Things you need to know
- Investors reconsider the data and the FED commentary
- Stocks come under pressure on Friday and again today
- Lots of economic data this week along with the FED boondoggle
- Dollar up, gold and oil lower, treasuries inverted
- Try the Pasta Fresca
Stocks came under pressure on Friday as the week ended…..the reality of continued aggressive rate hikes (and the coming recession) was behind the move….the idea that traders and algo’s convinced themselves that the FED was prepared to ‘back off’ in September – appears now to have been a bit pre-mature…..the idea that inflation ‘had peaked’ is now the question…..the release of the FED minutes on Wednesday – lit the fuse and then renewed insight (and commentary) from some KEY and not so KEY Fed members turned this bear market rally into what feels like the end….And suddenly investors are waking up to the fact that the FED is supposed to accelerate the balance sheet reduction in September and that (if they do it) will only add pressure to stocks – which have continued to benefit from accommodative policy…..
By the end of the day – the Dow gave back 295 pts or 0.8%, the S&P lost 55 pts or 1.4%, the Nasdaq lost 260 pts or 2%, The Russell gave up 44 pts or 2.2% and the Transports gave up 265 pts or 1.7%.
The minutes giving a clear signal that the ‘team’ is still very much in the 75 bps camp and then the comments we got from Bullard, George, Kashkari, Daly, Evans and even former Dallas Fed President – Kaplan confirmed what I (and many others) have been saying all along…..I don’t see how they can do anything else other than hike by 75 bps….the idea that traders and some analysts convinced themselves and the markets that the FED had succeeded in taming inflation and would therefore back off was and is incorrect – …….Inflation is still running at 8.5% y/y according to the CPI, PPI is running at 10.5% and this week we will get the FED’s favored inflation data point – the PCE deflator and like the CPI – the top line number is expected to come in at 0% m/m and 6.8% y/y – and when you take the ‘core’ number it is expected to show an increase of 0.3% m/m and 4.7% y/y.
In addition this week is loaded with other macro data points that are sure to shed even more light on the current state of affairs – S&P Manufacturing PMI of 51.9 – down from 52.2 and edging ever closer to contractionary territory…, Services PMI of 50 – which would be up from last months ‘contractionary’ read of 47…..New Home Sales down 2.5% but many are suggesting the whisper number is down more than 4%. Pending home sales are also expected to be down 2.5% – so we will see. Durable goods, Cap goods ordered, and Cap goods shipped are also due out. 2nd Qtr. GDP coming in at -0.9%, no change from the initial report – leaving the US with 2 negative qtrs. of growth. Add to that – Personal Income and Personal Spending, 2 regional FED surveys – Kansas City and Dallas – and you have a week full of data points….
But the kicker is going to be the Jackson Hole Boondoggle that is taking place August 25 – 27th and features an A list of global central bank elites…This year – the headliner is
“Reassessing Constraints on the Economy and Policy”
And it is now expected to feature an aggressive JJ Powell as he tries to manage the narrative and keep the heat on rate increases while trying to calm the markets – telling us that the US economy is robust and that a recession is NOT guaranteed…..….but here’s a tidbit….Every time that there has been a bear market rally since the crash of 1929 – where the S&P fell more than 10% (this time it fell 23%) – the ‘rally’ took the S&P up 17.2% over 39 days…..before resuming its decline….this time – the S&P has rallied 18% over 35 days….now understand that past performance doesn’t suggest future performance at all…but it is something to consider, considering that inflation is still up and federal gov’t spending is surging – which will only add to the inflationary pressures in the months ahead. So, at the moment – we must rethink the ‘inflation has been tamed’ theory and consider what if it is not? And that is what appears to be happening…
As you might expect – some of the biggest gainers over the past 6 weeks were the biggest losers on Friday and will likely be the biggest losers today – (futures markets suggesting further weakness this morning) and that makes sense. Trader types that took some of the most beaten-up names higher will be the first ones to hit the SELL button on those same names trying to take profits before they evaporate….as they all run for the door amid the angst. – creating longer term opportunities for the patient long term buyers. Remember – In an environment like this – patience is always a virtue.
Recall that we discussed this at the beginning of the month……caution as we moved thru August – lower volumes at month end will create exaggerated moves (in either direction) and then we are about to enter the usually volatile September/October time period – so while the rally felt good, I don’t believe it is over just yet…. A test of 3800/4000 would not be out of the question but a test lower could happen if we see inflation turn higher once again…. something that I think is exactly what we will see – and if that is the case – then I would not be surprised to see a test of the June lows – 3650 ish…
Look – the S&P kissed the long-term moving average at 4325 and failed….and will likely move lower today…. leaving us in the 4100/4325 trading range. The next real level of any support is 4100…. or 3% down from here…. not a disaster by any stretch – unless of course 4100 does not hold….so sit tight – no need to chase anything….
