Things you need to know
The hurricane is building – stocks under pressure for 3rd day.
- Oil – trades back down on demand destruction hysteria and China lockdowns.
- Expect the Saudi’s to defend the price of oil
- Russia turns off the pipeline to Germany – Will they turn it on in 3 days as promised?
- Gold about to test $1700 again…
- Try the Dark and Stormy
The storm clouds are building…. stocks come under assault…. Jamie Dimon’s prophecy seemingly coming true…recall what he said…. ‘Prepare for an economic hurricane’ remember that? Remember how his global economist – Marko Kolanovic challenged him on the very same day – saying that ‘we’ don’t think a global recession will happen and inflation will ‘resolve itself on its own’…. How’s that working for you? (Oh, to be a fly on the wall…) …
Stocks have not been able to stabilize since mid-August – just ahead of JJ’s speech at Jackson Hole….as the algo’s try to decipher what it all means…. Which I find comical – because all it does is reveal that the algo’s weren’t paying attention before the speech. The algo’s can’t interpret the body language, the intonation, or the meaning……So, that rally off the June lows has now failed, and a test of the June lows is now in plain sight.
Monday, I indicated that the short term trendline support at 3996 was a KEY level that needed to be watched…. would it hold when we tested it or not? And while we did not test it on Monday – we did test it yesterday – after not 1 but 3 different additional FED heads continued with the theme of a more hawkish FED…..NY’s Johnny Williams, Richmond’s Tommy Barkin and Atlanta’s Raffi Bostic and when it failed – the bottom fell out…..the algo’s (again) went into overdrive because of a technical failure…the sell side algo’s get all worked up while the buy side algo’s took a step back….not cancelling their interest – just deciding to bid lower in the face of what is starting to feel a bit ‘panicky’.
By the end of the day there was more blood on the street…… Dow had given up another 308 pts or 1%, the S&P down 45 or 1.1%, the Nasdaq lost 135 pts or 1.1%, the Russell lost 27 pts or 1.45% and the Transports gave back 226 pts or 1.6%.
What I find really interesting is that the algo’s wanted you to believe that it was all good and that JJ wouldn’t ‘grow a pair’ that he would ‘pivot’ and cave…….…. even after fed head after fed head kept hinting…. I mean how much more did you want them to say…. Bullard, Daly, Mester, George, Powell, Evans, Kashkari – every one of them telling you (hinting) at what was to come…..Even a former Dallas FED head – who resigned his position due to questions about his personal trading account chimed in – telling us that the FED needed to be aggressive…..But – whatever…it is what it is.
Many were quick to call the bottom and the end of the bear market after one month that showed the CPI had improved by 0.1% – asset managers that had been sitting on the sidelines with cash – rushed to get in – in what appeared to be a FOMO (fear of missing out) move…and that caused many retail traders to jump in as well….never mind that we are on the verge of a seasonally volatile time (which I warned you about) accentuated by historic tightening events – and I say events because not only are we raising rates, but we are shrinking the balance sheet – something that I don’t think the markets or the algo’s were paying much attention to…..but suddenly they are….
Now what I find really interesting is that there are some out there that ‘remain mixed’ on what JJ’s comments mean for the markets – because they have lost confidence in the FED’s ability to manage it…..…. Hmmmm – here’s a hint –
‘They completely missed the boat……inflation is out of control and won’t easily be tamed…so get ready for a more aggressive fed.….’
Recall the ‘Sacrifice Ratio’ explanation yesterday? How many people will the FED have to sacrifice to stop the madness? How high will unemployment have to go to make a dent? How deep and long will the recession be? These are now all of the questions that need to be answered and ones that won’t likely be answered anytime soon…Why? Because they don’t know the answers…. we are in unchartered (transitory) territory…. this is a completely fly by your pants event…who is kidding who…. they have no clue and that is not a criticism, it’s the reality of the situation. Remember – we’ve been doing this for 13 years…holding rates at artificially low levels and stimulating the economy via monetary policy and now they are stimulating the economy via fiscal policy….so, I say it again…. they don’t know what the answer is or will be.
Treasuries ended the day lower in price again and that sent yields up….and yes, the curve still remains inverted….
