The Week On Wall Road – Inflation Feeds The Bear (NYSEARCA:SPY)

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Khanchit Khirisutchalual

“I have thought it my duty to exhibit things as they are, not as they ought to be.” – Alexander Hamilton

How many times have we heard the following statement over the years?

“The stock market has disconnected from the economy!”

There is a notion that the post-financial Crisis era has been a strange one in which the underlying fundamentals matter less than what the market expects the Fed and other Central Bankers to do. In the past when the economy started to falter, another round of stimulative measures was applied. If you recall during that era, inflation was struggling to even reach the Fed’s 2% target, so there was no real reason for anyone to change course.

For the investment community that believed in that concept, the fact that the FED is now moving in the opposite direction, it’s time to pay close attention to the “fundamentals” of the economy. Fed policy has switched from doing “whatever it takes” to keep the economy and markets going to doing “whatever it takes” to slam on the brakes.

That prompted a change in mindset and a complete reset of my strategy in February. Entering the year, the economy appeared to be an easy read. 2022 was expected to be marked by normalization of economic and earnings growth, valuation, and returns as the Fed ended its unprecedented level of monetary stimulus out of the Covid-19 shutdown. In the aggregate, consumers were well-positioned due to strong job growth, wage gains, and abundant savings, and the only question was how quickly consumers would shift spending from goods to services. The answer turned out to be immediate, as consumers have returned to pre-pandemic activities near or at record speeds.

Recession/No Recession

We’ve seen the consumer data and it continues to come in strong. TSA screenings are at a post-COVID high, 2.5 million weddings are expected this year (which is the most since 1984), and over 70 million concert tickets have been sold year to date—36% above 2019 levels. Vacation resorts are packed, while restaurants and other public venues are experiencing a boom. Average spending at all the Disney Parks also increased by 30% compared to 2019.

All of this suggests that the U.S. economy is not currently in the midst of a recession. That keeps the “no recession” crowd confident in their stance that all is not so bad. However, much of that is explained as simple pent-up demand being worked off after covid-19 lockdowns. Whatever the case, corporations are signaling a slowdown as persisting inflation is a risk to the downside. The cat (energy costs) was let out of the bag with a global war on fossil fuels untying the string and setting off an inflationary spiral.

Metrics such as normalizing money supply growth, bloated inventory levels, and peaking or falling prices for freight routes, semiconductors, and fertilizer suggest that inflation may have seen the highs. The Fed’s measure of inflation – Core PCE – has moderated from the highs. So it is a simple analysis now. If inflation drops as fast as it rose then all is well. If it hangs on at an elevated level not much is going to change.

Regardless, with business and consumer confidence falling and the Fed on the path of taking interest rates into “restrictive” territory, if the recession isn’t here already it’s sure to visit shortly. I’m not going to play word games regarding what some will call an “official” recessionary period, because it serves no purpose. Whether it be negative growth or not, I do believe we will see a period of much slower growth ahead. That is based on the notion that there would appear to be a lack of pro-business, pro-growth initiatives on the horizon. Yet, I continue to see forecasts based on historical data suggesting this weak market period will be followed by strong market gains in the months ahead.

My view differs. Future market returns are going to depend on how economic growth shapes up. In past events where the market sold off to the extent it has today, the slower growth periods that followed were accompanied by flat stock markets. That is the way I see it shaping up today. What changes that view is a return to low energy costs and lower inflation. It is clear what consumers are focused on and the historic lows in sentiment in EVERY poll confirm that view and can’t be dismissed.

The Week On Wall Street

A sloppy start to the trading week as all of the indices sold off and closed lower on the day. The NASDAQ’s 5-day winning streak was broken in the process. The market has taken on a bit of a streaky vibe in the last few weeks. After four straight down days to close out June where the S&P 500 fell 3.2%, the month of July started with a four-day win streak where the S&P 500 rallied 3.1%.

