It’s All about the Fundamentals..

This past couple of weeks have seen a lot of market commentators talking about how the market action is all about the technicals and whether various moving averages and trend lines of the bear market are being violated. That is all well and good, but for me the fundamentals are what is important now.

The Market Bottom is fully developed.

• The bottom that started being built on May 11, 2022 has become fully developed. The S&P close on May 10, 2022, the day before the bottom started, at 4001. This 4001 level has now become an important swing point in the SPX 3950 to 4050 consolidation zone.
• Interest rates, inflation, and the FED have played a role. How I feel about this aspect has been covered in various posts lately.
• I would not be surprised to see the FED stop trying to raise the FED Funds rate at the next meeting, but next, try to control the long end of the curve by accelerating QT, i.e. dropping the Balance sheet more rapidly. This will give them a bit of cover on trying to be tough on inflation. Actually, doing this will play into the hands of macro analysts by giving them the kind of yield curve associated with favorable economics, i.e. the 30 year rising vs the 5 year rate.
• One thing that I believe that many analysts are missing is that the consumer, the 70% of the economy that everyone likes to talk about, is changing where they are putting their money. Covid turns out to be more than death tolls, it is about bringing people to realize that there are bigger things out there than Facebook and Twitter and all the Fang type stocks. There is a new economy that is taking on climate change and broad health issues. If one takes a look at the sectors that have acted well since the FED rate rise hit a wall on January 9, it has been Solar, Chips, Biotech, and EV, the core pieces of the New Economy.
• Big numbers are coming out this week before next weeks FED meeting, those are the fundamentals that I feel are important.
• Q4 GDP and Durable Goods on Thursday.
• PCE Prices, Durable Goods, U of MI sentiment, and GDPNOW 1st QTR on Friday.
• A couple of add on’s here this morning. I don’t think oil and gold are going to do well once the S&P clears the 4100 area and holds. These are sectors where big money is hiding. As such I am looking at short ETF’s, GLL in gold and SCO in oil. Also, my comments on the dollar in the 2023 forecast still hold. We saw a top in the dollar on Sept 27, 2022, actually the early sign that market based interest rates were close to topping a month later. So, I am just watching the dollar in the expectation that the DXY 97.00 area will be touched in 2023.

So entertain yourself watching the big money bears who are already heavily short, sell against the technical lines through the FED meeting period. I believe things will get interesting on the upside in a couple of weeks. I will probably defer from making comments until the SPX closes over 4100 or fails to do so and closes under 3900.

And one more thing…Fifteen years

I started this website and blog on January 22, 2008, 15 years ago. I just realized this morning that I had passed that waypoint on Sunday. In March, if the lord willing, I will celebrate my 80th birthday. It has been interesting and fun, not always right, but seldom late to a Macro turn. I remember so well my start in the business, walking onto the floor of the Chicago Board of Trade on July 15, 1970, just as the Corn Blight hit, corn had traded for years around 1.10 a bushel, all of a sudden it was 1.70 a bushel, the excitement keeps showing its face.

I then quickly moved to the Chicago Mercantile Exchange trading cattle, hogs, and pork bellies. During my ten years on the CME floor, I got to see the start of currency and interest rate futures. Then in 1980 as the computer saw its early start in trading I moved upstairs and in a sense I have never left the computer trading scene, even engaging in the folly of raising money to develop machine learning for trading, it would have been much easier to have waited 20 years and let silicon valley do the hard part, raising the big development money. Now AI is everywhere. See WSJ article from 1986 here.

Donald Knepp