Oct. 8/23, Weekly Summary Analysis

 

 

The September jobs number was better than expected:

 

The monetarists see this as a negative because the Fed might raise rates some more. It won't matter if the Fed raises another 0.25%, which is only a 4.7% increase over the current FFR of 5.25%. It is not like when rates were at 0.5% and a 0.25% hike was a 50% increase. The knee-jerk reaction from the monetarists is gave us better prices to buy the dip.

 

The SPX is impeded at the start of rate hikes, but not once rates have risen (black indications below).

 

The lack of understanding, by almost everyone, about the monetary-system we have been using since 1971, when Nixon removed the dollar from the gold-standard, is almost comical. It does, however, give those that have a grasp of monetary-reality a massive advantage.

 

Fund-Flows

September's net-transfer was +$141B, compared to last September's +$48B.

The full-year (fiscal-2023) net-transfer was +$1,720B, compared to +$1,166B in 2022...a 48% increase.

The 20-day average of the daily net-transfers is +$3.87B/day which is well above last year's drain of -$1.50B/day on the same date.

The tax-take in mid-October (thick red vertical dotted-lines below) is likely to pull back the rally that started on Friday, like it did last year (black rectangles).

 

 

It now remains to be seen what fiscal 2024 brings; if there is a reduction in the net-transfers, then the market will suffer. However, most of the spending is non-discretionary which means reductions in spending should be minimal. And since interest rates are expected to stay elevated, the interest payments will continue to add to the deficit.

The non-functional Congress raises some concerns over the possibility of spending cuts, but we are in an election year during which spending cuts almost never happen, so we are not too worried yet, but we will monitor the daily Treasury statements and inform our subscribers of any reductions in spending that occur.

The SPX has dropped well below the $2T net-transfer rate and below the actual $1.7T transfer rate. We need to see how the net-transfers progress over the next few weeks, but if transfers stay above $1T, then the SPX will be supported.

 

 

Our liquidity model, while staying within a range over the past 3-months, has diverged from its normal positive correlation with the SPX (red-rectangle below). The correlation is expected to normalize at some point by either: the liquidity increasing in tandem with the SPX: or decreasing in tandem with the SPX. In the latest week, the SPX and the liquidity have both increased in tandem (green arrows).

 

Bank credit, the other "money creating machine", has been weak since the start of the calendar-year, but was again higher in the latest reporting week ended September 27. All major loan-types were higher, except for residential real estate loans. Weak credit-creation can be viewed as potential future-liquidity.

 

The HY spread has broken above the second resistance level (blue-horizontal) and is approaching the next resistance level. While there could be more weakness, we are closer to a bottom in the SPX than a top.

 

The FSI financial stress index continues to increase, but remains at a safe level for now. (for a more complete discussion, see David Huston's article HERE).

 

The reserves model has not been performing very well the past several weeks. It is currently in a headwind period that is supposed to last until Oct. 19. For the time being, the model is not performing well and we are ignoring it.

 

On the other hand, the foreign reverse repo model has done a good job of forecasting the SPX. It is predicting a near-term rally up to a local maximum (pink rectangle), followed by weakness. The SPX has started to move higher, but could weaken around the mid-October tax-take.

 

The SPX looks like it has reached the low predicted by the "other" reserves model.

 

Technical

The fractal step-pattern is still predicting a breakout to new highs.

 

The monthly SPX has bounced off its 12-mo MA and is close to braking out above the 8-mo MA. The September weakness is a speed-bump in the bull trend (orange oval).

 

The weekly SPX is back above first support.

 

 

The daily SPX has held support and is starting to move higher.

 

QQQ has held at support and is moving higher.

 

The IWM has under-performed the SPX and the QQQ, but its momentum measures are oversold

 

 

Thrust is bouncing off of oversold levels.