Since then the S&P 500 has been down five straight days with Thursday’s action pushing this losing streak to 2.9%. The losses could have been much greater if not for late-day rallies in the S&P on both Wednesday and Thursday. Interestingly enough, the NASDAQ was down 2% during the initial selloff but closed up 2% on the day. Despite the downtrends that are dominating the scene these types of reversals are noteworthy.

The BEARS had plenty to feed on with poor news on inflation followed by a poor start to the earnings season. However, just when it appeared the indices were ready to set sail for lower prices, the unsettled market scene became more confusing.

All of the major indices posted gains around 2% to close out the week on a positive note. It wasn’t enough to lift any of the indices out of the red for the week, but it sent the BULLS home happy.

Global Markets

Similar to most US stocks and sectors, there are downtrends everywhere when it comes to country stock market exchange-traded funds (“ETFs”) that U.S. investors can own to gain international exposure. Brazil (EWZ) and China (ASHR) are the only country ETFs that aren’t in long-term downtrends, and most are oversold and well below their 50-Day moving averages at the moment.

Brazil remains up slightly YTD (the only country in the green), but keep in mind that it was up more than 40% YTD back in early April and has given nearly all of it back. Germany (EWG) is down the most YTD at –29%, while Italy (EWI), France (EWQ), and Israel (EIS) are all down 20%+ YTD.

THE ECONOMY

Headline CPI jumped 1.3% in June with the core rate rising 0.7%, both hotter than projected. These follow respective gains of 1.0% and 0.6% in May. For the former, it’s the biggest gain since September 2005, and it is the biggest since June 2021. The 12-month headline pace accelerated to 9.1% y/y from 8.6% y/y, the fastest since 1981, and was 5.9% y/y from 6.0% y/y for the core.

Nearly every major component increased, with many by a lot. Energy prices climbed another 7.5% after bouncing 3.9% previously, with gasoline nearly tripling, rising 11.2% from 4.1% in May. Housing costs were up 0.8%, the same as May, with owners’ equivalent rent rising 0.7 % from 0.6%. Transportation costs increased 3.8% from 2.0% with gains in vehicle prices. However, airline fares declined by 1.8% after surges of 12.6% in May and 18.6% in April, Medical care prices rose 0.7%, almost doubling May’s 0.4% gain. Apparel prices were up 0.8% versus 0.7% previously. Recreation was up 0.3% from 0.4%. Real average hourly earnings posted a -3.6% y/y rate versus -2.9% y/y.

PPI climbed 1.1% in June, with the core rate rising 0.4% following respective gains of 0.9% and 0.6%. The headline is on the higher side of expectations and the ex-food and energy component underperformed at the margin, though both after upward revisions to May. On a 12-month basis, the headline jumped to an 11.3% y/y clip from 10.9%, just shy of March’s 11.6% all-time high.

The core rate also decelerated slightly to 6.4% y/y from 6.7% y/y previously. Energy prices were up 10.0%, doubling the 4.6% prior gain, with food prices up 0.1% versus 0.5% previously.

None of this should be a surprise to anyone. HIGH energy costs affect everything.

GDP

This past week, the IMF cut its forecast for U.S. GDP growth down to 2.3% from 2.9%. This news is notable for two reasons. First, it comes less than a month after the IMF downgraded its growth forecast to 2.9% in late June. Second, given the indication from the Atlanta Fed’s GDPNow model, which is calling for a Q2 contraction of 1.2% following Q1’s decline of 1.6%, the US economy would need to grow by 3.2% in the second half to reach that goal. Based on the trend in recent data and the Fed’s tightening bias, that level of growth seems optimistic. I believe I can make that a “wildly optimistic” view.

A CRISIS of CONFIDENCE

IBD/TIPP economic optimism index rebounded 0.4 points to 38.5 in July. But that is a meager gain after tumbling 3.1 points to 38.1 in June, the lowest since August 2011. It was at 41.2 in May. And this is the 11th consecutive month the index has been in pessimistic territory (above 50 signals optimism). Today’s poll showed only 19% believe wages have kept up with inflation, while 54% say they have not.

