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Technically Speaking: Bears Gain Control As Market Fails Resistance

With yesterday’s rout, the "bears" gained control of the narrative as the market failed at resistance.

In this past weekend’s newsletter, we discussed…

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This article was originally published by Real Investment Advice

With yesterday’s rout, the “bears” gained control of the narrative as the market failed at resistance.

In this past weekend’s newsletter, we discussed the market reclaiming the 100-dma on Friday. To wit:

“It is worth noting there are two primary support levels for the S&P. The previous July lows (red dashed line) and the 200-dma. Therefore, any meaningful decline occurring in October will most likely be an excellent buying opportunity particularly when the MACD buy signal gets triggered.

The rally back above the 100-dma on Friday was strong and sets up a retest of the 50-dma. If the market can cross that barrier, we will trigger the seasonal MACD buy signal suggesting the bull market remains intact for now.

Chart updated through Monday’s close.

The failure to hold the 100-dma is concerning. With the “bears” continuing to maintain control over the market, risks are mounting. With the market pushing well into 2-standard deviations below the 50-dma, we expect a counter-trend rally.

However, for now, those rallies should likely get used to “sell into,” rather than trying to “buy the dip.”


Numerous Headwinds To The Bullish Outlook

The selloff in September took our short-term indicators into oversold territory. Such suggests selling pressure is getting exhausted near term.

While short-term indicators got oversold, longer-term indicators did not. The dichotomy of these different indicators supports the idea of a rally short-term (days to a couple of weeks) but a more significant correction ahead.

On RIAPRO (Free 30-day trial), we provide the sentiment and technical measures we follow. The number of oversold stocks is back towards extremes, which supports the idea of a short-term rally.

However, the overall “breadth” and “participation” of the market remains highly bearish. Thus, to avoid a deeper correction, breadth must improve.

There are reasons to be hopeful for a short-term rally with markets oversold, and the sentiment very negative. Furthermore, we are entering into the “seasonally strong” period of the year. The month of October has a spotty record, but November and December trend stronger.

However, don’t ignore the risks. Much like a patient with a weak immune system, the weak market internals leave investors at risk of numerous headwinds.

  • Valuations remain elevated.
  • Inflation is proving to be sticker than expected.
  • The Fed will likely move forward with “tapering” their balance sheet purchases in November.
  • Economic growth continues to wane.
  • Corporate profit margins will shrink due to inflationary pressures.
  • Earnings estimates will get downwardly revised keeping valuations elevated.
  • Liquidity continues to contract on a global scale
  • Consumer confidence continues to slide.

While none of these independently suggest a significant correction is imminent, they will make justifying valuations difficult. Moreover, with market liquidity already very thin, a reversal in market confidence could lead to a more significant decline than currently expected.

Longer-Term Signals Suggest Caution

Given the broader macro issues facing the market and not dismissing the possibility of a near-term reflexive rally, the weekly and monthly signals suggest caution.

Important Note: Weekly and monthly signals are only valid at the end of the period.

On a weekly basis, the market has triggered sell signals for the first time since April. However, despite the sell signal, the market continues to hold above its weekly moving average support. Furthermore, the market is as oversold today as it was during the selloff earlier this year.

The monthly picture is more concerning. Monthly “sell signals” are rarer and tend to align with more extensive market corrections and bear markets. But, as shown below, it is the first time since March 2020 that this signal has gotten triggered.

While the longer-term MACD has not yet confirmed that monthly signal, it is worth paying close attention to. Historically, the monthly signals have proven useful in navigating correction periods and bear markets.

Let me reiterate these longer-term signals do not negate the possibility of a counter-trend bull rally. As noted, in the short-term the market is oversold enough for such to occur. However, these longer-term signals suggest that investors should be using such rallies to rebalance portfolio risks, raising some cash, adding hedges, and reducing overall portfolio volatility.

My best guess is that we are still in midst of seasonal weakness and could decline a bit further before sellers get exhausted. Such should lead to a stronger rally into the end of the year, however, new highs may be in the rearview mirror for now.

15-Portfolio Management Rules

There is a substantial risk of a bigger correction as we move into 2022. Such does not imply selling everything and moving to cash. However, being aware of the possibility allows for a logical approach to risk management.

