Bulls are limping and scattered after being tripped by the Fed chair’s super-hawkish oration in Wyoming, notes Jon Markman, editor of Strategic Advantage.
In this issue, we refer back to history to explain why the elite bankers are so focused on inflation, and we take a long look at new federal legislation that is likely to open the floodgates for massive investment in green energy producers and suppliers.
Strategic Insight
Bulls were walloped Friday following comments from Federal Reserve Chairman Powell at his Jackson Hole retreat. It was never a contest. Don’t fight the Fed is one of the immutable market rules for a reason.
The benchmark S&P 500 (SPX) declined immediately and closed at 4,057, the session low. The 3.4% loss bolsters the bearish narrative that the Fed is public enemy number one for bulls. It’s a good talking point, and a further decline to the inverted 50-day moving average now seems inevitable.
That marker is at 3,996 and rising. The slope is important. Expect bulls to vigorously defend that level because real interest rates, for mortgages and corporate lending, are determined by bond traders. Those rates are dictated by inflation and economic growth. They are not rising.
The Ten-Year Treasury yield peaked in June at 3.25%, coincident with the bottom for the S&P 500. As the economy slows in the weeks ahead, those rates will fall. Bulls will argue, correctly, that inflation has peaked.
The fight for the soul of the market is far from over. Bulls have plenty of ammo and won’t give up without a real fight. Expect a rally for the benchmark this week starting at the 3,996 level. Initial overhead resistance is at 4,120.
Money Mayhem
Before going on, a quick history lesson is in order.
Keep in mind that inflation is largely good for borrowers (eg the middle class) and bad for lenders (the elites). This is because inflation makes money in the future worth less than money today.
This pivot between borrowers and lenders has existed for centuries and will likely endure for centuries to come. The value of money has undergirded political battles for as long as coinage has served as a means of payment.
You may recall your grade 11 US history class which covered William Jennings Bryan’s famous “cross of gold speech” at the 1896 Democratic convention in which the Nebraska representative argued that “bimetallism,” or the introduction of silver into the money supply, would bring more prosperity to farmers, “laboring interests” and “toiling masses.” Elites were opposed to allowing silver to dilute the money supply.
In his speech, Bryan famously decried the restrictive gold standard in effect at the time, concluding the speech, "you shall not crucify mankind upon a cross of gold". (Listen to the speech here; the “cross” line occurs at 9:30.)
I mention this because there is a lot more to inflation than the cost of eggs and gasoline. It has been and continues to be a friction point between Wall Street and Main Street, and you’ll never guess who usually wins these battles. Reducing inflation serves the elite so that is the Fed’s objective.
Strategic Trade
The upward trajectory for the S&P 500 fizzled Friday morning. I still plan to recommend purchase this week of the ProShares Ultra S&P 500 (SSO) and the ProShares Ultra QQQ (QLD) into a decline to the 4,000 range. Wait for my signal; don’t jump the gun.
This is an all-out war between bulls and bears. The battle lines are drawn. The bulls are defending the rising 50-day moving average. Bears are holding tough at the declining 200-day average. When one of these lines is broken, the next major market move will ensue.
The Backstory
The Dow Jones Industrial Average (DJI) plunged 3% to 32,283.40 and the Nasdaq (IXIC) retreated nearly 4% to 12,141.71. For the week, the three market indexes reported at least 4% declines. Those are big drops, make no mistake.The battle is joined and it will be medieval in its cruelty, like “Game of Thrones” without the sex. “Leave one wolf alive and the sheep are never safe,” said female assassin Arya in GOT, adding later in the show, “Fear cuts deeper than swords.”
Technology (XLK) and Consumer Discretionary (XLY) led the decliners Friday, with all sectors in the red. Breadth favored decliners seven to one, and there were 238 new lows vs 60 new highs. The thin ranks of leadership were Equinor ASA (EQNR), Arthur J Gallagher (AJG), Constellation Energy (CEG), and CF Industries (CF). Energy, fertilizer, and cell phones—a weird mix. It’s as if the advancing army has lost its generals. “When you play the game of thrones, you win or you die. There is no middle ground, said Cersei Lannister.
Despite signs that inflation has slowed from recent peaks, the Federal Open Market Committee will not pause its campaign to bring price growth down, Powell said Friday. "We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored," he said. "We will keep at it until we are confident the job is done."
Powell expects that achieving price stability will take "some time" as the monetary tightening cycle continues while acknowledging that it poses "some pain" for the economy. Believe him.
The US two-year yield ended one basis point higher to 3.4%. The ten-year yield climbed by a basis point to 3%. West Texas Intermediate futures rose 0.4% to $92.85 a barrel, clawing back declines earlier in the session.
In other economic news, the personal consumption expenditure price index fell by 0.1% in July, below the flat reading expected, trimming the year-over-year rate to 6.3% from 6.8% in June, according to the Bureau of Economic Analysis.
Data released Friday by the University of Michigan's Surveys of Consumers showed that year-ahead inflation expectations eased to 4.8% in August from 5.2% in July—the lowest reading in eight months—while the five-year outlook remained flat at 2.9%.
In company news, Amazon (AMZN) will probably not acquire Electronic Arts (EA), CNBC reported, citing unnamed sources, quashing earlier media reports the e-commerce giant was all set to mount a bid. Shares of Electronic Arts jumped 3.6%, the top performer on the S&P 500 and the Nasdaq 100, while Amazon's stock fell 4.8%.
Several brokerages lowered their respective share-price targets for Marvell Technology (MRVL) after the semiconductor manufacturing firm reported fiscal second-quarter results late Thursday. Shares of Marvell slumped 8.9%, the second-steepest decliner on the Nasdaq 100.…Tech is in trouble.