NFIB Small Business Optimism Index is now at an all-time low. The index dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased seven points to a net negative 61%, the lowest level recorded in the 48-year survey. Expectations for better conditions have worsened every month this year.

While small business owners are dealing with all of the issues that plague their businesses today, the administration continues to porose tax increases that will further inhibit their efforts to remain profitable.

NFIB Chief Economist Bill Dunkelberg;

“On top of the immediate challenges facing small business owners including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations.”

The data doesn’t lie and if the anti-business policy and rhetoric don’t end it enhances my theory that a recession becomes a long drawn-out affair.

The Michigan sentiment increase to 51.1 from the all-time low of 50.0 in June and the 11-year low of 58.4 in May left Michigan sentiment above assumptions, though still dramatically below the early pandemic bottom of 71.8 in April of 2020.

EMPLOYMENT

Jobless claims have continued to rise hitting the highest level since November this week. Claims rose from an unrevised 235K up to 244K this week. With consistent increases in claims over the past few months, the reading has gone from multi-decade lows to levels that would have been the highest since late 2017/early 2018 pre-pandemic

I haven’t been as bullish as everyone else on the jobs picture for the simple reason that the data isn’t supporting job “growth.”

Employed

Total Employed (www.fred.stlouisfed.org/series/PAYEMS)

All that has been accomplished is the jobs scene get back to just under pre-pandemic employment — so I question the job growth everyone is talking about, people just went back to work!. Despite the rhetoric, there haven’t been any jobs created.

Facts, not fiction or “spin.”

CONSUMER

June retail sales gains of 1.0% for both the headline and ex-auto series followed small upward revisions that left a stronger trajectory than analysts had assumed for retail sales. Big price gains due to inflation likely drove headline sales increases, however, leaving a weak path for “real” sales.

MANUFACTURING

Empire State manufacturing index jumped 12.3 points to 11.1 in July from -1.2 in June, much stronger than expected. This is the highest since 24.6 in April. It was at a record high of 43.0 a year ago. However, the guts of the report were mixed but importantly showed an easing in price pressures. The prices paid index fell to 64.3 from 78.6, and was at a historic peak of 86.4 in April.

Industrial production moved down 0.2% in June but advanced at an annual rate of 6.1 percent for the second quarter as a whole. Manufacturing output declined 0.5 percent for a second consecutive month in June; even so, it rose at an annual rate of 4.2 percent in the second quarter.

The Global Scene

As the European economy continues to crater given rampant inflation, geopolitical instability, an energy crisis, and labor/supply issues, the collapse in the bloc’s currency continued overnight as the euro reached parity with the US dollar for the first time since December 2002. While the round number generates a lot of headlines, it means little in the broader picture of a weak European economy and what looks to be an even weaker outlook in the months ahead.

It gives me no satisfaction to report that I believe this is just the beginning of the issues the Eurozone is going to face. I mentioned it a while back, Energy costs will ravage consumers who have to pay exorbitant costs, assuming there is availability.

CHINA

China’s retail trade unexpectedly rose by 3.1% year-on-year in June 2022, easily beating market estimates of a flat reading and shifting from a 6.7% drop in the prior month. The latest figure marked the first increase in retail trade since February, as consumption recovered following a drop in COVID-19 cases and relaxation measures.

The lockdown in cities did take its toll on growth. On an annual basis, the economy grew 0.4% in the second quarter, the worst since the first months of 2020 when the pandemic hit. The report was worse than the consensus forecast by economists of 1%.

EARNINGS

The commentary from the earnings release for JPM on Thursday gives us a clue on how this earnings season might play out:

“The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy. But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road. We are prepared for whatever happens and will continue to serve clients even in the toughest of times.”

Mr. Dimon wasn’t in a good mood, as he went on to bash the “stress test” regulations imposed on large banks.

“We don’t agree with the stress test, it’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary.”

