Summary for the Non-Technical Readers
In plain English and for our less technical subscribers, the stock market is tenuous as interest rates rise from abnormally low levels brought on by the Pandemic and return to normal levels. Financial assets (like stocks) rise with lower interest rates and fall when rates rise.
Higher rates alone would be enough to cause the stock market to fall or go sideways in a trading range to catch its breath. Governments, companies, and the general economy need time to adjust to the higher rates, adding to market uncertainty and volatility. Investors are unsure what to do, and the stock market reflects indecisiveness with higher fluctuations.
But the situation is even more complicated in this cycle because abnormally high inflation arose from all the government debt and money printing undertaken during the Pandemic. Higher prices also resulted from global supply disruptions as various countries depending on each other locked down and got behind in their production and shipping. The resulting shortages caused abnormal price inflation, requiring more aggressive rate hikes than usual.
Green Energy/Anti-Fossil Fuel executive orders by the new administration starting in early 2020 also caused the price of oil to skyrocket, contributing to inflation. Oil prices impact almost every economic sector not only related to inflation, but higher energy prices tend to slow economic growth, sometimes causing a recession.
When Russia invaded Ukraine, countries worldwide started taking sides (e.g., China) and the supply of goods and food became even more disrupted than during the Pandemic. That has led to even more inflation, and the conflict further emphasizes the need to bring the production of many of the goods and services currently made and performed overseas back home. We are calling this “deglobalization.” It is the reverse of the process we have experienced over the past 25 years.
No matter how you view it, both the transition to deglobalization and the result of higher production costs here at home lead to higher prices for many of the goods and services we consume and enjoy. The process and transition are inflationary until the new paradigm stabilizes. On a separate note, the world will be less stable as the East and West go their different ways again, similar to the period we experienced before the Soviet Union failed. Global instability, like inflation, negatively impacts the stock market too.
That’s it – we are in a transition. The Federal Reserve is aggressively raising interest rates and taking other measures to dampen consumer demand and fight inflation. But there is only so much they can do. The stock market is trying to adjust to all of this uncertainty. On a positive note, there will be many opportunities to identify new earnings growth leaders in the transition and outcome of this deglobalization theme.
I share my thoughts in these pages because our families in the Founders Group contend with all the same problems with our money as you do. Right now, we move in and out of the market when the opportunity presents itself during the turbulence using fundamentals, technical, and quantitative analysis. Not being so young, the Founders Group does not buy and hold at this time because declines in this environment can be swift and severe. We do not have enough runway to recover from a steep drop at our ages.
Today, the stock market had another unhelpful day unless you were in cash like us. The market is at an inflection point that will decide whether it can rally a bit further or still explore lower prices.
If you are not technical, you can ignore the rest of this discussion. Please keep it simple. You can follow our lead in the Navigator Swing Strategy™ with all or part of your funds. We are unequivocal in immediately alerting our community about what we specifically buy and sell, at what price, and when. We are damn good at it too. Now on to the granular picture.
A.F. Thornton’s Afternoon Notes
Good Afternoon:
- I am half Irish and married to a Greek, which can be interesting.
- The Irish are superstitious, and my full Irish mother is no different. The Greeks are superstitious, too, focusing on the “Evil Eye.” So, I always expect a Leprechaun to come around the corner when things are seemingly going well. I am rarely disappointed.
- I am even thinking of signing these outlooks as The Doomscroller – the nickname my wife gave me.
- Anything can still happen – and the SPX/ES reversal pattern discussed in the AM and yesterday’s PM Notes is still valid, but it is on thin ice.
- I refer you to both previous discussions, as I had a feeling the reversal pattern might be too obvious. We shall see. The Leprechaun is always waiting to steal your gold.
- Today, after gapping higher, the market rolled over to complete the Head and Shoulders Top pattern identified a few sessions ago and as yet unfinished on the hourly chart.
- But that leaves no room for error tomorrow – the market needs to go nearly straight up from the open to keep the reversal pattern intact in the daily time frame.
- The pattern wasn’t the only culprit this morning, as the market also rejected the 200-day line and the top of the Daily and Weekly Expected Moves, intersecting around 4490.
- Price then slid back, slicing and dicing through the other key, moving averages like a hot knife through butter.
- From an options perspective, the price also encountered the highest Gamma strike and Hedge Wall just below 4500. It is no wonder the market ran into a brick wall.
- If you are reading these morning and afternoon notes regularly, you should have anticipated the 4500ish resistance.
- Sure, the market could have blasted through the level this morning, but the probabilities were low.
- When the price went immediately back into the opening gap and filled it, you had the first clue that sentiment might turn south. That is why we have Gap Rules.
- The selling was relentless from the Open until the close.
- More Fed jawboning was unhelpful today, as was the 10-year Treasury Note rate popping over 3%.
- Do you remember several months ago when I predicted the 3% target from another long-term pattern that the 10-year yield broke?
- Well, here we are.
- What comes next?
- Tune in for the Morning Notes tomorrow and more Leprechauns.
A.F. Thornton (a.k.a. the Doomscroller™)