Economic Stagnation and Inflation: What Lies Ahead for the Market?
2023.05.22 07:17
We started out this year thinking that the economy stagnates, and has a second wave or a super-cycle.
At this point, 5 months into the year, the recent economic stats still support that our economy is contracting.
But those numbers are looking back, not forward.
Risk factors that all turned positive this past week now suggest that perhaps we can look forward to a better market other than what we have just witnessed in the tech sector.
With a market timing mechanism of a 2-year shorter-term business cycle within a long-term 7-year business cycle hence zooming out, the growth in chips and AI is in expansion.
The monthly charts of and indicate that growth can continue upward if May closes out above the blue or 23-month moving average.
The SPY chart shows just how powerful that moving average is. SPY touched it, tickled it, and is closing the week pretty much dancing on it.
On the other hand, the small caps, retail, and even transportation are still weak.
If SPY clears 420, then it could see 440-450.
But what will small caps do?
How long can the market hold up if we are seeing nothing more than a stagnating or, worse, more contracting “inside economy”?
The and Retail are at a completely different precipice than the SPY and QQQs.
The question is, will they contract more, thereby failing the longer-term business cycle as seen by the 80-month moving average in green?
Or are they done contracting, thereby holding the 80-month MA and hence proving that we have seen the bottom of the trading range? (using October lows as major support)
After a news-heavy week, our original thoughts about an impending super-cycle of commodities are back on the table.
The CRB index hit a 52-week low, so what seemed so clear in January has yet to play out in May, 5 months in.
For the next several months, though, many inflationary bullets could resurface.
Watch the momentum (Real Motion) in the CRB chart, which is bouncing off the 200 day moving average (green).
And watch the price, especially if it clears back over 265. That, to us, would be a signal that commodities are ready to rise again.
Regardless, stagflation is our yin/yang scenario.
Looking back to past peaks -the one in 2000 and then the one in 2008 (which, by the way, had a lower high and a lower low than the one in 2000, it took until 2013 to see new highs.
Now, with the peak we saw in January 2022, one has to wonder how many years it will take to get through 4800.
ETF Summary
- S&P 500 (SPY) 23-month MA 420 Support 410
- Russell 2000 (IWM) 170 support – 180 resistance
- Dow (DIA) 336 the 23-month MA
- Nasdaq (QQQ) 336 cleared or the 23-month MA-now its all about staying above
- Regional banks (KRE) 42 now pivotal resistance-37 support
- Semiconductors (SMH) 23-month MA at 124 now more in the rear-view mirror
- Transportation (IYT) 202-240 biggest range to watch
- Biotechnology (IBB) 121-135 range to watch from monthly charts
- Retail (XRT) This could be the new harbinger like KRE was in March. Poor Granny.