The upshot is that the bank has to act at “precisely the wrong time reducing credit to the marketplace.”

The moves will ultimately impact ordinary Americans, particularly lower-income minorities who typically have the hardest time obtaining loans to begin with.”

“It’s not good for the United States economy and in particular, it’s bad for lower-income mortgages.”

Perhaps Mr. Dimon forgot that he and the rest of corporate America are operating in an anti-business climate void of growth initiatives and that is exactly what a ball and chain are supposed to do.

Morgan Stanley (MS), BlackRock (BLK), Bank of New York (BK), Wells Fargo (WFC), and US Bancorp (UBS) also missed analysts’ expectations. PNC Financial (PNC) bucked the poor financial reports by beating estimates, and Healthcare behemoth UnitedHealthcare (UNH) posted a beat and raise quarter.

FOOD FOR THOUGHT

ENERGY and the ECONOMY

The global energy crisis began in 2021 (before Russia invaded Ukraine), and I’ve noticed that pundits have used the energy crunch to further entrench respective beliefs regarding the energy transition — confirmation bias if you will. That has led to a crisis that is about to get worse IF remedies aren’t established soon.

Energy demand growth will be substantial in the coming years and an “all the above” approach that emphasizes economics, reliability, and raising global standards of living should be a key priority of policymakers worldwide. So far there has been nothing to shake off the “complacency” of governments/officials and broader society regarding safe, reliable, and cost-competitive energy needs. “If it isn’t green, it is acceptable” has led us to where we are today.

Unfortunately, it may take harsh financial impacts (at times painful) from a “human need” perspective over the coming summer and winter demand peaks to finally force the issue. The Green initiative as presented to societies around the globe has failed miserably. Finally, there are “cracks” in this failed agenda that take a more common sense approach.

The negative impacts on economies and global markets have been felt for months and they will only grow and multiply as long as the existing energy policy remains in place. Hopefully, an “Energy Security” mindset starts to make a comeback. Due to the shotgun approach (firing up coal plants) to now fix what has been broken, it is a complete guess as to how the natural gas situation will be solved, or not solved, in Europe this winter. Thankfully, the media is alive in Europe with stories of potential rationing, shutdowns of manufacturers, governments backstopping utilities, etc. This was all avoidable.

Whatever the case, the economic outlook for Europe potentially looks far more negative than in the U.S., which could impact companies with both revenue exposure and manufacturing exposure in this region. That will have a huge impact on U.S based companies with high international exposure.

AN ENERGY CRISIS is BREWING

A sobering look at the energy crisis here in the U.S. indicates we are following the same path and suggests things could get a whole lot worse before they get better.

Grid operators are dealing with an increasing reliance on intermittent resources like wind and solar as coal units retire and the reliability and emissions of gas resources come under scrutiny. It’s’ all about the decarbonization of the U.S. power grid.

Grid manager and energy market operator in the central Midwest, MISO (Midcontinent Independent System Operator) faces a capacity shortfall in its North and Central areas, resulting in a high risk of energy emergencies during peak summer conditions. In part this is due to increased retirements of coal, natural gas, and nuclear generation, leading to an inadequate response last month as it lined up power reserves to create a required cushion against system disruptions and unexpectedly heavy power demand. The region enters the summer 1,230 MegaWatts short of meeting its planning reserve margin. MISO President and Chief Operating Officer Clair Moeller:

“The reality for the zones that do not have sufficient generation to cover their load plus their required reserves is that they will have increased risk of temporary, controlled outages to maintain system reliability.”

The forced initiatives have led to the retirement of otherwise economic power plants, and steps to improve the market have proven “woefully inadequate.”

In May, California officials described conditions that could occur this summer — including potential blackouts because of power supply shortages. Among the times with high risks are the early evening when solar power goes away and the entire month of September.

As the old saying goes “this is one heck of a way to run a railroad.” Sadly it may take a harsh reality of taking a step back in time to bring common sense to the table. This may just be the beginning of this crisis.