  1. Cut losers short and let winner’s run
  2. Set goals and be actionable. 
  3. Emotionally driven decisions void the investment process. 
  4. Follow the trend. 
  5. Never let a “trading opportunity” turn into a long-term investment.
  6. An investment discipline does not work if it is not applied.
  7. “Losing money” is part of the investment process. 
  8. The odds of success improve significantly when the technical price action confirms the fundamental analysis. 
  9. Never, under any circumstances, add to a losing position. 
  10. Market are either “bullish” or “bearish.” During a “bull market” be only long or neutral. During a “bear market”be only neutral or short. 
  11. When markets are trading at, or near, extremes do the opposite of the “herd.”
  12. Do more of what works and less of what doesn’t. 
  13. “Buy” and “Sell” signals are only useful if they get implemented. 
  14. Strive to be a .700 “at bat” player. (No strategy works 100% of the time.)
  15. Manage risk and volatility. 

For now, it appears the “bears” have regained control of the market. However, the bullish trend remains intact which suggests we remain long our equity exposure. When there is a dichotomy of conditions, sometimes the best action is “no action” at all.

The “need to do something” is emotionally driven and tends to lead to worse outcomes.

For now, please pay attention, make small changes as needed, reduce risk on rallies, and wait for the market to tell you where its headed next.

Things are getting interesting.

The post Technically Speaking: Bears Gain Control As Market Fails Resistance appeared first on RIA.




Author: Lance Roberts

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Economics

Supply

The Revenge of Supply, at Project SyndicateSurging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return…

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The Revenge of Supply, at Project Syndicate

Surging inflation, skyrocketing energy prices, production bottlenecks, shortages, plumbers who won’t return your calls – economic orthodoxy has just run smack into a wall of reality called “supply.” 

Demand matters too, of course. If people wanted to buy half as much as they do, today’s bottlenecks and shortages would not be happening. But the US Federal Reserve and Treasury have printed trillions of new dollars and sent checks to just about every American. Inflation should not have been terribly hard to foresee; and yet it has caught the Fed completely by surprise. 

The Fed’s excuse is that the supply shocks are transient symptoms of pent-up demand. But the Fed’s job is – or at least should be – to calibrate how much supply the economy can offer, and then adjust demand to that level and no more. Being surprised by a supply issue is like the Army being surprised by an invasion. 

The current crunch should change ideas. Renewed respect may come to the real-business-cycle school, which focuses precisely on supply constraints and warns against death by a thousand cuts from supply inefficiencies. Arthur Laffer, whose eponymous curve announced that lower marginal tax rates stimulate growth, ought to be chuckling at the record-breaking revenues that corporate taxes are bringing in this year. 

Equally, one hopes that we will hear no more from Modern Monetary Theory, whose proponents advocate that the government print money and send it to people. They proclaimed that inflation would not follow, because, as Stephanie Kelton puts it in The Deficit Myth, “there is always slack” in our economy. It is hard to ask for a clearer test. 

But the US shouldn’t be in a supply crunch. Real (inflation-adjusted) per capita US GDP just barely passed its pre-pandemic level this last quarter, and overall employment is still five million below its previous peak. Why is the supply capacity of the US economy so low? Evidently, there is a lot of sand in the gears. Consequently, the economic-policy task has been upended – or, rather, reoriented to where it should have been all along: focused on reducing supply-side inefficiencies. 

One underlying problem today is the intersection of labor shortages and Americans who are not even looking for jobs. Although there are more than ten million listed job openings – three million more than the pre-pandemic peak – only six million people are looking for work. All told, the number of people working or looking for work has fallen by three million, from a steady 63% of the working-age population to just 61.6%. 

We know two things about human behavior: First, if people have more money, they work less. Lottery winners tend to quit their jobs. Second, if the rewards of working are greater, people work more. Our current policies offer a double whammy: more money, but much of it will be taken away if one works. Last summer, it became clear to everyone that people receiving more benefits while unemployed than they would earn from working would not return to the labor market. That problem remains with us and is getting worse. 

Remember when commentators warned a few years ago that we would need to send basic-income checks to truck drivers whose jobs would soon be eliminated by artificial intelligence? Well, we started sending people checks, and now we are surprised to find that there is a truck driver shortage. 

Practically every policy on the current agenda compounds this disincentive, adding to the supply constraints. Consider childcare as one tiny example among thousands. Childcare costs have been proclaimed the latest “crisis,” and the “Build Back Better” bill proposes a new open-ended entitlement. Yes, entitlement: “every family who applies for assistance … shall be offered child care assistance” no matter the cost. 

