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2/5/23
#STOCKS – $TGT $NVDA $TSM
#MACRO – $SPY, $VIX $DXY #RATES $QQQ
The reasons for this may be clear: as the market eases financial conditions, the economy is more likely to achieve a soft landing, and inflation will take longer to decrease. Powell may be okay with this outcome as it means that he will not only reach his goal of getting interest rates to a range of 5 to 5.25% but will also be able to keep them elevated for all of 2023.
A soft landing suggests no economic recession, but also marks the start of a new rate regime where ZIRP (Zero Interest Rate Policy), NIRP (Negative Interest Rate Policy), and QE (Quantitative Easing) are a thing of the past. This may be Powell’s ultimate goal.
Powell may have also given us insight into the financial conditions index he favors. He mentioned that financial conditions remained unchanged between the December 14 and February 1 FOMC meetings. The chart below shows that the GS financial conditions index was at 99.75 on December 13 and 99.69 on January 30, indicating that the index fluctuated but ended roughly in the same place.
Powell gets to reinforce or change his views again on Tuesday of this week when he speaks at the Economic Club of Washington.
Fed Funds Futures
Regardless, the impact of the FOMC meeting may not matter at this point as the job data came in much stronger than expected, causing the unemployment rate to drop to 3.4% from 3.5% in December. The 517,000 jobs added were far beyond the estimated 188,000, leading to a surge in Fed Funds Futures rates. The December 2023 contract is now back to 4.70%, similar to its position on January 5, before the December job report.
If the contract breaks through the resistance level of 4.7 to 4.75%, it may indicate that the market agrees with the Fed’s stance on interest rates being over 5% for all of 2023.
2-Year
If the December 2023 Futures contract moves higher, then the 2-year rate will also need to increase. This was seen on Friday when the 2-year rate jumped by almost 19 basis points to finish at 4.29%. If the December 2023 contract reaches above 5%, the 2-year rate will likely return to its highs around 4.7% to 4.8%.
10-Year
This likely means the 10-Year rate is also heading back to around 4 to 4.1%.
Dollar (DXY)
This could indicate that the dollar is set to rise again after breaking out of a falling wedge pattern and may be headed back to 106. Higher interest rates and a stronger dollar could result in the GS Financial Conditions Index rising from its current level.
Volatility (VIX)
If the dollar and interest rates are on the rise, then it is likely that the VIX index, which measures market volatility, will also increase. Tightening financial conditions typically leads to a higher VIX index.
S&P 500 (SPX)
If the dollar, interest rates, and the VIX are all rising, and financial conditions are tightening due to stronger-than-expected job and ISM reports, then the S&P 500 is likely to decrease. The corrective phase of the bear market seems to be ending, and the S&P 500 has retraced 50% of its entire 2022 decline. Based on Elliott wave analysis and Fibonacci retracement, the current move higher appears to be corrective rather than the start of a new bull market.
NASDAQ (QQQ)
The Thursday edition of the “Reading The Markets Lite” newsletter noted that the QQQ hit its 38.2% retracement level of the 2022 decline.
Nvidia (NVDA)
In addition to the signs of a turning market, stocks such as Nvidia indicate a change. Nvidia seems to have completed an ABC corrective wave off the October lows, with Wave A equaling Wave C. The RSI has also breached 70, which could indicate a potential rally to around $220, making it an ideal place for a stop and reverse.
Taiwan Semi (TSM)
Taiwan Semi has a similar look and feels to Nvidia with the same corrective Wave and an RSI over 70, as well as wave A equal to wave C. This would also suggest that the Taiwan Semi is probably overextended, and the recent rally in the stock is near its end.
Target (TGT)
Target reached resistance this week around $180 while the RSI pushed above 70. That is where the shares failed for the third time since the summer. There was a large bearish options wager on the stock earlier this week, and perhaps this is why. (First two weeks are free to try – RTM: Trader Bets Target’s Stock Falls)
Have a good week, and see you next!
-Mike
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.