As this scene starts to play out, there might be a rather large opportunity for companies that stand to benefit. That is exactly where I’ve put some money to work and where my research is focused on.

SENTIMENT

I’ve always felt that one picture can speak volumes.

Consumer

Consumer sentiment (www.bespokepremium.com)

If consumers feel this way about stocks. is there any surprise that we are in a BEAR market?

The overwhelming Crisis in Confidence will continue to be a headwind for both the economy and the markets.

The Daily chart of the S&P 500 (SPY)

From a potential breakdown to a move above a short-term resistance level. Despite the downtrend remaining firmly in place, this market is full of surprises for both the BULLS and the BEARS.

S&P 500

S&P 500 7-15 (www.FreeStockCharts.com)

Perhaps the price action last week is another small sign that the markets are trying to find a bottom. In this environment, the stock market will be in tune with the fundamental backdrop. Simply because it is burdened with 40-year highs in inflation. What happens on that front will indeed affect stock prices.

Could there be a summer rally in the cards?

Stay tuned.

INVESTMENT BACKDROP

The issue investors face today; What comes along to change the high energy costs that feed inflation? With present policies in place and proposals for more tax and spending legislation, I am inclined to stay with the “higher for longer” energy costs view that keeps growth muted. We can then conclude that a durable bottom in stocks likely comes in conjunction with a peak in oil prices, inflation, and bond yields. The equity market is attempting to figure out when all of that will occur, and remember the market will turn back into BULL mode well before the bottom in the economy. However, the timetable for that to occur is a long way off.

Legendary portfolio manager Stanley Druckenmiller had some interesting things to say about the MACRO situation that investors face today:

“In my 45 years as a CIO I’ve never seen a period like this where there “is no historic analogue” and that, as a consequence, believes that it’s “very important to be open minded.”

Likewise, he discusses the need for a “new toolkit” to invest in this environment. These points should sound very familiar to members of my marketplace service here on Seeking Alpha. My new toolkit was put into use during Q1.

While many have tried to compare our current situation to past markets such as the post-WWII era, the stagflationary 70s, the Dot Com Bubble, the Financial Crisis, or even the Great Depression, the fact is that we have never seen the particular collection of issues facing us at the moment. There are elements of several past periods, but there is no ONE historical analog that we can use to know how this will play out.

Mr. Druckenmiller goes on to say, it is an experiment conducted in real-time. If we all look very closely at what has taken place, we can see his point. The situation we are facing is unprecedented and so is the recent bout of selling that such a situation has caused. According to Sentimentrader.com’s Jason Goepfert, the seven-session period from June 8 to June 16th was “the most overwhelming display of selling in history.” A period where 90% of the S&P 500 fell in five of those sessions. That has never happened before.

The stock market remains in a state of flux as it continues to try and determine where all of the crosscurrents lead the economy. At the moment, the path of least resistance is still down.

Thank you for reading this analysis. If you enjoyed this article so far, this next section provides a quick taste of what members of my marketplace service receive in DAILY updates. If you find these weekly articles useful, you may want to join a community of SAVVY Investors that have discovered “how the market works”.

The 2022 Playbook is now “Lean and Mean”

Yes, that is correct, opportunities are condensed in Energy, Commodities, and Healthcare. The message to clients and members of my service has been the same. Stay with what is working.

Each week I revisit the “canary message” which served as a warning for the economy. The focus was on the Financials, Transports, Semiconductors, and Small Caps. I used them as a “tell” for what direction the economy was headed to help forge a near-term strategy. There will be times when they appear to be revived, but, until there is a decided swing in the technical picture where rallies take out resistance levels, they continue to warn about the near-term outlook.

SMALL CAPS

The Russell 200 small cap index as measured by the (IWM) remained more in a sideways pattern since mid-June, in an attempt to carve out a bottom. With the ETF at the old highs achieved in February 2020, this is a critical area of support. A break here and it’s a long way down to the next support level.

