U.S. Equity Markets finished Tuesday led by the 1.48% rally in the NASDAQ 100. Markets finished higher – reversing Monday’s losses as investors received a slight boost from positive retail earnings on this holiday-shortened trading week. Momentum continues to build among investors that the Fed will slow the pace of tightening in December and are not far from its terminal rate. The Richmond Fed Manufacturing Index was largely in line with expectations, showing another month of contraction in activity. Overall, a largely quiet Tuesday as investors anticipate a slight influx of market news this afternoon in advance of Thursday’s Thanksgiving holiday. Yesterday, I discussed the Federal Reserve’s current rate-hike cycle could be approaching its peak. Central bank policymakers like San Francisco President Mary Daly and St. Louis President James Bullard recently commented they want to get interest rates to at least 5% before they pause or stop raising rates. Even Board of Governors member Christopher Waller, a noted hawk (inclined to raise interest rates), said last week that he is open to slowing the pace of hikes. Throughout this year, members of the central bank have said they want to get to a point where they feel monetary policy is restrictive once more. In other words, it is weighing on inflation growth. A number of members including Vice Chair Lael Brainard have said we are already there. But they would like to go a bit further to ensure inflation growth comes back to the 2% target. So, considering the Federal-Funds Rate is already at 4%, that means we don’t have too much further to go until we hit the 5% mark. In past rate-hike cycles, the Fed has sought to keep raising rates until the real fed-funds rate turns positive. That metric is derived from current interest rates minus the U.S. Bureau of Labour Statistics’ Consumer Price Index (“CPI”) annualised growth. My analysis suggests that could happen as soon as March 2023, which would give the central bank reason to rethink its current course. Based on the stock market outcomes from past rate-hike cycle peaks, the change will function as a tailwind for the S&P 500 Index. With history as our guide, we want to try and discover when the event of a positive real Fed-Funds rate might take place. I turned to the monthly CPI growth as our guide. Since July, the number has averaged an increase of 0.25%. Over the past five years, the gain has averaged closer to 0.3%. we could see the real Fed-Funds rate turn positive as soon as March. The next step was to go back and look at the S&P 500’s performance once rate increases have stopped and after the first-rate cut comes into play. I observed all of the cycles going back to 1980 when inflation growth was this high. When investors are fearful of the central bank aggressively raising rates, they want to hang on to their money. After all, the investing environment is fraught with uncertainty. Liquidity dries up and investors are uncertain of how rising rates will affect consumer sentiment and balance sheets. When Money Managers are uncertain, they tend to sell first and ask questions later. So, by raising funds now, those Money Managers are sitting on cash, or in safety assets like U.S. Treasury bonds, seeking the opportunity to invest it once more. Based on the above results, once investors get a sense that uncertainty is gone, they begin to pile back into risk assets like stocks. The gains are far better than the historical 9.1% increase. In fact, the two tightening cycles, in 1983 to 1984 and 1994 to 1995, closest to the current one saw the best returns. Forecasting is not an exact art, and a lot can change between now and March. For instance, we could see inflation slow further next month as the central bank continues its tightening, speeding up the path to positive rates. But this at least gives us an idea of when the Fed might start considering that rate hikes are weighing on inflation. That is an important time frame for Money Managers trying to forecast the end of the Fed’s rate-hike cycle. You see, yields are becoming increasingly attractive on U.S. Treasurys and on companies with fortress-like balance sheets and steady cash flows – like Hershey (HSY), McDonald’s (MCD), or Coca-Cola (KO). So now is the time to start doing our homework and preparing. Because if we get another large pullback early next year, those big-money investors don’t want to miss out on potential returns they may not see again for some time. They will be encouraged to lock in high yields on great companies while they still have a chance. Then, as yields begin to fall, those same Money Managers will work their way down the investment food chain, looking for other opportunities and attractive returns, in turn, supporting a long-term rally in the S&P 500. Within the S&P 500 Index, all the 11 sectors finished higher. European Markets closed positive. Markets ended higher as attention continues to focus on global central bank policy amidst the backdrop of a Euro-Zone recession. The OECD’s latest economic update showed that high inflation is likely to persist into 2023 for much of Europe, with the U.K. and Germany projected for economic contraction. The European Union Commission also poised to introduce gas price cap for one year in 2023 amid industry criticism. In other news, Euro-Zone Consumer Confidence improved in November, but is still deep in negative territory. In Asia, Markets ended largely mixed as a second slow trading day was largely dominated by Chinese speculation. Concerns continue to grow over China’s response to its grooving COVID-19 outbreak. Broker Nomura estimated that about 20% of China’s Gross Domestic Product is now again in some form of restriction or lockdown. The People’s Bank of China urged banks to increase its credit support for certain sectors struggling with output from COVID-19 restrictions. Meanwhile, the Reserve Bank of New Zealand is expected to hike its interest rates by a record 75 basis points Wednesday. Elsewhere, Oil rose 1.32% while Gold closed flat.
