The best part about the recent stock market progression has been the push/pull of the inflation trade. Sometimes energy and materials lead the market along with financials (driven by interest rate pressure). This leadership alternates with technology. Technology leads when there is less pressure on rates due to lower inflation expectations. The result has been mild pullbacks because the sectors don’t correct in unison.
Notably, this week, we get the new CPI number on Wednesday. Even the consensus expects inflation to rise. And we already know that CPI understates the true inflation rate. I fear that the inflation genie is out of the bottle. Good luck stuffing her back in.
For example, government and Social Security retirement funds are given a 5% plus cost of living boost. That is 75 million people with more money to spend. That boosts inflation and accommodates higher prices.
If you believe the statistics, there are 7 million unemployed available for 10 million jobs. That will surely lead to wage pressure.
The Fed has not exactly been aggressive in the inflation fight. Chairman Powell wants to be reappointed in January and won’t cross the Biden administration. The Fed has also caught the “woke” virus, which will skew their mandate to maintain price stability.
Unbelievably, the Biden administration wants to shut down another oil pipeline. They are turning a blind eye to the parabolic rise in energy prices and utility bills. In fact, they are celebrating it.
Then, as I have pointed out, the Millennial generation is moving into its housing stage. Along with illegal immigration, this is causing considerable demand for housing, just as their Baby Boom parents experienced in the late 1970s.
Over the weekend, the headlines have all been about how the stock market is ready to crash due to the parabolic rise from the October low. If I have learned anything these past 35 years, it is that the market rarely follows consensus expectations.
The market definitely looks like it is in a climatic blow-off phase, but I cannot tell you the climb is over yet. I can say that just as it has over the past year, the market has climbed to the top of the weekly channel. Up here, it has tended to go sideways for a bit, then dips slightly into one of the cycle lows.
So I am giving the market two possibilities. First, it could expand the channel with the seeming lack of sellers at hand. Second, it could go sideways and ride the channel at a slower pace and lower angle, as it has done recently. The latter is more likely than the former.
There remains considerable cash on the sidelines – nearly $3.5 trillion in dry powder. That cash has to land somewhere. The return on bonds is negative at this point when inflation is considered.
There is an asset class that has the potential to explode higher. It is commodities (DBA and DBC). Even gold, silver, and gold stocks are on my radar. If money managers even made a small allocation to these areas, they would move as fast and parabolically as stocks. What else makes sense with inflation seemingly climbing unabated?
If I have a major concern, it is the fact that the dollar and bonds are rising together. This supports the crash crowd and their arguments. Normally, bonds and the dollar counter each other. Rising bonds mean falling interest rates. Why would investors buy the dollar when U.S. rates are declining unless it is a “fear’ trade? China still has significant economic problems, particularly in its real estate sector, which could become contagious. Global tensions with China remain high.
Trading Strategies
Swing traders should maintain high cash positions until the next dip and consider allocating to mining stocks and commodities (e.g. the DBA or DBC ETFs). Day traders can use Friday’s low at 4667.50 as a threshold. Any acceptance below that level, say on the hourly charts, supports some corrective action.
The market structure underneath current levels remains poor. There are so many virgin points of control. I cannot count that high. If we get through 4700, so be it. But if 4667.50 fails, we could get back to the virgin Point of Control at 4613 rather quickly.
There is nothing in Globex to guide as at the open. So more reliable trades should develop later rather than earlier.
A.F. Thornton