This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.
Otherwise, enjoy the column!
Subscribe to the Monster Stock Market Commentary to get the Weekly Monster Market Commentary and join the 3,342 subscribers getting it for FREE!
#STOCKS – NONE
MACRO – $SPY, $QQQ, $SPYG, $SPYV, $TLT
- RTM- Replay Live ZOOM 10.21.22
- RTM: Live Q&A Session Tmrw 10/21 @ 2 PM ET
- RTM: Higher Rates, Stronger Dollar Drive Stocks Lower
- RTM: Vix OPEX Tomorrow Should Free Markets Up Into Friday
- RTM: Stocks Are Stuck Heading Into Opex
- RTM: Breaking Down 10.13.22 Trading Action
- RTM: Volatility May Be About To Pick Up
THIS WEEKS FREE YOUTUBE VIDEO:
Stocks rallied on Friday, despite being down sharply 30 minutes before the opening. A WSJ article noted that the Fed was going to discuss the pace of future rate hikes following another 75 bps rate hike in November.
The story didn’t lay out anything new, and the majority of Governors I have heard favor a front-loading approach still. It means that I think unless inflation comes crashing down over the next two months, it seems likely that we will get a 75 bps hike in November and December.
This week we will get a couple of crucial inflation metrics, with PCE, CORE PCE, the GDP Price index, and the employment cost index. Core PCE y/y is expected to rise to 5.2% in September, up from 4.9% in August. Also, the Core PCE reading has beaten estimates in 19 of the last 21 months.
Meanwhile, headline PCE is expected to rise by 6.3% in September from 6.1% in August. Like core PCE, it has come in hotter than anticipated in 19 of the past 21 months.
Additionally, the employment cost index is expected to rise by 1.2% for the third quarter, down from 1.3% in the second quarter. Also, the GDP price index is anticipated to come in at 5.3% for the third quarter, down from 9% last quarter. Third quarter GDP is projected to have risen by 2.3%, up a drop of 0.6% in the second quarter. The GDP price index has come in hotter than expected in 9 out of the last 11 quarters.
These will all be essential data, especially in the Fed’s next meeting on November 2.
Additionally, on Friday, the big news was that Japan intervened in the FX market to defend the yen vs. the dollar. I’m not sure it changes anything. The last time Japan intervened in September, it did nothing other than slow things down.
The yen fell back to support at around 146 to the dollar and is probably still on its way to 158.75.
S&P 500 (SPY)
However, on Friday it helped send the dollar index down and killed the idea I had run with the night before for a drop to around 3,600 on the S&P 500. The S&P 500 futures were trading down to about 3,640 at 9 AM, with rates racing higher and the dollar up sharply; the day was well positioned for a drop to 3,600. But as fate would have it, the market gods pulled the rug on me.
But the futures failed to push beyond the October 18 high, stopping short, and the straight-line rally higher seems unstable at best. And with options expiration now behind us, plenty of puts came off the board, and traders may look to create new put positions heading into the economic data this week and the Fed meeting next week. Additionally, it is not unusual to see a counter-trend move coming out of OPEX.
Every month, except for March, saw either a sideway consolidation or a reversal post-OPEX from the prior trend. For example, going into July, OPEX stocks fell and then reversed higher following OPEX. Into August, OPEX stocks had been rising and then declined after OPEX. In September, stocks fell into OPEX and moved sideways for a few days. Into October OPEX, stocks were rising, which would suggest either a reversal lower or a sideways consolidation.
So, for now, I will stick with my call to see the S&P 500 fall back to 3,600. If the futures should successfully close above 3,760, then maybe I need to reassess things, but at this point, it is worth waiting and seeing one more day.
Growth Vs. Value
Going in a different direction, I noticed a few things this week that I follow and check in on from time to time. Most interesting to me was the ratio of the SPYG to SPYV. Growth stocks could be at a point to significantly underperform value stocks, as this ratio comes to a historically significant trend line. A break of that trendline would be terrible for the direction of growth stocks.
QQQ to SPY
The QQQ to SPY ratio has fallen sharply and is also at a critical point. Interestingly, a 1.618% extension of this latest bear flag would line up with the ratio where it stood before the pandemic. That would suggest the QQQ has a lot of underperformance ahead of itself versus the SPY.
TLT to SPY
Finally, this last chart shows the TLT to SPY ratio at a record high. It would suggest that the SPY is overvalued to the TLT and that the SPY would need to drop for the ratio to fall. For the ratio to fall back to its pre-pandemic levels of 2.4, the SPY would need to drop to $223, assuming the TLT remains unchanged. That would be a massive decline which suggests that perhaps, the SPY needs to fall and the TLT needs to rise. But considering how much the TLT has moved relative to the SPY, it seems that the SPY has some catching down to do. Even to get back to the March 2021 level of 2.96, the SPY needs to fall to around $275.
The rising flag pattern is bearish and suggests this ratio reverses and starts to head lower. Of course, this can mean the TLT rises, but given how far out of whack the ratio is, I think the SPY also has to decline.
Have a good one
Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments based on that index. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.