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#STOCKS – $TIP, $TLT, RINF
MACRO – $SPY, $YUAN #CHINA
- RTM: Stocks Rise As China Fears Rise
- RTM: TLT May Head Sharply Lower As Rates Surge Towards 5%
- 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
Stocks finished the day higher, with the S&P 500 rising by around 1.2%. It was a curiously odd rally because the China markets were smashed overnight, with Hong Kong dropping more than 6% and the Chinese Yuan rising to over 7.30 to the dollar. That is a big deal, and the China 5-Yr CDS, yes credit default swap, increased by 13 handles to close above 130, its highest level since 2016.
The S&P 500 peaked at 3,810 on the cash market today and hit wave three’s 38.2% retracement mark. Given the sideways nature of this market since the middle of September, it is possible this could be a wave four sideways consolidation. For that to work, the index must hold around this 3,800 cash level.
On top of that, this 3,800 level marks the 50% retracement from the September 12 peak.
It also marked the 78.6% retracement from the September 21 peak.
Today, the index came within 6 points of touching its upper Bollinger band, an overbought signal.
There are plenty of good reasons for the S&P 500 to stop here. What is interesting here, too, is that long-term inflation expectations are exploding higher, with the RINF ETF rising rapidly.
What is interesting is that you realize that the chart of the RINF looks an awful lot like the SPY to TLT ratio I posted yesterday. What this would suggest to me is that the reason the market is rising is that inflation expectations are rising.
Inflation expectations are rising because the 30-yr rate is soaring higher, but real yields stay put, causing the spread to widen and inflation expectations to increase. So this tells us two things: either inflation will get wildly out of control again, nominal rates have risen too far, or TIP rates haven’t advanced enough. The TIP to TLT ratio is another way to measure inflation expectations.
I guess if I had to choose based on the technical patterns, the TIP ETF probably needs to start dropping to rein in inflation expectations, and once the TIP ETF starts to drop, the stock market is likely to reverse course. Of course, the TLT could also begin to rise, which could also sink inflation expectations and stocks.
What is ironic here is that the headlines say that the market is rising due to the expectation of slower rate hikes. But indeed, it grows on expectations of higher inflation rates, which would suggest the Fed will not do its job in bringing inflation down. Why would the market rise on higher inflation rates? That is easy because sales and earnings are derived in nominal terms, and if inflation runs hot, then sales and earnings will run hot, which is good for stocks.
It is another way of saying that the Fed will not pivot because the market is telling it not to pivot, and every time the stock market rises, it is yet another indication to the Fed that it doesn’t have a handle on inflation. It will need to raise rates even more.
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.