Whipsawing Higher On “Transitory Disinflation”

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[Chart courtesy of MarketWatch.com]

  1. Moving the markets

As the chart above shows, pumping, dumping, and pumping was the theme of the day, as traders tried to incorporate Powell’s “transitionary disinflation” in their vocabulary, while assessing if it would produce a bullish or bearish outcome.

Judging by the ramp into the close, the current picture is positive for equities, but traders and algos alike had to sort through seemingly opposing statements during his latest speech.

Here are some of the highlights:

  • …disinflation has barely begun and there’s still a long way to go…
  • …financial conditions have tightened.
  • …more rate hikes are likely to be needed. This process is likely to take quite a bit of time…
  • My guess is it will take certainly into not just this year but next year, to get to 2%.
  • The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more than is now expected.

Yet, all Wall Street heard was “disinflation,” and off to the races we went. Never mind that he did not mention any pause or pivot in his speech, and he even stretched the timing of his projected outcome into next year.

Bloomberg’s Ira Jersey viewed market reaction with a sense of reality:

“The market (could it be algos?) again seems to take the word ‘disinflation’ and give it a greater significance than it should have.

But “the caveat of ‘early’ in the process just solidifies my view that the Fed won’t be cutting this year, which is different than the market is pricing.”

I agree with his more hawkish assessment, and that today’s euphoric reaction does not sync up with reality. However, bond yields were mixed, as the US Dollar tumbled, and triggered a ‘Death Cross,” which helped Gold to inch closer to it’s $1,900 level.

The precious metal has now triggered a golden cross, which means its 50-day M/A has crossed above its 200-day M/A, a very bullish sign.

2. “Buy” Cycle Suggestions

For the current Buy cycle, which started on 12/1/2022, I suggested you reference my most for ETFs selections. However, if you came on board later, you may want to look at the most current version, which is published and posted every Thursday at 6:30 pm PST.

I also recommend for you to consider your risk tolerance when making your selections by dropping down more towards the middle of the M-Index rankings, should you tend to be more risk adverse. Likewise, a partial initial exposure to the markets, say 33% to start with, will reduce your risk in case of a sudden directional turnaround.

We are living in times of great uncertainty, with economic fundamentals steadily deteriorating, which will eventually affect earnings negatively and, by association, stock prices. I can see this current Buy signal to be short lived, say to the end of the year, and would not be surprised if it ends at some point in January.

In my advisor practice, we are therefore looking for limited exposure in value, some growth and dividend ETFs. Of course, gold has been a core holding for a long time.

With all investments, I recommend the use of a trailing sell stop in the range of 8-12% to limit your downside risk.

3. Trend Tracking Indexes (TTIs)

Our TTIs finally rebounded as Powell’s speech was interpreted as bullish.  

This is how we closed 02/07/2023:

Domestic TTI: +8.83% above its M/A (prior close +7.83%)—Buy signal effective 12/1/2022.

International TTI: +9.98% above its M/A (prior close +9.20%)—Buy signal effective 12/1/2022.

All linked charts above are courtesy of Bloomberg via ZeroHedge.

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