The Elusive Soft Landing
Premium Section: Review of Intermarket Dynamics
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Fed Chair Powell did it! He successfully achieved the elusive soft landing, where inflation is reduced while the economy and employment remain strong. This is quite an impressive feat, as many of his predecessors struggled with this balance, often overtightening monetary policy to curb inflation, which plunged the economy into recession.
Friday’s strong jobs report and reduced unemployment rate, alongside lower inflation, make this soft landing official.
Typically, the combination of no recession and a dovish Fed policy injecting liquidity into the system is bullish for risk assets. However, some intermarket patterns are creating confusion. This week, we’ll review current market conditions and dive into some peculiar intermarket analysis from a cycles perspective in the Premium Section.
Market Conditions: Support Levels Hold
The SPY declined to the 21 Exponential Moving Average last Wednesday and Thursday, but recovered and got back above the 9 EMA on Friday on news of the strong Nonfarm Payroll (NFP) report. The trend is still up and as long as the $565 support level holds, the uptrend is intact. Net New Highs spiked along with the NFP report, signaling that this is still quite a bullish market for individual stocks. The McClellan Oscillator also started to turn up, telling us that breadth may start a new multi-day uptrend. The VXV/VIX is also turning up, confirming that this is the time to expect higher prices in risk assets until it hits the 1.20 wall once again. The Equity Put/Call ratio still points to significant call option buying in the market, however with strong economic fuel, it’s likely that options market makers hedged their short call option positions by buying S&P 500 futures. This appears to be a non-factor for now, but could resurface in the future to take the market by surprise.
Let’s look at the market using the Cycle SMA system. The SPY broke below and retook the Daily Cycle SMA (pink). This tells us that a new Daily Cycle started, which is between 24 to 30 trading days. The cycle bracket trough around 10/16 points to some weakness mid-month. Perhaps SPY will break and retake the Half-Primary Cycle SMA (sky blue) around $562. Weakness is also possible in mid-November as the cycle brackets renew around 11/22. These cycle bracket renewals could provide buying opportunities.
Once again, Dumb Money seems to outsmart Smart Money as it capitalized on the NFP rally on Friday, while Smart Money remained under-positioned. Smart Money will likely wait for the next pullback to increase exposure.
Meanwhile, greed remains at extreme levels. As long as this persists, the trend can continue. However, this extreme greed leaves the market vulnerable to a future rug pull. With positioning overly bullish, the market is heavily reliant on economic momentum to drive prices higher. If the soft landing narrative is challenged, the market could be set up for a significant drop.
Next week, the FOMC Meeting Minutes will be released on Wednesday, which could have a significant impact on the markets. More importantly, the CPI is set for release on Thursday, followed by the PPI on Friday. Now, let’s dive into the intermarket picture…
Intermarket Analysis:
Here’s a head-scratcher…why are interest rates going up as the Fed is cutting the Fed Funds rate? We’ll cover this next in the Premium Section.
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