Managers will likely employ less leverage because it costs more to borrow. For example, at the start of the year, you would have to make 2% on your investments to be at breakeven (minus the cost of funds). But now, you have to return 6% to get back to flat. That is a big change. Considering the S&P 500 is down 16.3% this year on a total return basis (dividends reinvested), the bar on the hurdle is even higher. This, is why recession fears have resurfaced. Are you going to price a stock’s fair value price-to-earnings (P/E) multiple at 17 or even 20 times like you did when interest rates were zero? Of course not! After all, it costs more money for fund managers to borrow and lever up to invest in risk assets like stocks. Because of the jump in volatility due to the Fed’s rate-hike plans and the consequent economic uncertainty, potential returns can be wiped out more easily. Money managers are not being paid to blow people’s life savings. They are earning fees by making people money and growing their wealth. Their job is to make calculated bets investing in ideas with the highest return potential and least amount of risk. So, those institutional investors are going to be less willing to pay high multiples for stocks – especially technology companies that need to borrow heavily to grow. As I said before, this is because the cost of funds eats away at your returns over time. So, you need to be certain if you are paying up for an idea that does not make money and has a high P/E multiple. Instead, you should be looking look for investment opportunities in good companies with fortress-like balance sheets, tons of free cash flow, and steady dividends that are trading at multiples of, say, 14 to 15 times. Being more careful and strategic in your investment process increases your potential for outperformance compared with your peers and the market. That is what Money managers are paid to do and is inherently their fiduciary responsibility. So, the stock market won’t command a high-flying multiple until borrowing costs drop. And based on guidance from Powell, that could take a while. At the end of the day, stock markets do not go up in straight lines. We want to see this process happen. Demand needs to slow to get inflation growth back down. In the short term, there will be pain. But longer term, it is what investors and the market need. If we do see a recession, it will prove to be a buying opportunity – because trust me, every Money manager is anticipating the event. The dynamic will ultimately lead to the Fed lowering interest rates once more and create a long-term tailwind for the S&P 500. Within the S&P 500 Index, eight of the 11 sectors finished lower. European Markets finished lower. Markets ended the day in the ‘’Red’’ despite a relatively quiet day on the macro news front. German Industrial Production was not as weak as estimates but still forecasts a recession is likely. On Tuesday, Russia said that it is considering an oil price floor in response to the price cap imposed by Europe and its Western allies. Investors continue to speculate on the future of rate policy as uncertainty increases around the terminal rates of the Bank of England as well as the European Central Bank (“ECB”). In Asia, Markets ended lower on worries that Beijing was considering a growth target of only 5% next year. Recent optimism toward reopening plans was drowned out by the release of weaker economic news, which showed November exports out of China contracted more than expected. Elsewhere, Australian Gross Domestic Product growth weakened by more than anticipated as net exports and government spending unexpectedly served as headwinds, while the Reserve Bank of India hiked interest rates by 35 basis points as it continues its fight against high inflation. Elsewhere, Oil fell a further 2.51% while Gold closed higher by 0.95%.

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 made 15 points yesterday and is now ahead by 581 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 0.19% lower at a price of 3933

The Dow Jones Industrial Average closed 1 point higher for a 0.0001% gain at a price of 33,597.

The NASDAQ 100 closed 0.45% lower at a price of 11,497.

The Stoxx Europe 600 Index closed 0.62% lower.

This morning, the MSCI Asia Pacific Index fell 1.1%.

This morning, the Nikkei closed 0.40% lower at a price of 27,574.

Currencies 

The Bloomberg Dollar Spot Index closed 0.3% lower.

The Euro closed 0.3% higher at $1.0501.

The British Pound closed 0.3% higher at 1.2178.

The Japanese Yen rose 0.2% closing at $136.78.

Bonds

Germany’s 10-year yield closed 3 basis points lower at 1.79%.

Britain’s 10-year yield closed 3 basis points lower at 3.05%.

U.S.10 Year Treasury closed 11 basis points lower at 3.42%.