SECTORS

ENERGY

While the “growthier” areas of the market gained some interest, the former leader Energy is taking a breather. The Energy ETF (XLE) has fallen more than 28% in a little more than a month and gone from “extreme overbought” to “extreme oversold” condition in the same span.

A swift move lower has shocked a lot of people, but that is what can happen when stocks get too extended. Yet, what we have witnessed is still within the realm of normal. The rally from March 2020 to June 2022 was phenomenal, but the ETF hasn’t retraced half of that move.

Despite the selloff, the Long term trend is still BULLISH, and it’s why I have not sold my positions since they are all HIGH yielding stocks. NONE of them have broken long-term BULL trend lines. WTI broke below its short-term trendline on Thursday only to reverse and close flat on the day. Perhaps that was the flush that sent the weak hands packing.

While I may decide to hedge my long positions if the selling picks up again I’m not inclined to leave a BULL trend too soon.

FINANCIALS

After a fairly large correction that pushed the Financial ETF (XLF) into a BEAR market, the ETF is starting to show small signs of stabilization. However, I’m not inclined to go bottom fishing in this group.

This past week I uncovered a small cap “gem” in the group that will do well in a slowing economy. The company’s fundamentals improve dramatically as the economy softens. Their Q1 EPS report blew away forecasts and I see more of the same as the U S economy slows. More importantly, the stock is in a BULLISH trend.

HEALTHCARE

Healthcare (XLV) is now back in the middle of its trading range after a brief dip that looked like the sector was going to join the general market in BEAR mode. The recent rally negated that scene and that leaves us with another sector to look for opportunities. The chart of Lantheus Holdings (LNTH) is in BULL mode and still looks constructive. It was uncovered in May and has easily outperformed the indices.

BIOTECH

Biotech is following through on the potential I saw back in late May/early June when I noted;

“Biotech may offer the best risk vs reward in the market.”

The ETF is up 26% off the successful test of the lows on June 16th. In doing so it has broken through all resistance levels. There are still plenty of things that could change this scene (general market decline), but from a technical perspective, XBI is one of the most positive areas of the market now and has outperformed all sectors in that time frame.

The next strong resistance level is at $100, about 20 points higher than the ETF closed on Friday. The fact that such a speculative area of the market is pulling away from its recent lows is encouraging for those that have decided to follow this momentum situation.

TECHNOLOGY

Like other areas of the market, Technology is mired in a severe downtrend that has recently shown some signs of slowing down. However, until I see additional evidence of a solid basing pattern start to form, here is another group that is “out of favor”. My strategy is confined to staying with what is in an uptrend and “working”. There are select opportunities in the sector but they are few and far between.

Semiconductors

No group has a tougher and longer road back to recovery than the semiconductors. The one-time darlings have now been tossed aside. Another instance where a LONG and STRONG rally is being worked off. Let’s look back at what has occurred in the long term. The index broke out of a trading range in 2016 when it broke $100. The subsequent rally took the group to $550, a gain of 450%.

Since then the semis have given back ONLY 36%. Sure that is painful, but when the primary trend turns the potential giveback is easily one-half of that initial move. While the index may have found support here and a rally can take place, this group possesses one of the more concerning BEAR patterns.

Many technicians will easily make a case for this group to be serial underperformers for a Long long time. That comes after this group was a serial outperformer for years.

However, in the short term, this is an area to keep a close eye on as the group has outperformed in July gaining 6.2% while the S&P is up 2%.

ARK INNOVATION ETF (ARKK)

ARKK and Cathie Wood have been at the very center of this deeper market decline and for very good reason; ARKK was down almost 80% from its February 2021 high to its low in May. This area of the market remains very speculative and, just because it has rallied, that should not be forgotten. This is another rubber band that got stretched too far in one direction.

For now, ARKK is perhaps the most actively traded barometer in existence for these more speculative companies, and we have to respect the fact that ARKK has not made a new low since May 12 and once again is outperforming the S&P 500. This move has setup up a potential BEARISH to BULLISH reversal.

