Hey There Income Hunters,
Friday’s almost 1% increase in the S&P 500 was impressive, to say the least. The key now is to see if it was due to the option expiration or renewed real buying.
Last week’s data continues to support a stagflation environment, which is represented by elevated price pressures and slower growth. Retail sales were down 1.1%, three times more than forecast, showing that economic strength could be weakening.
While initial unemployment claims dropped to a new low, signaling labor market strength. Here we are seeing a power shift to the labor force and potential wage pressures that could keep inflation higher for longer.
This week is critical for validation of key trend shifts in currency, bond and stock markets.
I’ll share the data and charts that matter — plus trades I am monitoring as choices for exclusive Griff’s Picks that will be rolled out each week in September.
Slowing Growth
The chart below illustrates the deteriorating personal savings rate. The rate is now only 1% above where it was pre-Covid.
Think about that …
After reaching 26%, a year after Covid began personal savings has plummeted as consumers have spent just about all of their excess.
This has knock-on effects for retail sales going forward, after already plunging1.1% in July.
GDP grew 6.5% in Q2 — however, it was not real growth. It was free money spent and now that money is drying up. Stimmy checks simply created an illusion of prosperity.
Continuation of consumer weakness is negative for stocks from a fundamental standpoint.
Expectations for Rising Inflation
Over 70% of consumers expect price increases to continue …
Rising inflation due to supply chain bottlenecks could last longer as the Delta variant cases keep rising, and this is driving massive flows into Treasury inflation rotected securities (TIPS) …
Check out the massive flows in TIPs for the last two months …
This Friday we will get the Core PCE price index, which is the Fed’s preferred measure of inflation. The June number was .4%.
Now Let’s Look at Market Technicals
The S&P 500 was up .65% last week, but it may have been helped by option expiration because many internal numbers did not reveal positive technicals.
For instance, notice the chart of the SPDR S&P 500 ETF Trust (Ticker: SPY) trade up on lower volume. 445 will be a good challenge to overcome with the variant and geopolitical risks …
The put/call ratio below shows an inverse relationship to the S&P and currently with the 20-day moving average rising, the S&P could come under pressure …
Now, below is a revealing chart. Notice the zero percent line. The orange lines below zero are periods that the Fed fostered tightening conditions in the market …
As the Fed starts to pull back QE, let’s say in October, that pullback in stimulus could have a very damaging effect on the market as it has in the past.
I currently have on a few 442/439 put spreads expiring Aug. 27, and I am looking for a slight correction as the economy rolls over in the weeks ahead.
Bring It Home
As I always say, the bond market tells the true story and last week TLT had the golden cross, meaning the 50-day moving average crossed the 200-day moving average in a positive move that signals higher TLT prices and lower bond yields.
As long as bond yields go lower, be prepared for some negative shocks to the economy and sooner or later stocks will have to correct for the loss of growth.
Stay with me, as I am watching very closely and will present solid trades that will capitalize on any Fed mistakes along the way.
Stay tuned and as always …
Live and Trade With Passion My Friends,
Griff