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There will be plenty of economic data this week, but Fed commentary will be absent. The Fed is in the middle of its blackout period so we won’t hear from the Fed again until December 14 at the FOMC meeting.
I think the significant number of the week comes on Friday, the University of Michigan Inflation expectations for one year and 3-5 years; estimates are for 4.9% and 3%, respectively. I think consumer expectations are essential, hitting a peak of around 3.1% and falling through most of the summer and then into the fall has now reversed higher. It raises the question of whether this is a series trending lower, making lower lows and lower highs, or a series making higher lows and higher highs. It matters because if the expectations are for inflation to rise in the future, it could suggest that inflation will be much harder to bring down.
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The ISM services report will also be critical, coming on Monday. That is estimated at 53.3, down from last month’s 54.4. The ISM manufacturing report suggested the economy is inching towards an actual recession, and the services sector could confirm or deny whether that is happening. It would probably take a reading below 52 to signal the potential for a recession.
I think if we were to get a cooler-than-expected ISM report and a hotter University of Michigan report, coupled with the hot wage growth from Friday’s job report, it would suggest that we have entered a period of stagflation. A time of slowing economic growth, but rising wages and high prices. The reason wages could be increasing is due to the size of the labor force shrinking and the number of people not in the labor force rising. The data show that the number of people not in the labor force has pushed back above 100 million, while the population has declined, and the number of people working has declined.
Add that there are nearly 10.7 million job openings and just 6 million people unemployed. You can see why wages are rising and why consumers expect inflation to be higher over the long term.
So it seems more than likely that we will see slower growth at some point, and prices will remain high as wages keep rising. It will create a terrible environment for businesses, forcing them to keep raising prices or see margins and profits deteriorate. So the data this week is essential.
S&P 500 (SPY)
The S&P 500 gapped lower on Friday by more than 1%, rallied back to fill the gap, and closed down by just 12 bps. Now, depending on how you want to look at things, the S&P 500 is inching closer to the large trend line which started in January and needs to close above 4,150 for an official break out.
Or it has tested that trend line at 4,100 and failed. Now you ask how there can be two trend lines that can be so different. Well, the top chart is based on closing highs, and the bottom chart is based on Intraday highs, and it does make that much of a difference.
In this type of environment, it is pretty easy to be faked out, and for me, I have a few criteria to determine whether or not a move above the trend line is real. First, I want to see the index gap above the trend line and, more importantly, close above the closing trend line.
What I do know so far is that neither has happened. The index rose to the Intraday high trend line at 4,100 and has thus far failed, which matters most. It may have even risen enough to fill the gap from September 13. So instead of trying to predict where the index will head, it is worth waiting a day or maybe two to find out what it wants to do. But my gut says it will not break the closing trend line.
One reason is that I think there is a diamond reversal pattern on the Intraday chart, which usually results in the index returning to its origin, which would be at 3,950.
The other reason I feel this way is that the VIX spot minus the VIX 3-month generic futures contract fell to -5.78, and this year when the number has fallen below -5, it has told us we are in a region of a market top, and once it gets below -5.7, it suggests we are at a market top. It doesn’t mean the indicator has to work again this time, but that is what has happened in the past.
Meanwhile, the Nikkei has turned lower in recent days, and this is important because if the Nikkei continued to fall, it would be a negative indicator for the Dow Jones. The Dow Jones has been moving with the Nikkei for some time, and this is the first time the two have diverged recently.
Additionally, the Dow has a rising flag pattern present, and those are bearish reversal patterns. It would suggest the Dow is near or at a peak, and a break of 33,500 would signal a trend reversal.
Meanwhile, the XLE has diverged from Oil, and that divergence probably isn’t going to last much longer. The XLE has formed a diamond reversal pattern, indicating that the XLE could be heading lower to $78.50.
Goldman has also formed a diamond reversal pattern, and if that plays out as I expected, it could result in Goldman falling back to support at $352.
Exxon has the same diamond pattern formed as in the XLE and Goldman. If it is the case that it is a diamond pattern, it would probably mean Exxon falls back to $102.
Anyway, that is all I have for this week. I will be back next Sunday. If you enjoyed this write-up, you could get it Monday through Thursday as part of my newsletter subscription; it is only $99 for the first year.
Have a great Sunday!
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.