I’ll take door # 3, Monty

January 13, 202311 Comments

“Don’t fight the Fed” is a cardinal rule to be aware of when investing in the stock market. The Fed (and the BOC) responds to inflation and growth in the economy by using monetary and fiscal policies to keep these two key measurements balanced. Right now, the Fed is dealing with high inflation.  Monetary tightening has been the tool used by the Fed to reduce it. Investors are fixated on what the Fed’s next move will be. CPI reports are eyed bullishly if there are signs of inflation easing, or bearishly if inflation seems persistent.

This week’s headline CPI coming from the USA may comfort the bulls. That means less tightening, they believe – and that’s bullish for stocks.  But Sticky CPI (food, rent, wages) should comfort the bears . This CPI reading might be a little like weight loss. When you diet, the first 10lbs come off fast. But the last 10 take 5 times as long! Reducing CPI may take longer than the stock market anticipates

“2/3rds of consumers living paycheck-to-paycheck. This isn’t a great situation for an economy led by consumption.”- BearTraps

 

Why history matters

As we can see in the chart above, inflation started in the same range that we’ve just been through (aka 2% or less). Through the 1960’s, it rose into the 6% range. A brief decline, and inactivity by the Fed to taper inflation through monetary tightening, a massive spike was seen by 1975 at 12%. Here’s the clincher: after coming down to 6% in 1976, CPI rose to almost 14% by 1980!

This is a mistake the Fed wants to avoid at all costs. They will keep rates tight until inflation is beat. That – as I have been hammering on for 2 years now – will push us into recession.

IMPORTANT: Read my very important “Go Johnny Go” blog to understand the opportunities from that cycle, and then read my Right on Schedule blog to understand what sectors should perform as that cycle moves forward.

“I’ll take door # 3, Monty”

Door #1: Stock investors are assuming that inflation is declining and the Fed won’t raise much longer or deeper. Then, the economy will enter a mild recession in 2023. This will bring about disinflation and the Fed/BOC, with perfect timing, will flatten then ease rates and thus avoid deflation, or stagflation. This scenario seems very unlikely given the track record, and cold hard reality. Still, it seems to be priced into the market.

 

Russia may trigger the next move UP in energy & DOWN in stock markets

I have noted in past blogs that one of the research services ValueTrend has access to is a political investment analysis service (ACG Analytics). Basically, they look at alternative data – that is, worldwide moves by politicians that can affect stocks, commodities, bonds, currencies. Its really been quite insightful. For example – in helping us to identify opportunities in energy in 2020. Back then: extreme ignorance/stupidity prevailed when leftist governments were capping energy production – with no planning or foresight beyond their political idealism and swaying financially unaware young voters.  This, right on the cusp of COVID reopening demand. The setup was there for a pop in oil. Coupled with a base breakout on the chart, it was a fantastic trade, which we exited (mostly) in early 2022.

Recently, I noted in this blog that ACG has speculated on a potential move of heightening aggression by Russia against Ukraine in February. Well, here we (may) go:

Hot off the press (January 11):  Link here

Sudden Surge In Russian Navy Ships And Submarines In Black Sea

 

 

What does this mean?
-Surge in Russian Navy and Submarines in the Black Sea
-Suggests a new era in the conflict might be about to start

Another factor that may trigger a move in energy prices:

We see the upcoming round of sanctions on Russia as a catalyst for refined product prices such as gasoline and diesel. EU is planning to cap the price of Russian refined products starting Feb 5. Based on Russia’s comments and actions to the December price cap on their crude, we can expect that Russia will severely limit the export of refined products to the EU once the cap is in place. This means that Europe will need to get the more refined product from elsewhere, most likely the US. -BearTraps

 

Conclusions

  • The market has priced in a Fed pivot, which it may not get. If it doesn’t, markets will likely sell off.
  • Sanctions on Russia may invoke a new spike in energy prices.
  • Military moves by Russia may add to the reasons for a market selloff.

IMPORTANT: Watch for markets rolling over as the current rally matures… the final Wave down (washout) may be approaching

 

 

11 Comments

  • Thank you for writing about everything, your the best commentator, the clearest voice, I’ve unsubscribed from the rest.

    Reply
  • Interesting that the suggested move in oil also fits into the seasonality charts. Perhaps the two combine for a larger move. Because the seasonal move is based on a stocking up period for refiners before the summer driving season and the upcoming cap in Europe is on gas and diesel do you think that the biggest move will come from Western Canadian Select closing the discount to WTI?

    Reply
    • Not sure if WCS will close the gap, although that is an interesting angle I hadn’t though of (thanks!). WTI is the standard, so I watch it closely. But to your seasonal point, yes that absolutely fits into the argument–although bears might say a recession dampens that seasonal cycle. Either way, we drive and heat homes and transport goods–and any shortage is going to push the price even if some of that activity is reduced a bit.

      Reply
  • Very revealing if that’s going to happen, a naval attack on Ukraine.. I also just read that CDN Governement is giving
    $5 million anti-missile system and battery FREE to Ukraine. If Canada has to contribute to NATO, what does it have ? Why are so many 100’s of millions and billions of CDN dollars available when Canadian military is defunded? As a reservist back in 1990, I was paid $5.50 per hour (five dollars ….) and .25 cents per hour more if in the field, not in the Regiment, training or working.

    Why was that money not paid to the actual front-line people back then, or NOW ..the military personnel?

    Is it because Christa’s Grandpa and Grandma are from Ukraine ? is there a conflict of interest maybe ?

    Reply
  • Thanks for your thoughts.

    Your thesis doesn’t seem to be changing, just pushed forward.

    Has that affected your allocations?

    ( The thesis initially being a September pivot, then later a December pivot)

    Reply
    • Obviously there will be a pivot – but not until the recession is acknowledged. That could be a bit longer than I thought. But the song remains the same.

      Reply
  • Thanks for your clear comments. We are back down to the low end of the VIX price channel again, let’s see if we bounce off it again. Do you have any thoughts on 0dte options (super short options that seem to proliferate at this time), and how they affect the markets?

    Reply
    • Harry–good question. I dont trade options (many years ago I did but have not for 20 years)–so I am not up to speed on these new options.
      And yes- good observation. The VIX has a tendency to bounce (aka vol picks up, aka markets correct) when its in the 20-range. Its below that now. A mega-complacent market often gets to 12 or lower –which typically signals a huge correction about to happen. So lets see if the market takes a dip now at current VIX level, or if the party goes on so late as to invoke a mega-decline

      Reply
  • Thank you for the heads up Keith….Definitely some flash points to watch out for…..Just exactly when did you experience this 10 day weight loss of which you speak?…Was it in a previous incarnation?…LOL

    Reply
    • Actually, although I have been a “serious” cyclist for 35+ years, and racing for 30 of those years–I recognized after years of mid-pack race results that I was carrying too much jello to be competitive. So I lost some 20 lbs — went from 180lbs to 160 lbs! And yes, it was easy to lose the first 10. Then, although you do establish a rhythm of eating, you start to feel you’ve had enough and really want to go back to your old habits. If you look at the cover photo of my first book, SmartBounce, taken in 2009, you will see my “before” picture. I was pushing 180 in that photo!

      Reply

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