Besides the meme stocks that got hammered – BBBY down 41%, GME down 4%, AMC down 6.6% (which I don’t consider ‘investments’ but rather ‘bets’) we saw weakness in Housing – XHB down 2.8%, Semi’s – SOXX down 2.7%, Airlines – JETS – 3.3%, Disruptive Tech – ARKK -6%, AI – BOTZ down 3%, and of the broad 11 S&P sectors Consumer Discretionary – XLY and Financials – XLF both lower by 2%. Tech – XLK – 1.8%, Communications – XLC down by 1.6%, Basic Materials – XLB down by 1.8%. with the others all down less than 1%.
Treasury yields rose across the curve but remain inverted.
Natural Gas is trading at $9.59/mbtu’s here in the states and is trading at $70/mbtu’s in Europe and likely going higher as they move into winter.
On Friday – Russian gas company – GAZPROM announced that they will shut off Nat gas supply to Europe for 3 days (Aug 31 – Sept 2) for a routine (yet) ‘unscheduled’ maintenance project. This is now setting the stage for what could come in the fall/winter…what will Russia do? Will they freeze the Europeans as a punishment for taking sides with Ukraine? We are about to find out….and that will set the stage for further conflict….and investor angst.
Oil – is hovering at $90/barrel…. Gold is down $14 an oz this morning…. now trading at $1,748…. the pressure on gold, oil and other commodities is also a direct result of dollar strength. The dollar index – DXY is up 14 cts at $108.30….about to test the July highs of $109.30…recall that commodities are priced in dollars – so as the dollar rises – commodity prices should decline – and that is what we are seeing….the dollar index is up 7% since June….oil down 24%, Gold down 7%. Now the other part of the story is that if the global economy enters a recession that demand for energy will decline (thus the weakness) and if the FED continues to raise rates (strengthening the $) then gold should back off as well….and I think that happens until investors seek the ultimate safety trade….and that is gold.
US futures are down this morning……Dow down 300 pts, S&P’s down 45, Nasdaq off by 180 and the Russell down 20 pts. The tone being driven by the aggressive FED innuendos. The algo’s are reacting to the headlines – so stay focused and eliminate the noise, but don’t eliminate any fundamental changes to names that you own….As long as the fundamentals are intact – then take advantage of any sale that happens….protect yourself by hedging your portfolio and buying ETF’s that get you short the market IF that helps you sleep at night….the simple ones are the PSQ, SH and DOG – they get you short the Nasdaq, the S&P and the Dow and will increase in value if the broader market takes a hit – thereby helping to offset any losses on your long positions. In fact, on Friday – when stocks were down – those 3 etf’s were up 1.9%, 1.3% and 0.9% respectively.
In Europe – stocks are down across the board – lower by better than 1%….…. Nat gas prices in Europe are up and that is extending the losses in stocks as the fear rises over what happens to the European economy in the months ahead if Russia plays dirty…. Expect Europe to be ground zero over the Russian oil/gas story….as Moscow decides to put pressure on the Europeans to withdraw sanctions and stop supporting Ukraine in his battle to take it over….Remember – Dec 5th is the key date to watch – that is when the European oil sanctions are due to hit Moscow….so don’t go anywhere…..
The S&P ended the day at 4228 – down 56 pts…. As noted, – last week we kissed resistance and failed and this morning – futures are pointing lower…. real support will not be found until we get to the trendline at 4100 – not a level I am suggesting we are going to today, but a level that I do believe we will test over the coming weeks. Then we run into September and October typically volatile months and likely more so this year as the FED tightens rates and reduces the balance sheet. Right now, we remain in the 4100/4325 trading range – but do not discount a move even lower if we cannot get control of inflation.
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Pasta Fresca
So, I was at a dinner last night and everyone made a favorite dish- so I thought this was as good as any…. fresh summer cherry tomatoes, fresh basil, garlic, red onion, mozz and fresh grated Parmegiana cheese….
Essentially – you are making a summer tomato salad and then putting it over pasta….so slice the cherry tomatoes in half, slice the red onion, slice the garlic, chunks of fresh Mozz, s&p, “splash” of water, and a couple turns of olive oil, s&p and decorate with the fresh basil.
Prepare and let it sit out and marinate. It will create its own juice the longer it sits. You want it to be room temperature when you mix it with the pasta. If you make it the day before then remove from fridge and let warm up for about 30 mins….
Now bring a pot of salted water to a rolling boil – add pasta and cook for 8 / 10 mins…. or until aldente. Strain – always reserving a mugful of water…. return the pasta to the pot – add back 1/4 mug of water to re-moisten. Toss – wait a min or two so that the pasta absorbs the water…you do not want a puddle of water in the bottom of the pan. Now add the tomato salad, 2 or 3 handfuls of grated cheese and toss well. Serve immediately in warmed bowls. Again – set the table outside, turn on some relaxing music to set the mood, light the candles and enjoy the sunset on a great summer eve. Never rush – enjoy the moment.
Buon Appetito.