The ETF has now successfully tested the $34-$35 range three times. The latest bounce to $47 has exceeded the last rally that ended at $46. The ETF is testing resistance now and if that holds this move may not be over.

A decisive move back above $47 would be a test to see if the move is for real, but considering it would still require a 72% move just to return to its 200-day moving average, there is potential there if we can get a coordinated market bottom. This sector is not for everyone BUT it can still be a good vehicle to play these more tactical bounces.

CRYPTOCURRENCY

Bitcoin has been in a relatively narrow trading range for over a week now. The BULLS say it is coiling and ready to make another move higher, The BEARS say it can’t rally above resistance and is ready to collapse.

INTERNATIONAL MARKETS

China

When we start to look around at global economies I’ve mentioned that China stands alone because they have plenty of tools in its toolbox to reinforce the turnaround that is taking place in its economy and markets. This past week, Bloomberg reported China’s Ministry of Finance is considering a program that would allow local governments to sell 1.5trn CNY ($220bn) of special bonds to fund infrastructure investment.

The sales in the second half of this year would be pulled forward from next year’s quota. That is spilling over to their equity indices, and other specific Chinese stocks that have been mentioned. My analysis shouldn’t be taken as “cheerleading” for China but to present opportunities that are working. I’ve deemed the technical picture as a BEARISH to a BULLISH reversal in their markets.

(ASHR), (FXI), (BABA), (JD), (KWEB), etc. all have been rallying and remain quite resilient. They are ways to participate in a trend that is outperforming the U.S.

FINAL THOUGHTS

If you are in the crowd that is now saying the “stock market has disconnected from the economy,” because the present economic data (consumer strength job market, etc.) does not support the kind of steep decline we are experiencing, I believe you are missing a very key signal.

That approach is “buying into” the politically correct rhetoric and dismissing the BEARISH technical patterns that have formed. I still hear some analysts recommending getting involved in areas of the market that look “cheap.” Unless you have a multi-year time horizon I believe that is a wrong-footed approach now. Let me remind everyone, that the stock market is a great predictor and the price action this year has predicted a slowing recessionary environment is coming.

If one does not believe that, please consider when the major indices started to head lower in February, the GDP forecasts were for moderate growth in Q1 and Q2, with a rebound to higher growth in the back half of the year. Based on Q1’s actual data and a Q2 forecast that says we are going to see back-to-back negative quarters to start the year the stock market’s warning has been correct.

The potential for a sharp V-bottom back to the old highs is LOW in the current environment due to all of the issues we are dealing with in an investment backdrop that has completely changed. I’m amazed how some refuse to see the reality of the situation. Until an “Energy Security” mindset takes hold, all of the issues plaguing the economy and the stock market stay in place.

What happens next in the market is going to tell us just how long this high inflation, poor growth scene hangs on. There was enough “news” to send the indices below the June lows this week, but the indices held support. Plenty of the bad news is out, it’s in the rearview mirror and most of it including a poor earnings season has been discounted. With the late-day reversal in all of the indices on both Wednesday and Thursday with a strong rally on Friday, that is the optimistic (Bullish) view of what occurred this week.

The pessimistic view (Bearish) says the other shoe is about to drop, as earnings will continue to come in weaker than expected, and inflation hasn’t peaked. We will soon find out who is correct. I’m going to try and avoid all of the noise about new lows, market bottoms, and economic rhetoric. Instead, watch the data and follow the price action.

Finally, whether it is “political correctness” or extreme bias, there remains a contingent that wishes to defend indefensible policies that have the economy on the brink of recession. This economy is one tax hike or spending bill away from a complete disaster, and those proposals are STILL on the table. Remaining in a state of denial is part of the reason investors find themselves in this most difficult backdrop.

As the opening quote states, I tell things as they are – not what some “want” them to be. That is the only way to manage money over time.

POSTSCRIPT

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client’s situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

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