Oil – gave back some of its recent gains…. falling more than $7 – to $90.54 at one point before ending the day down $5 at $92/barrel. Yesterday it was about the whole surging inflation story that will be sure to destroy demand, it is the ongoing drama in how China handles the covid response and the news that Iraq has not taken any oil off the market…and this causes the ‘hysterical types’ to suggest that we will be in an ‘oversupplied state’. Couple that with lower volumes – that create exaggerated moves and booooom…. the bottom falls out….This morning – oil is trading at $89.60 – just a hair above the trendline at $88.95….where it found plenty of support – and surely – let me remind you, the Saudi’s are prepared to defend the price of oil….they told us that….remember.
Gold ended the day at $1736/oz after testing as low as $1732 an oz…. Yesterday I said that Gold took JJ’s comments in stride…. suggesting that the idea of a FED pivot was very premature…If rates keep rising and then remain elevated for an extended period (as JJ told us) then gold should remain under a bit of pressure – but I still think $1700 is the floor. But once the markets digest the fact that rising rates will cause a marked slowdown and inflation proves to be more difficult to manage – gold will start to shine again…. this morning gold trading at $1,724 – down $11.
The VIX was all the place yesterday at first falling by 4% only to surge up 9% to close flat on the day as the anxiety permeated the markets…. suggesting that the nervousness is alive and well…. which just means that investors are coming to terms with what’s next. The VIX remains well below the 40 mark – a level that many believe will ignite capitulation and this morning with futures attempting to rally – the VIX is trading up 0.15 cts at $26.37.
Eco data today includes the ADP employment report which is expected to show an increase of 300k new jobs……mortgage apps which have been down week over week over the past couple of months and the Chicago PMI- expected to be 52.1. Thursday brings us Manufacturing PMI, construction spending, challenger job cuts and total vehicle sales…and Friday – brings us the NFP report…. but remember – it is also the beginning of the long Labor Day Weekend…. lots of empty desks leaves the algo’s in charge….and we know what happens when you unleash the algo’s.
US futures were up and are now mixed…..Dow futures down 20 pts, the S&P’s -2, the Nasdaq up 20 pts and the Russell is down 2….Remember – it is the last trading day of the month, moves can be and are usually exaggerated going into labor day weekend…..so that is just another reason not to make any dramatic moves if you are a long term investor…if you are a day trader – then none of that applies at all….a day trader loves the chaos and confusion….
European stocks are all lower this morning…Eurozone inflation hits yet another record…..rising by 9.1% as food and energy prices soar…..and will continue to soar in the months ahead. French inflation came in at 6.5% – a bit lower than last month at 6.8%. Spain’s inflation rate is 10.4%, vs. 10.8% last month. German inflation hits another high at 8.8%. The ECB which raised rates by 50 bps in July is expected to raise them by 75 bps on Sept 8th. The ECB is way behind the curve – something I have been pointing out for months….and leaders there expect inflation to remain elevated until at least the summer of 2023……’at least’. Vlad -shut down the Nord Stream II pipeline today – shutting off natural gas to the continent…it is expected to be out for 3 days….but 3 days could turn into something else……Nat gas in Europe is exploding higher….. At 5:30 – markets across the zone are down about 1%.
The S&P closed at 3986 down 45 pts……breaching the trendline at 3996….the S&P is NOW below all 3 trendline supports….leaving it flailing….as it searches for a bottom…..the chart suggests that it could be 3 places….3955 ish (weak), 3740 ish (weak again) and finally the June low of 3665….which takes us back to the September/November time frame 2020….At the time it WAS resistance and fairly strong resistance….today it would represent support – let’s hope it is strong…..
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Dark & Stormy
A vintage WWI era drink that might just be making a comeback!
When the clouds roll in – it must mean a storm is coming… and last night the clouds did roll in…BTW – there are 3 storms building off the coast of South Florida…..
For this you need: 4 oz of Ginger Beer, 2 oz of Dark Rum, ½ oz of fresh lime juice and a lime wedge.
Fill your glass with ice, then add the ginger beer, lime juice and then the rum (in that order). Garnish with a lime wedge.
Enjoy.
