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Market Commentary

August 10, 2022
 
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Stocks closed off their lows yesterday but for the S&P 500 it has now been 4 consecutive negative days after the Fed rate hike rally last week.  It may be the calm before the post CPI storm, or is it a sell the rumor, buy the news setup if the CPI turns out to be more benign than expectations?  The Dow lost 58-points while the broader market indices were down more sharply.  Bonds were down as yields moved up but still quite inverted. 

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The CPI report today before the opening bell will set the tone for trading in the coming days, but as always we want to be on the lookout for some kind of fake out move.  After a +9.1% year over year reading in the June report (reported in July), the CPI estimates are looking for a 8.7% year over year gain in the July report, which optimists may see as a sign that inflation may have peaked.

But we don't have to go too far back to see how much the economic data can be off from the estimates after we saw the jobs report come in more than double expectations last week.  Will it be better than expected like the jobs report?  Will we see a worse than expected report to set up relief for next month?  Whatever it turns out to be, remember this is rearview mirror data as it tells us what happened last month, not what is going to happen.

Yesterday the modest to moderate losses were not hiding any underlying strength as the advance / decline numbers were quite negative, especially on the Nasdaq.  And even though we've had a two-month, 14% rally off the lows, we saw more than twice the number of new lows than new highs yesterday.

             

The yield on the 10-year was up, but so was the 2-year yield and the yield curve inversion continues to widen.  These were at par in late June and now the 2-year is about a half of a percent higher, which is quite rare and is not something that is going unnoticed.  It could mean trouble for the economy. 

        


That said, the Dow Transportation Index is quite economically sensitive and it has been holding up very well in recent weeks after a successful double bottom.  We do see an "F" flag right near a possible double top, so there are some roadblocks and, while still basically in a bearish environment, how far can this run without another meaningful pullback?

       


I know I repeat myself often, but the story has been the same for some time now.  Yes, we have inflation and it is basically caused by the people that print and spend the money.  So, the Fed is raising interest rates to try to keep inflation under control but that is likely going to slow down the economy - and we haven't even seen those effects yet.  So, the government just passed another large spending bill ironically called the Inflation Reduction Act which will more than likely tick inflation even higher, or at least keep the Fed raising rates to keep it under control, which will hurt earnings and the economy.  So I am not sure that we are seeing an easy way out of this current situation.



The S&P 500 (C-fund) is still sitting just below the 200-day EMA but even though it has been down for four straight days, the bears are not really putting on much pressure yet.  Perhaps today's CPI will give the bulls or the bears the catalyst they need to take charge of the next direction, whatever direction that turns out to be.  Right now it seems like a stalemate with the indices basically flat during the first 7 trading days of the month.

      


The DWCPF (S-fund) is back below the June high after giving up all of the gains from the prior two days.  It is near some support but with the CPI coming out, my guess is that this will find its way either below support, or above resistance.  I think the the last week's sideways action is done.

      


The EFA (I-fund) looks to be making some sort of bullish flag, but it made the same formation back in June and failed, and that was after the CPI was released that month.  Again, look for the consolidation to end, but I am not sure if we will be able to trust the initial move after the CPI is released.  Remember the S&P 500 futures were down about 40-points after the jobs report, but by the close that loss was all but gone.

             
 

BND (Bonds / F-fund) was down slightly yesterday as the chart seems to be doing some backing and filling of the open gaps it created in recent days.  It is below the trading channel, but above the 50-day EMA.  The CPI could mess this chart up as well.

       


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Thanks for reading.  I appreciate it.  We'll see you back here tomorrow.

Tom Crowley

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