Indecision Rules—Recession Looms

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[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Despite the CPI turning out a bit “cooler” than expected, with the headline number printing +0.1% MoM and +5.0% YoY vs. 5.1% anticipated—and down from 6% YoY prior—the reaction was lukewarm at best.

The Fed’s favorite core CPI rose 0.4% MoM, in line with expectations, but it pushed the index up 5.6% YoY, up from a prior 5.5%, as ZH reported.

The market’s initial reaction was positive, yet after an early rally, the major indexes retreated, only to rebound at midday, after which a sudden decline across the board pushed all three of them into the red.

This kind of directional indecision appears to have been caused by the Fed’s release of the March minutes, which showed that officials were alarmed that the economy could slip into a mild recession later this year, with a potential recovery slated over the subsequent two years.

The Citi Economic Surprise index seems to confirm the fact that not all is well with the domestic economy, as the banking crisis, which is far from being over, has done its part to make the current environment appear to be not up to par.

Not helping the bulls to gain momentum were a couple of Fed mouthpieces singing from the same hymn sheet from a month ago that “policy makers have more work to do,” and “there are good reasons to think that policy may have to tighten more to bring inflation down,” along similar bon mots.

None of this is new, as the Fed had made it clear last year that rate hikes for “higher and longer” would be on the agenda, but that theme has been lost on traders and algos, who refuse to believe that a pause is not on the current horizon.

Bond yields went on a wild ride, ended the session just about unchanged, but the 10-year was yanked off its high and back below the 4% level. The US Dollar dove after the dovish CPI print, while Gold rode its own rollercoaster but managed to add another 0.45% to its impressive YTD gains.

Tomorrow, it’s up to the Producer Price Index (PPI) to determine short-term market direction.  

2. “Buy” Cycle Suggestions

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

I also recommend you 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.

In my advisor’s 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)

A last hour dip in the indexes pulled down our Domestic TTI as well. The International one bucked the trend and gained.  

This is how we closed 04/12/2023:

Domestic TTI: +1.97% above its M/A (prior close +2.47%)—Buy signal effective 12/1/2022.

International TTI: +8.22% above its M/A (prior close +7.88%)—Buy signal effective 12/1/2022.

All linked charts above are courtesy of Bloomberg via ZeroHedge.

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