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The Fed is on a struggle path in opposition to inflation. The longer they keep hawkish, the extra probably a recession types…the extra probably shares (SPY) tumbling decrease. In February there have been 2 clear strikes in opposition to the bulls. And Thursday doubtlessly brings strike 3. What’s it? What does it imply? And the way do you have to commerce this market? Learn on under for the solutions….
Love is within the air…so is inflation.
Why are bulls not getting the message?
Actually my mind HURTS attempting to rationalize the elevated stage of shares after 2 straight strikes in opposition to a bull market.
What are these strikes? And is the threerd strike on the best way Thursday?
All that and extra is on faucet for at present’s Reitmeister Whole Return commentary.
Market Commentary
Let’s wind the clock again to Wednesday February 1st. That’s when the Fed proclaims yet one more price hike adopted by an prolonged press convention by Chairman Powell.
Each phrase he says is bearish to individuals who had been already bearish.
Shockingly each phrase he says can also be bullish to of us that had been already bullish.
The bulls gained that present down with the S&P 500 (SPY) sprinting up close to 4,200…the best ranges for the reason that summer season rally topped out at 4,300.
Simply two days later comes strike 1 in opposition to the bulls. That being a MUCH stronger than anticipated Authorities Employment scenario report exhibiting strong job good points. That sounds nice on the floor til you understand it got here hand in hand with very persistent wage inflation.
This was exactly what Chairman Powell warned about that earlier Wednesday and why the Fed will maintain charges increased for longer than the market appreciates. Bulls scoffed on the notion the primary time round. Nevertheless, they did get shocked when confronted with that sticky inflation as soon as extra on Friday.
Powell then made it clear the next Tuesday 2/7 on the Financial Discussion board that this employment stories makes him consider that they could have to push charges increased…or maintain them in place for longer to get inflation again to 2% goal.
This prolonged hawkishness is an enormous STRIKE 1 in opposition to the bulls.
Then got here a bout of amnesia. Bulls simply wanted to purchase one thing. So that they obtained on the offensive as soon as once more on Monday with shares up over 1% on the session.
This appeared to be brief lived as Strike 2 was pitched this Tuesday. I’m referring to the upper than anticipated Shopper Value Index (CPI) report coming in at +6.4% vs. 6.2% expectations. That is clearly a far cry from the two% goal of the Fed.
What’s even worse is that month over month inflation was +0.5% which is 6% annualized. This flies within the face of those who say inflation actually simply occurred in early to mid 2022 and that’s what reveals up within the yr over yr numbers. Sadly, this far too excessive month over month tally confirms the Feds notion that the long run battle with inflation is way from over.
The speedy response to this information was shares falling practically 1% early on the Tuesday session. But amazingly bulls fought again as soon as once more to a virtually breakeven end.
These bulls proceed to see optimistic issues that I’m not…maybe they’re smoking issues I’m not as effectively.
Strike 3 might very effectively be on the best way this Thursday 2/16. That’s when the forward-looking Producer Value Index (PPI) index is introduced at 8:30am ET. As soon as once more, the month over month studying must be probably the most telling because it speaks to what’s occurring within the right here and now.
The forecast calls for under +0.2% worth improve, which is fairly tame. Nevertheless, if we get served up one thing a lot hotter like Tuesday’s CPI report, then I believe bulls will whiff on this 3rd strike in opposition to untimely bullishness.
Let me overly simplify the bear case at the moment.
The Fed will maintain charges excessive by the tip of the yr given the information in hand. Plus there are sometimes 6-12 months of lagged results from Fed coverage. This creates a window to create a recession that extends effectively into 2024.
If you add that to the notion that we have already got many financial readings pointing to a weak financial system at the moment, then you have got a recipe for recession which begets decrease company earnings…which begets decrease inventory costs.
I beforehand acknowledged that I might probably get extra bearish with any subsequent break under the 200 day transferring common (3,944). That’s as a result of it will be a affirmation that the remainder of the market was lastly abandoning their defective bullish view of issues.
Nevertheless, I’m tempted to make a transfer earlier than that break if this Strike 3 is thrown on Thursday. This may imply including extra inverse ETFs to revenue from probably subsequent market draw back if inflation continues to be too scorching prompting ever vigilant hawkishness from the Fed.
Keep in mind that a return to the bear market means probably touching the earlier low of three,491 set in October. Or maybe making it down to three,180 which quantities to a 34% decline from the highs (which is the common decline for a bear market). Or maybe even decrease.
This isn’t to say that the bulls haven’t any leg to face on. Sadly strike by strike in February it’s turning into all of the extra probably they should head again to the dugout and let the bears get again as much as bat.
What To Do Subsequent?
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Wishing you a world of funding success!
Steve Reitmeister…however everybody calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Whole Return
SPY shares fell $0.39 (-0.09%) in after-hours buying and selling Tuesday. Yr-to-date, SPY has gained 7.90%, versus a % rise within the benchmark S&P 500 index throughout the identical interval.
In regards to the Creator: Steve Reitmeister
Steve is best identified to the StockNews viewers as “Reity”. Not solely is he the CEO of the agency, however he additionally shares his 40 years of funding expertise within the Reitmeister Whole Return portfolio. Be taught extra about Reity’s background, together with hyperlinks to his most up-to-date articles and inventory picks.
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