Oct. 29/23, Weekly Summary Analysis

 

There is a lot going on:

A slow-moving climate catastrophe.

A US Congress incapable of functioning normally.

Two dangerous wars.

A Federal reserve that has the connection between inflation and interest rates backwards.

The causes of climate-change are both man-made and natural. We can do little-to-nothing about the latter, and we are not doing enough about the former. Humans have progressed because of the tools we invent. To continue progressing, we have to invest in creating climate-friendlier tools...it is existential. That is why we continue to bet on climate technologies even though they are out of favour currently.

Congress will be unable to properly function as long as a handful of GOP are intent on stopping it from functioning. However, even though the new House Speaker holds seriously anti-Democratic ideas, he at least seems to want the US Government to work well enough to fund both Israel and Ukraine.

The Fed raised rates at a historic pace because it believes that Volcker solved the inflation of the 1970's by raising rates (enough to strangle the economy)-- even though Volcker himself admitted, later in life, that he had actually been wrong to push rates the way he did. The Fed has done this because it does not have a working model of inflation. Most of the World's central banks follow the Fed in this, even though the data shows that the opposite is true.

Most central banks are hiking rates at present as a reflection of the dominance of the New Keynesian prioritisation of monetary policy as a counter-stabilising, anti-inflationary policy tool over fiscal policy. One central bank is not following suit – the Bank of Japan. The BOJ has not shifted rates, is maintaining its yield curve control policy and the government is expanding fiscal policy. The diametric opposite to the New Keynesian approach. We now have enough data to assess the relative merits of the two approaches. Japan has lower inflation, no currency crisis and its citizens are better off as a result of the monetary-fiscal policy initiatives....Prof. Bill Mitchell

The Fed simply does what Wall Street tells it to do.That is why, the Fed will not raise rates this coming week...

 

...and likely will not be raising rates in December either.

 

Considering all of the above, the reality remains that the stock market depends on having positive net-transfers into private bank accounts. The weak net-transfers so far this fiscal-year are in the process of strengthening, which will support the stock market.

 

Fund-Flows

To date, $51B of the $80B tax-take has been returned. October's net-transfer, so far, is +$10B, compared to +$55B last year. The leading spending-flows, however, are higher this year ($420B) than last  year ($390B). This increased spending-flow, gives us confidence that the extra-large tax-drain will be returned to the private bank accounts soon.

The 20-day average of daily net-transfers is +$3.80B/day, compared to last year's +$7.10B/day. The spending-flows will eventually close this gap and the SPX will rally again.

The TGA has $200B more sitting in it than it did last year at this time. That represents $200B more possible spending than last year.

 

 

The SPX has 'overshot' and fallen below the $1T net-transfer rate. Unless spending is halved and/or taxes are increased relative to last year, the SPX will rally back above the blue-line.

 

 

Aggregate bank credit (the other money-creator) continues its year-long decline. All loan types were lower for the week ending Oct. 18/23, except for a small increase in commercial real estate.

 

 

Our liquidity model is up for the second week in a row and its correlation with the SPX is back in positive territory. Over the next month, liquidity should grow further due to the positive net-transfers we are expecting; there is a quarterly interest-payment on Nov. 15, and no more tax-dates until mid-December.

 

 

The HY spread is trying to make a top (SPX low.)

 

 

The financial stress indicator is below zero and falling.

 

 

Foreign reverse repo maxima and minima correlate with the SPX on a 1-3 week lag. The SPX should be at, or just a few days away from a minima (green).

 

 

I have reformulated the reserve model. The new model fits the data better than the old one. This new formulation shows the market is in a headwind period until the first week of November.

 

 

From a fund-flow perspective, the SPX is oversold and will start to bounce over the next several days.

 

Sentiment

 Up-spikes in the Rydex bear:bull asset allocation ratio (green-ovals) correlate with SPX local-lows. The Rydex ratio is at, or close to making an up-spike which implies that the SPX is close to making a low.

 

 

Negative spikes in the AAII bull-bear differential, mark local SPX minima. Like in the Rydex ratio (above), this differential is implying that the SPX is close a local-minimum.

 

 

The equity put:call ratio is trending bullish (green arrow).

 

 

The 50-week MA of the NAAIM has stalled (red-oval). This is a caution flag that we will continue to monitor.

 

 

David Huston sent along the CNN Fear and Greed Index which shows that fear levels below 24 correlate with SPX lows. This indicates we are closer to a low than we are to a high. This sentiment indicator is bullish.

 

 

Maxima in the nominal weekly put:call ratio when associated with an up-spike in the 10-day MA, correspond to bottoms in the SPX 90% of the time.

 

 

From a sentiment perspective, the market is closer to a minima than it is a maxima.

 

Technical

At the monthly-scale, the 8-mo MA remains above the 122-mo MA and the SPX is still above the 40-mo MA. However, the MACD is on the verge of a bear cross-over, and the ADX has already crossed over (red-ovals). It would be a bad technical signal if the SPX drops below the 40-mo MA.

 

 

 

At the weekly-scale, the SPX has closed below the 50-week MA and the next support is at the 200-week MA (~3950). On the positive side, the momentum indicators are oversold and due for at least a bounce.

 

 

 

At the daily-scale, the SPX has closed below the 38% Fib level, but it has held at the 4100 support level (like it did back in May). On the positive side, all the technical and momentum indicators are very oversold and due for a bounce.

 

 

The QQQ is in the support bubble on the lower rising channel-line, and all the technicals are oversold and ready for a bounce. Next support is at the 200-dma (~340).

 

The Russell 2000 Value ETF (IWN), is at the bottom of the trading-range that it has been in since mid-2022, and the majority of the technicals are oversold.

 

 

Thrust has started to bounce higher off of oversold level (red-box).

 

 

David's breadth model has yet to show signs of recovery.

 

 

The BB-width model is in a headwind, but the %B is at its lowest level all year (red-rectangle), which means a bounce is near.

 

 

From a technical perspective, the long-term is starting to look a little "weak", but shorter-term the daily technicals are calling for a bounce that would help brighten the longer-term technical picture.