Mirror Opposites

By Crest Capital Advisors on September 9, 2022

Dow: 2.66% to 32,151.71
S&P 500: 3.65% to 4,067.36
Nasdaq: 4.14% to 12,664.50
Russell 2000: 4.04% to 1,882.85
10 Year Yield: 3.31%
Outperformers: Consumer Discretionary 5.62%, Materials 4.94%, Financials 4.38%
Underperformers: No Negative Sectors on the week.

US stocks rallied this week to break three-straight weekly declines, turning in a near mirror image series of gains for the respective indices, and fully erasing last week’s decline. The gains came despite a high degree of skepticism from the bearish camp. Afterall, nothing really changed from previous weeks, yet the market ripped higher. Let’s do a quick inventory of what we got this week:

Hawkish Fed Rhetoric? Check and ‘No problem’.
Higher Interest Rates? Check and ‘Been There, Done That’.
European Rate Hike? Check and ‘Meh’.
China Covid Lockdowns? Check and ‘Yawn’.

Perhaps the largest catalyst was simply that sentiment had once again reached too extreme of a low. JPMorgan said net positioning has fallen back to the first percentile since 2017 for equity long/short net leverage, with hedge funds still defensively positioned. The latest AAII survey showed bulls falling to 18.1%, the lowest since late April, while BofA’s Bull & Bear indicator also fell back to zero after rising for the first time since April last week.

Looking ahead to next week, the main event will focus on Consumer Prices and Producer Prices via the CPI and PPI reports. Economists are expecting another deceleration and, if we see a second consecutive “less than” report, it could provide a catalyst to keep this week’s rally moving higher.

Tactical Update

The dog fight at 3,900 on the S&P 500 continues…after getting short-term oversold, the S&P has shown some resilience in defending the 3,900 level this week, with several days of strong upside breadth adding to the significance of this area. If the approximate -10% decline from the mid-August rally high is to prove itself as a successful retest, it would be important for sustained momentum to quickly re-emerge. The late week push is a start in the right direction. Either way, we’ll let the market determine the path forward. With downtrends still dominant around the globe, the bar remains high.

The chart below clearly indicates the wedge that is forming as we connect the lower highs throughout 2022 (Forming the downtrend) in contrast to the recent string of higher lows, forming the short-term uptrend. The resolution from this wedge formation (higher or lower) will be significant to determining the intermediate direction of the market.

Only One Winner Thus Far

2022 has been a tough year for nearly every asset category, with only one asset class higher…Commodities. The table below shows the year-by-year results for major asset categories over the past 6 ½ years.

Peak Inflation – Right On Schedule

While our illustrious Fed Chair may prefer not to focus on monetary drivers of the current bout of inflation, there are many economists that would gladly disagree with him. We’ve shown variations of the chart below on several prior occasions — primarily because it accurately forecasted the rise in inflation we’ve experienced — and we commensurately argue the graph is forecasting an imminent drop in inflation.

As a refresh for those that may have responded to prior CMD’s with a “TLDR” (Too Long, Didn’t Read), the chart below overlays the increase in US Money Supply (M2) with the Personal Consumption Expenditure (PCE), only lagged by 13 months. What it shows is that growth and contraction of money supply leads inflation by about 13 months. So, here we are, right on cue just a bit more than 13 months removed from peak Money Supply, and we are seeing peak inflation today. So, what do you think we’ll see 13 months from now? We argue it will be substantially lower inflation!

And, it’s not just the PCE that is showing us falling inflation. Just this past week, we received the following reports:

The August Services PMI showed the sharpest contraction in US Services since May 2020 due to weak demand. New orders were down the sharpest in 2+ years. Employment grew at the slowest pace since January. Finally, input and output inflation eased to the lowest in 16 months. Similarly, the August ISM Non-Manufacturing index decreased for the 4th consecutive month to the lowest reading since January 2021.

Dumbing It Down

The following has nothing to do with markets, but everything to do with lockdowns and more specifically, school closures. According to data released this week by the National Center for Education Statistics, we see the average math score for 9-year old US students fell 7 points from 2020 to 2022, the first statistically significant decline since long-term trend assessments began in the 1970s. Reading scores fell by 5 points, the sharpest decline since 1990!

Economic Funnies

In honor of the kickoff for week 1 of the NFL Season!

Crazy Stats of the Week

Here are this week’s crazy stats:

Last week, institutional traders bought $8.1 billion worth of put options. They bought less than $1 billion in calls. This is 3x more extreme than in 2008! This is off the charts for 22-years worth of data. From a contrarian point of view, this adds massive fuel to the rally fire and probably helps to explain a large part of this week’s upside as positions are unwound.

It’s happening. According to Mannheim, wholesale used car prices declined 4% in August, the biggest 1-month decline ever recorded. Record rates of ascent in 2021 are being met with record rates of descent in 2022. Inflation is heading lower!

Quote of the Week

“[Low inflation] is one of the major challenges of our time.”
– Jerome Powell, 2019

“History cautions against prematurely loosening policy.”
– Jerome Powell, 2019

Calendar of Events to Watch for the Week of September 12th

The earnings calendar remains relatively slow with notable reporters being Oracle on Monday after the close and Adobe Thursday after the close. But the US Economic Calendar will be quite busy, with August CPI data on Tuesday and PPI on Wednesday leading the news cycle. This will inform Fed rate hike expectations and likely influence the near-term direction of stocks at least until the Fed meets again on September 20th – 21st. Enjoy your weekend and the kick of the 2022 NFL Season!!

Monday 9/12– No Major US Economic Reports. Overseas, Japan will release its August Domestic Corporate Goods Price Index.

Tuesday 9/13 – The main event of the week will be the August Consumer Price Index (CPI). Economists are expecting a headline rate of 8.1% year-over-year and a Core (ex-food/energy) reading of 6.1%. The month-over-month change at the headline is expected at -0.05% (that’s deflation) and at the core at 0.40%. Last month’s report came in below expectations so if we can get two in a row, the market would likely respond very favorably.

Wednesday 9/14 – Following on the heels of the CPI, today’s Producer Price Index data is also expected to show a decline from prior reports. The headline rate is projected to come in at 8.9% whereas the Core rate (ex-food/energy) is projected at 7.1%. Here again, economists are projecting a roughly flat month-over-month rate.

Thursday 9/15 – Lots of data out today with August Retail Sales projected at 0.1% for the month and August Industrial Production at 0.2%, down from 0.6% in the prior period. We’ll also get the Philly Fed Index (expected to show meager results) and the Empire State Index (expected to be less of a contraction than last month).

Friday 9/16 – The University of Michigan Consumer Sentiment Index for September is expected to show a slight uptick to 59.2 from last month’s 58.2.

Source: FactSet