The bill explodes costs and disincentives. It stipulates that childcare workers must be paid at least as much as elementary school teachers ($63,930), rather than the current average ($25,510). Providers must be licensed. Families pay a fixed and rising fraction of family income. If families earn more money, benefits are reduced. If a couple marries, they pay a higher rate, based on combined income. With payments proclaimed as a fraction of income and the government picking up the rest, either prices will explode or price controls must swiftly follow. Adding to the absurdity, the proposed legislation requires states to implement a “tiered system” of “quality,” but grants everyone the right to a top-tier placement. And this is just one tiny element of a huge bill. 

Or consider climate policy, which is heading for a rude awakening this winter. This, too, was foreseeable. The current policy focus is on killing off fossil-fuel supply before reliable alternatives are ready at scale. Quiz: If you reduce supply, do prices go up or go down? Europeans facing surging energy prices this fall have just found out. 

In the United States, policymakers have devised a “whole-of-government” approach to strangle fossil fuels, while repeating the mantra that “climate risk” is threatening fossil-fuel companies with bankruptcy due to low prices. We shall see if the facts shame anyone here. Pleading for OPEC and Russia to open the spigots that we have closed will only go so far. 

Last week, the International Energy Agency declared that current climate pledges will “create” 13 million new jobs, and that this figure would double in a “Net-Zero Scenario.” But we’re in a labor shortage. If you can’t hire truckers to unload ships, where are these 13 million new workers going to come from, and who is going to do the jobs that they were previously doing? Sooner or later, we have to realize it’s not 1933 anymore, and using more workers to provide the same energy is a cost, not a benefit. 

It is time to unlock the supply shackles that our governments have created. Government policy prevents people from building more housing. Occupational licenses reduce supply. Labor legislation reduces supply and opportunity, for example, laws requiring that Uber drivers be categorized as employees rather than independent contractors. The infrastructure problem is not money, it is that law and regulation have made infrastructure absurdly expensive, if it can be built at all. Subways now cost more than a billion dollars per mile. Contracting rules, mandates to pay union wages, “buy American” provisions, and suits filed under environmental pretexts gum up the works and reduce supply. We bemoan a labor shortage, yet thousands of would-be immigrants are desperate to come to our shores to work, pay taxes, and get our economy going. 

A supply crunch with inflation is a great wake-up call. Supply, and efficiency, must now top our economic-policy priorities.

*********

Update: I am vaguely aware of many regulations causing port bottlenecks, including union work rules, rules against trucks parking and idling, overtime rules, and so on. But it turns out a crucial bottleneck in the port of LA is… Zoning laws! By zoning law you’re not allowed to stack empty containers more than two high, so there is nowhere to leave them but on the truck, which then can’t take a full container. The tweet thread is really interesting for suggesting the ports are at a standstill, bottled up FUBARed and SNAFUed, not running full steam but just can’t handle the goods. 

Disclaimer: To my economist friends, yes, using the word “supply” here is not really accurate. “Aggregate supply” is different from the supply of an individual good. Supply of one good increases when its price rises relative to other prices. “Aggregate supply” is the supply of all goods when prices and wages rise together, a much trickier and different concept. What I mean, of course, is something like “the amount produced by the general equilibrium functioning of the economy, supply and demand, in the absence of whatever frictions we call low ‘aggregate demand’, but as reduced by taxes, regulations, and other market distortions.” That being too much of a mouthful, and popular writing using the word “supply” and “supply-side” for this concept, I did not try to bend language towards something more accurate. 






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Economics

Weekly data: ECB’s meeting and inflation ahead

The clear target for old buyers is the 161.8% weekly Fibonacci extension just below $90. Finding an entry as a…
The post Weekly data: ECB’s meeting…

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The clear target for old buyers is the 161.8% weekly Fibonacci extension just below $90. Finding an entry as a new buyer is likely to be difficult here, but a bounce seems possible from the 38.2% zone of the weekly Fibo fan and definitely from the psychological area around $80. Brent has been strongly overbought based on the slow stochastic since August: this doesn’t necessarily mean ‘wait until there’s no buying saturation’ but that new buyers should pay particular attention to appropriate entries. This week’s regular data, primarily the EIA’s stocks, could provide some if intraday volatility increases.

Key data this week

Bold indicates the most important release for this symbol.

