Inflation Pause? Last Thursday we had the benefit of being able to examine some MONTHLY candlesticks. In general the longer the timeframe the more meaningful. The most powerful sector by far in the first half of 2022 was energy and that had a big impact, many felt a negative way on the consumer in a myriad of ways. Not just filling up at the pump, but the cost of the goods they purchased was also boosted as a result of the inflated PRICE. Below is the chart of the XLE and its MONTHLY bearish engulfing candle may be providing some relief. Round number theory came into play with a precise bounce off the very round 20 figure in March 2020, and the very next month recorded a bullish piercing line candle. Now the tricky part is the range between those two months was very large, like the present engulfing candle in June. The XLE doubled to a high above 40 just 4 months later until finally, a bullish morning star pattern was complete in November. The 20-point range we saw in June could see some wild swings and I would not be surprised to see it trade up to the middle of that range into the 80s, but I think June pretty much said energy inflation will be easing heading into the back half of 2022.
So Bad, So Good? One can write a long laundry list of the negatives associated with the current market. Today the consumer sentiment index with a record low once again touching the very round 50 number. Does round number theory give that a bounce? Of course, that is a bad stab at humor, but here is an excerpt from the University of Michigan “consumers across income, age, education, geographic region, political affiliation, stockholding, and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009.” Inflation, although it feels might be easing, is still prevalent. PMIs are on the descent but at the end of the day most people equate their worth with their portfolios, and the main reason they are feeling gloomy is the market action. Below is the chart comparing the depth and velocity of the current decline to two of the worst drawdowns on record. Are things so gloomy that in a contrarian stance they could be bullish?
Complacency: Are we tired of hearing that word yet? It is the new "transitory", and that word in itself is an oxymoron as we have heard that word daily for it feels like a couple of years. Well, complacency is what could describe the WEEKLY chart below of the VIX. The instrument, believe it or not, is in your technical definition of a bear market, 20% off the high made in January near 39. It has produced back-to-back double-digit gains, but each time pressing the 35 area on a WEEKLY CLOSING basis it is repelled. To me, this has the feeling of a potential beach ball held underwater breakout. Meaning when we climb above 40 that is when we may begin to see the "white in their eyes" panic feeling and this could burst upward in a violent fashion. Throughout 2022 the VIX has found a floor at the very round 20 number and support at its rising 50 and 200-day SMAs, recording a bullish golden cross in the process. The right side of a cup-base could be forming and I am not sure it will reach the peak of 85 in March 2020 but higher PRICES feel necessary.
Inflation Topping? This week's note will have an inflation theme. Of course, this is casting a pall on markets, and if there is some reprieve perhaps the benchmarks can continue to climb the proverbial "wall of worry" during this very nascent, and tenuous rally. One thing that caught my eye this past week was the headline below about the state of the summer rental market. I have some anecdotal evidence as we rent our home on the South Fork of Long Island and every potential occupant is looking for a sizable discount compared to the last couple of summers. This could be an issue related to the prior 2 years due to the COVID premium disappearing, or is it a sign of things to come? They say inflation is a regressive tax, as it hurts the lower income bracket harder, but in this particular situation, we can see it filtering into the affluent.
Seasonality Tailwinds? As the XLF still trades down 9% YTD and is in the middle of the pack against the 11 major S&P sectors, over the last one month it is just one of 4 groups in the green. Sure the move higher in the ten-year is helping, and that instrument bounced nicely off its rising 50-day SMA and now sports a double bottom right at the "round" 3 number for a possible add-on. The XLF itself has declined 7 of the last 9 weeks and is down another .5% this week heading into Friday, showing little follow-through after the prior week jumped an aggressive 8%. The curious question is why did the banks not act better with the ten-year rising? Could it be that the banks will start to benefit if the ten-year happens to decline and surprise us once again? The TNX is on a 3-week losing streak, the first of this year, and below we see how seasonality factors may come into favor for the XLF. The XLF seems to rise in spurts over the last 5 years, particularly in April-May, July-August, and November-December. Maybe a bit of patience as the XLF tends to undergo weakness in June, but the markets tend to look ahead.