US stock markets, and other global markets, continue to chop. We began the week strong bouncing from previous lows. Tuesday was followed by momentum. Wednesday and Thursday saw markets drop and fall take out Tuesday’s gains.
Many are frustrated with current market action. Our readers should not be. I outlined the bullish and bearish cases in an article on Monday. The technicals still apply from that article but don’t worry, we will be going over the charts once again.
The fundamentals have taken a slightly new turn. Investors and traders are still balancing the earnings season catalyst against the Federal Reserve. Earnings season has seen some major surprises from Netflix, Goldman Sachs and Roblox, but this was not enough to prop the stock markets.
I really do think that markets are more focused on the Federal Reserve and inflation.
There are two camps. The first believes interest rates are heading higher due to inflation not slowing down or being tamed. The second camp believes that the Federal Reserve and other central banks will be pivoting soon due to the economy slowing down.
Even though technically a US recession was confirmed using the two consecutively negative growth GDP template a few months ago, the Federal Reserve has been saying there is no slowdown due to robust employment numbers. The Fed is watching employment numbers, which is why this data point is now more relevant than it was before.
The problem people in camp two may not understand is that even with a recession, inflation could still persist. If the Fed pivots too early, inflation will persist and could come in higher. A recession does aid in bringing inflation down because demand is killed. However, the recession must be very severe for the amount of demand to be killed to impact inflation.
Recall that the last time the Fed was dealing with major inflation like this, Fedchair Paul Volcker took US interest rates above 20% in order to stomp out inflation by essentially creating a severe inflation. Basically we can be in a recession or the early stages of recession, and the Fed will continue to raise interest rates.
The way the Fed is going to stomp out inflation is by raising interest rates to perhaps 5% and then keeping them there for a long time. But this could change if CPI data keeps coming in strong.
Markets are now waiting for a clear cut message from the Fed.
Elon Musk is the latest CEO or corporate titan to state a global recession could last until Spring 2024. He also believes the Fed will eventually cut rates.
“The U.S. actually is in – North America’s in pretty good health,” he said. “A little bit of that is raising interest rates more than they should, but I think they’ll eventually realize that and bring it back down, I think.”
Musk becomes the latest corporate titan to express reservations about the economy.
In a tweet Wednesday, Amazon founder Jeff Bezos said it’s time to “batten down the hatches” in preparation for rough economic waters ahead. That tweet accompanied a video of Goldman Sachs CEO David Solomon, who said in a CNBC interview that he thinks there’s a “good chance” of a recession in the U.S.
JPMorgan Chase CEO Jamie Dimon also has been warning of economic turmoil ahead.
On the other side of the coin, a few Fed members believe more rate hikes are needed. It was Fed Mester a few weeks ago who said there has been no progress on inflation even with rates going to 3.25% in the US.
Philadelphia Fed President Patrick Harker also said that interest rates have done little to keep inflation in check, so more increases will be needed.
“We are going to keep raising rates for a while,” the central bank official said in remarks for a speech in New Jersey. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.”
Markets widely expect the Fed to approve a fourth consecutive 0.75 percentage point interest rate hike in early November, followed by another in December. The expectation is that the Federal Open Market Committee, of which Harker is a nonvoting member this year, will then take rates a bit higher in 2023 before settling in a range around 4.5%-4.75%.
Harker indicated that those higher rates are likely to stay in place for an extended period.
Markets are awaiting the Fed decision on Wednesday November 2nd. Judging by current stock market action, it seems many are beginning to price in a dovish Fed. Meaning after November, the Fed will not be doing large 75 basis point rate hikes. All of this is speculation, and we will need to wait until Powell speaks.
Here at Equity Guru, I have been adamant about following the US 10 year yield chart (TNX). If you want to know where stock markets are heading, this is the chart to watch. When the 10 year moves higher, equity markets come under pressure. When the 10 year yield drops or just ranges, equity markets move higher.
There recently has been large jumps in the ten year yield which explains the drop in markets. The bond market believes rates are heading higher. With expectations of the Fed taking rates up to 4.75%, the ten year yield still has room to go.
There could be a pullback but it would not be a reversal. Just a relief which then sees the 10 year climb higher. For a reversal, we would need to close back below 3.95%.
Before we look at the daily charts, I need to stress that the weekly long term charts of markets are still saying more lows going forward! Because of this, my bias is still to the downside. At time of writing, the weekly candles are set to close below weekly resistance zones, failing to break above to begin momentum for a reversal.
The S&P 500 and the Nasdaq daily chart continue to range. The breakout levels are highlighted in blue. We have not closed above to confirm a reversal and we continue to range. If we close below the recent lows, then it would be a trigger to enter short. Although many traders are probably already doing this at these levels and placing their stop losses above my resistance levels in blue.
As I said in Monday’s article, the Dow Jones is actually the equity market which is showing signs of a breakout. Technically, it confirmed the breakout on Tuesday. Wednesday and Thursday price action just saw the pullback and we remain above the 30,000 zone. The question now becomes whether we can continue the momentum higher? Or do we break back below and confirm a false breakout… which would be very bearish for all markets.
I don’t use the Dow as my leading market indicator so this price action comes as a surprise. Perhaps it can be explained by investors jumping into ‘safe’ value stocks Warren Buffett style. Instead of picking a a growth stock, money is running into dividend paying stocks which will continue to pay dividends even in a recession.
A close above 30,800 is required for more upside.