Tuesday 26 October

  • 30 GMT: API crude oil stock change (22 October) – previous 3.29 million

Wednesday 27 October

  • 30 GMT: EIA crude oil stock change (22 October) – previous negative 431,000

Friday 29 October

  • 00 GMT: Baker Hughes oil rig count (29 October) – previous 443

Euro-Australian dollar, daily

Strong gains by many industrial commodities since summer and perceptions that the ECB is slow in winding back QE have combined to drive the ongoing round of losses for the euro against the Aussie dollar this month. The RBA is now among the more hawkish central banks and might raise its cash rate sooner rather than later next year.

A retest of the lows from February and March this year below $1.53 doesn’t seem favourable immediately. However, more losses towards the next possibly important psychological area around $1.54 are in view unless the ECB’s tone switches toward the hawkish on Thursday. New sellers would probably look for another failed test of $1.56 before entering. This might come during or around Australian inflation early on Wednesday morning GMT.

Key data this week

Bold indicates the most important releases for this symbol.

Wednesday 27 October

  • 30 GMT: Australian annual inflation (Q3) – consensus 3.1%, previous 3.8%
  • 30 GMT: Australian quarterly inflation (Q3) – consensus 0.8%, previous 0.8%
  • 00 GMT: German GfK consumer confidence (November) – consensus negative 0.5, previous 0.3

Thursday 28 October

  • 55 GMT: German unemployment change (October) – consensus negative 20,000, previous negative 30,000
  • 55 GMT: German unemployment rate (October) – consensus 5.4%, previous 5.5%
  • from 11.45 GMT: statement and press conference of the European Central Bank
  • 00 GMT: German annual inflation (preliminary, October) – consensus 4.4%, previous 4.1%

Friday 29 October

  • 45 GMT: French annual inflation (preliminary, October) – consensus 2.5%, previous 2.2%
  • 00 GMT: German annual GDP growth (flash, Q3) – consensus 2.5%, previous 9.4%
  • 00 GMT: eurozone-wide annual inflation (flash, October) – consensus 3.7%, previous 3.4%

Disclaimer: opinions are personal to the author and do not reflect the opinions of Exness or LeapRate.

The post Weekly data: ECB’s meeting and inflation ahead appeared first on LeapRate.




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Economics

Q3 GDP will show economic contraction? 150+ years of short term interest rate history says no

  – by New Deal democratNo economic news today, but let me show you one important reason I am not concerned about the supply chain or inflation issues…

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 – by New Deal democrat

No economic news today, but let me show you one important reason I am not concerned about the supply chain or inflation issues at this point, despite some DOOOMMsaying about a likely punk GDP reading for Q3 that will be reported on Thursday.

There is no one foolproof indicator that always has indicated recession in advance. For example, as I have noted many times, the yield curve never inverted between 1932 and 1957, even though there were a number of recessions during that time.
But if inflation were such a bugaboo, why hasn’t the Fed raised rates? In the modern era, the Fed raising rates has always been a reason that the economy has slowed down. But let’s go further back. Because even before the Fed undertook a systematic raising/lowering interest rate regime, in fact even before there even *was* a Fed, there were commercial paper rates.
And short term commercial paper rates (basically short term commercial loans) almost always increased substantially before the economy tipped over into contraction – and indeed the increase in those rates was probably a factor in why the economy did so.
Here are short term commercial paper rates going all the way back to before the Civil War:

Note they always increased before every 19th or early 20th century recession.
Here are the same rates from the Great Depression through 1971:

The only cases where they did not rise appreciably were in 1938 and 1945. The former was a recession caused by a sudden contraction in fiscal spending. I’ll come back to the latter in a bit.
Here are the last 50 years:

Once again, we have appreciable increases, mirroring the increases in Fed short term rates, before every recession.
In summary, we have over 150 years of history telling us that, even if the central bank does not raise rates, commercial lenders will if they think they need to protect themselves, and that tightening of credit provision helps bring about a recession.
And there is *no* such tightening going on now.
Finally, let me come back to 1945, the one possible example that might be similar to our own situation. That was a recession brought about by the end of World War 2, and the sudden synchronous stoppage of war production in factories all over the US. It took time to convert back to civilian production!
So let’s overlay the quarter over quarter change in industrial production over commercial paper rates for that era:

In both 1938 and 1945 industrial production suddenly contracted by over 10% in one quarter alone.
Now here is the quarter over quarter change in industrial production over the past 5 years, including Q3 this year that just ended:

Industrial production *rose* 1.1% in Q3 compared with Q2.
There simply is no indication that either inflation or supply chain issues have caused an actual contraction in economic activity.



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