December 13, 2022
Good morning,
With apologies, I was off by a day yesterday. The much-anticipated CPI comes out today and the Fed’s meeting decision is tomorrow. So, today is a big day (part 1). The equity market is anything but quiet ahead of this morning’s number. Yesterday’s rally (S&P up +1.43%) continued overnight and Futures are up another +0.60% an hour before the print (8:30 am ET). From the outside, it seems like stock market traders think things are going up no matter the outcome of today’s number. Inside the market, however, the Volatility Index has quietly gone from 19 to over 25 in a few days of harmless tape action suggesting whatever happens over the next couple of days, it may be explosive in either direction.
Stepping back from the daily action of the market, let’s look at how our rally is doing from a duration perspective. Recall the most recent health check revealed a rally that would likely last into year-end. We’ve been watching for longer-term rally confirmation from intermediate-term and longer-term technical breadth indicators that the rally has staying power. Those longer-term signals, absent during the past spring and summer rallies, are still missing for the current rally. Side note, there has been more improvement from global indicators than domestic ones. However, that is likely attributable to the low technology sector representation in overseas indices compared to ours.
Looking at the health of the current rally from macroeconomic indicators vs. purely technical ones, Inflation Timing Models (Ned Davis Research Economics team) for stocks and bonds have turned bullish. That may be one macro puzzle piece underlying the current rally. However, stock earnings yields are bearish for stocks versus interest rates now, and a recession could really hurt that relationship further. The NDR Economic Timing Model is consistent with an upcoming recession, and Fed Policy, while not as hostile, is still favorable (Don’t Fight the Fed).
We have a bit of a mixed bag of market signal evidence that it is bifurcated on a timeline, with the bullish evidence on the short-term side and less than bullish evidence (dare I say bearish) on the longer end of the timeline. Best guess then – we may see more rallying to celebrate the peak in inflation and peak Fed hawkishness but that the outlook for profits and valuation will weigh on stocks in the first half of next year.
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After writing the above, the CPI printed .01% vs. 0.3% estimated. Good news for bulls, Futures jumped 2%. One down, one to go this week. See you Thursday.
Be well,
Mike