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 has made 125 points yesterday and is now ahead by 3861 points for November, after 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 1.36% higher at a price of 4003.
The Dow Jones Industrial Average closed 397 points higher for a 1.18% gain at a price of 34,098.
The NASDAQ 100 closed 1.48% higher at a price of 11,725.
The Stoxx Europe 600 Index closed 0.78% higher.
Yesterday, the MSCI Asia Pacific Index fell 0.2%.
Yesterday, the Nikkei closed 0.61% higher at a price of 28,115.
Currencies
The Bloomberg Dollar Spot Index closed 0.7% lower.
The Euro closed 0.6% higher at $1.0298.
The British Pound closed 0.5% higher at 1.1887.
The Japanese Yen rose 0.8% closing at $141.18.
Bonds
Germany’s 10-year yield closed 2 basis points lower at 1.97%.
Britain’s 10-year yield closed 7 basis points lower at 3.13%.
U.S.10 Year Treasury closed 7 basis points higher at 3.76%.
Commodities
West Texas Intermediate crude closed 1.32% higher at $81.35 a barrel.
Gold closed 0.07% higher at $1739.10 an ounce.
This morning on the Economic Front we have German, Euro-Zone and U.K Composite PMI at 8.30 am, 9.00 am and 9.30 am respectively. This is followed by U.S. Weekly Jobless Claims and Durable Goods Orders at 1.30 pm. Next, we have Composite PMI at 2.45 pm, followed, at 3.00 pm by the University of Michigan Consumer Sentiment and New Home Sales. Finally, we have the FOMC Minutes at 7.00 pm
Cash S&P 500
Yesterday’s action was classic pre-holiday ramp with virtually no volume as the algos drove the market with virtually no two-way price action. This move higher saw the VIX get crushed by a further 5%, closing at a price of 21.29. The VIX is now sitting on a major support line, increasing the risk of a near-term sell signal for the S&P once we get this week’s strong seasonality out of the way. It is interesting that despite a lower VIX, the S&P could not challenge last week’s highs at 4040.The S&P traded in a narrow range with the 3930-support level again tested yesterday morning before rallying throughout the day, hitting my 4003 sell level on the close. I will add to this position at 4018 with the same 4031 ‘’Closing Stop’’. I will now raise my T/P level on this position to 3990. I will also move my buy level higher to 3945/3965 with a higher 3929 ‘’Closing Stop’’.
EUR/USD
I am still flat the Euro. I will now raise my sell level slightly to 1.0345/1.0415 while leaving my 1.0495 ‘’Closing Stop’’ unchanged. The Euro has support from 1.0110/1.0180 where I will continue to be a buyer with a 1.0055 ‘’Closing Stop’’
March Dollar Index
After the Dollar hit my initial 107.20 buy level we had a small rally enabling me to cover this position at my revised 107.38 T/P level as emailed to my Platinum Members and I am now flat. Today, I will again be a buyer on any further dip lower to 105.80/106.50 with a lower 105.25 ‘’Closing Stop’’
Cash DAX
No Change. 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’’.
Cash FTSE
The boring action in the FTSE continues. After the FTSE hit my 7445 initial sell level we had a small sell-off to my revised 7418 T/P level and I am still flat. Today, I will again be a seller from 7500/7560 with a 7605 tight ‘’Closing Stop’’. I still do not want to be long the FTSE at this time.
Dow Rolling Contract
I am still flat the Dow. The Dow rallied hard yesterday, closing above 34,000. It was a strong session all round – despite the low volume- as shown by the McClellan Oscillator closing at +125 last night. The Dow has resistance from 34350/34550 where I will be a seller with a 34705 ‘’Closing Stop’’. I am not going to chase the Dow higher leaving my 33250/33500 buy level unchanged with the same wider 32995 ‘’Closing Stop’’.
Cash NASDAQ 100
In contrast to Monday, the NDX led yesterday’s move higher. This rally saw my 12630 T/P level triggered on my latest 11550 long position and I am now flat. Today, I will again be a buyer on a y dip lower to 11480/11630 with a higher 11355 ‘’Closing Stop’’.
December BUND
The Bund missed yesterday’s buy level before having a nice rally into the close. I am still flat and today I will continue to be a buyer on any dip lower to 138.70/139.50 with a higher 137.95 ‘’Closing Stop’’.
Gold Rolling Contract
Gold continues to struggle and I am still flat. Today, I will leave 1710/1722 buy level unchanged with the same 1699 ‘’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.
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