Hello Everyone,
Two weeks ago (October 16th Weekend Newsletter) , I wrote that the market was at a very important short term juncture. Why? The SPX had met the minimum requirement of 5 waves down on October 13th but we could not completely rule out a subdivision lower until the SPX broke out of it's declining channel. The divergence at that low was fuel but the real spark for the current rally (for those who don't remember) came from a WSJ article authored by Nick Timiraos that hinted at a potential Fed Pivot. This article dropped pre-market when the futures were trading at their globex session lows - that marked the bottom (to the minute) and the futures rallied over 150 points leading to a major reversal candle and setting the stage for last week's follow through rally.
So what can we expect next? Once again the market comes into an important juncture with the FOMC decision on Wednesday November 3rd to be followed by the election on Tuesday November 8th and the all important CPI report on Thursday November 10th. Ironically, we have the new Fed Mouthpiece (call him Nickileaks) out preaching a different tune. I posted a snippet comment below but you can see such articles that I posted in the trading community.
The Federal Reserve can't risk not getting on top of inflation, The Wall Street Journal's Nick Timiraos says.
"Even though the risk of doing too much is a recession, the risk of not doing enough is that inflation just stays high and you have to have a bigger downturn later."
With such momentum and many newly born bulls, I think the market largely overlooks his comments (maybe a smaller degree pullback) and instead will focus on the FOMC decision on Wednesday and JP's comments. As stated many times, the FED finds itself in a very difficult position. Their efforts so far have done little to tame inflation (monetary policy has a longer lag effect) and real rates are still quite negative. On the other hand, the risk of continuing on the current aggressive path for too long is that something breaks. Remember what transpired in the UK with their pension issues.
Lastly, I keep wondering what is next on the geopolitical scene. The Russia/Ukraine war does not seem to have any short term resolution in sight - in fact, the latest developments will likely pressure grain prices higher. Further, China's XI is now firmly in command and we have yet to see a response to the Biden administration's policies regarding the chip industry. Do you think he accepts such actions and does nothing?
Thus far the SPX has retraced approximately 50% of it's prior down leg (typical retracements are 50-62%). Let's see what unfolds this week, for the bulls to extend they want to see pullbacks form a higher low and to be followed by a higher high (larger ABC). What would be concerning for the bulls would be a deeper pullback that is followed by a lower high. One thing for sure, the recent rally has served to alter sentiment (the CNN Fear and Green is now showing a reading of 57 which is in the Greed zone) with a big increase in the NAAIM index. There is certainly room to expand higher but much of the protection that was previously in place has been swept aside.
Steve
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