The narrative has not changed much so far this week. We have been experiencing an artificially induced economic recovery juiced by a lot of government stimulus. The unintended (but certainly foreseeable) consequences have been the worst inflation in 50 years. The prices of food, gas, cars, and houses have skyrocketed. Nor does the inflation appear to be abating.
But inflation is a funny thing. When prices go up, people have less money to spend. That means that there is less money to drive economic growth, especially when 2/3 of all U.S. economic activity is tied to consumers. The stimulus and added unemployment benefits all expire soon as well. Then what?
How about a heck of a lot less discretionary spending money in consumer pockets, with 14 million of them still unemployed. Those are recessional level employment figures, were they not preceded by the Pandemic figures. It is a bit like hanging out with an ugly friend to make you look prettier.
The bond market, arguably the most important market in the universe, predicts a slowdown, if not an outright recession. There is no other rational explanation for interest rates falling so much in an inflationary environment. Moreover, the U.S. dollar has been rising while interest rates have been falling. That is the opposite of a normal relationship between interest rates and the dollar. The logical explanation for this is fear – a potential stealth flight to safety by the institutions.
Rates did rise parabolically in what looks like a blow-off peak on the charts earlier this year. Given the steep, almost panic-like rise, one could propose the recent rate declines as a reasonable pullback in rates to correct the excess. But that would not explain the behavior of the dollar.
Lower interest rates are generally good for the stock market and all financial assets unless they fall because institutions have been flocking to treasuries to buckle up for a storm. A rising dollar can be good unless foreign institutions are flocking to the dollar to prepare for the same storm.
We await the July unemployment report coming out Friday morning for our next gauge on the economy, but yesterday’s ADP report already hints at a massive disappointment. And then you add in the negative consequences of the Delta strain of the China Virus. Last night, the Lambda strain from Peru was found to be vaccine-resistant like its Delta cousin. Meanwhile, we divide the country over a vaccine that doesn’t even seem to work. And tell that to the people dying from the vaccine side effects.
So the market (S&P 500 Index) remains in the balance range with Balance Rules still applicable. The NASDAQ 100 looks a bit better this morning, with the Dow and Russell a bit worse. We closed an inside day yesterday at roughly the halfway point for the range. We poked just above yesterday’s range overnight at 4408.75 overnight. So I would watch that level on the upside today as a potential buy signal, then 4417 from Monday, and the all-time high at 4422.50. Assuming we are fortunate enough to tag those levels, monitor for continuation. Be on high alert for a “look above and fail” per balance rule if we poke above the all-time-high, also the top of the balance range.
Yesterday’s low at 4391.50 would be the line in the sand and a sell signal today, as it is roughly the halfway point of Monday’s range and the overall balance range, as it was yesterday. Technically, all this has been a battle to hold the roundie at 4400, so watch that level carefully. I am anticipating more balance today, ahead of tomorrow’s employment report.
We had another Spike Channel form overnight from European trading. It started at 4394.75. We might revisit that level this morning before moving higher again. That is also the Globex low. If we hold that level, we may not even need to visit yesterday’s low at 4391.50.
Good luck today. I continue to monitor all of our swing positions carefully.
A.F. Thornton