Commodities

West Texas Intermediate crude closed 2.51% lower at $73.05 a barrel.

Gold closed 0.95% higher at $1786.10 an ounce.

This afternoon on the Economic Front we have a speech from ECB President Lagarde at 12.00 pm. The only other data of note is U.S. Weekly Jobless Claims which will be released at 1.30 pm.

Cash S&P 500

The S&P closed lower for a fifth consecutive day following a session that saw plenty of chop before a late-sell-off saw my latest long 3961 position stopped on the close at 3937 and I am now flat. The Daily Candle left from yesterday’s session is not encouraging and there is every chance that we may drop to my aggressive buy level from 3850/3870 before the rest of the Santa rally starts. The VIX having surged over 15% this week is a worry while all eyes will be on tomorrow’s key PPI release. I still believe that CPI will drop like a brick next year. Crude is now negative on the year while the Bond Market is having none of the inflation story as the 10-Year Treasuries dropped below their summer highs. This sends a clear message that inflation is over from a peak perceptive and slowing down hard. The big question is how much the Bond rally is telling us about how much of a recession are we to expect next year. I still believe that next week’s rate hike will be the last and if my recession views turn out to be correct, then it will not be long before the Fed starts cutting rates. Today, I will be a buyer of the S&P from 3900/3920 with a 3889 ‘’Closing Stop’’. If I am taken long I will have a T/P level at 3938. I no longer want to be short the S&P at this time.

EUR/USD

Unfortunately, the Euro missed my 1.04.10 initial buy level by 30 points before rallying 100 points and I am still flat. I will now raise my buy level to 1.0410/1.0480 with a higher 1.0355 ‘’Closing Stop’’. I no longer want to be short the Euro at this time.

March Dollar Index

The sell-off in the Dollar saw the market hit my 107.00 buy level. I am still long and ahead of tomorrow’s key PPI release I want where possible to be flat. I will now lower my T/P level on this position to 105.35. I will continue to add to this position at 104.40 while leaving my 103.85 ‘’Closing Stop’’ unchanged.

Cash DAX

Twice the DAX came close to yesterday’s buy range before reversing hard both times off the 14200-support level. Today, I will move my buy level to 14120/14200 with a tight 14055 ‘’Closing Stop’’.

Cash FTSE

Finally, we have seen some weakness in the FTSE with the market trading 60 points lower from where I marked prices 24 hours ago. The FTSE has short-term support from 7400/7460 where I will be a small buyer with a 7345 ‘’Closing Stop’’. I will now lower my sell level to 7570/7640 with a lower 7705 ‘’Closing Stop’.

Dow Rolling Contract

My Dow plan worked well yesterday. Shortly after I posted yesterday morning, the Dow rallied to my 33700 T/P level on my 33615 average long position. Subsequently, I emailed my Platinum Members to buy the Dow again at 33470. This level was triggered overnight, before rallying to my 33640 T/P level and I am now flat. Today, I will again be a buyer of the Dow from 33230/33480 with a 33095 ‘’Closing Stop’’. I still do not want to be short the Dow at this time.

Cash NASDAQ 100

No Change. I am still long the NDX from yesterday morning at 11540. With the 50-Day Moving Average coming in at a price of 11371, I will continue to look to add to this position at 11380. I will now lower my T/P level to 11650 while leaving my 11255 ‘’Closing Stop’’ unchanged. If any of the above levels are hit I will be back with a new update for my Platinum Members.

December BUND

No Change. I am reluctant to chase the market higher, preferring to leaving my 140.90/141.80 buy level unchanged with the same 139.95 ‘’Closing Stop’’.

Gold Rolling Contract

News that the Chinese are buying Gold helped the market to rally 1% yesterday. I am still flat and I will now raise my buy level to 1753/1768 with a higher 1741 ‘’Closing Stop’’.

Silver Rolling Contract

Silver had a nice 3% rally yesterday. I am still long at 22.70 with the same no stop and T/P level at 23.30. I will now raise my add-on-long to 22.20. If any of the above levels are hit I will be back with a new update for my Platinum Members.