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Starting Friday, everything changes in the market with Powell’s big Jackson Hole speech, possibly laying out the path for monetary policy for the next 6 to 9 months. I would expect that Powell lays out quite clearly that the pace of future rate hikes may slow but that they have much further to climb and are likely to remain high for some time. He needs to clearly articulate that rate cuts will not be in the future until it is clear that inflation is on a downward trajectory.
Again, as I have noted over and over, the futures market, bond market, and currency market get it. They have been adjusting for a higher, for longer monetary policy path for a few weeks now. Stocks have been oblivious to this, and the one piece of the market seems clueless. If rates were falling, Fed fund futures were still showing massive rate cuts, and the dollar was dropping, then it would be easy to say that the stock market has got it right. Unfortunately, for the stocks, that is not what is happening. Stocks are living on a fantasy island right now.
So this Friday, we will get Powell, the PCE inflation reading, and University of Michigan inflation expectations. The following week there will be the ISM manufacturing and Job reports. These reports over the next week will help shape that September Fed meeting and will help give markets a better handle on where things will be going.
Based on the data I have tracked thus far, the economy has slowed, but it hasn’t stalled out and hit recession speed. Nominal growth is still very high, and the most significant headwind facing the economy right now is high prices, not demand destruction. Yes, companies are reducing their hiring rate and even laying off a small piece of their workforce, but that isn’t the same as announcing massive amounts of job cuts due to a significant economic slowdown.
Initial jobless claims on a historical basis are very, very low, and remember, the size of today’s workforce is much larger than in the 1960s, 70s, 80s, and 90s. So despite the recent rise, it is essential to keep things in perspective.
In the 1960s, the labor force was around 65 to 70 million. Today that size is nearly 165 million. So historically, speaking, the initial jobless today as a percentage of the size of the labor is very small.
In the meantime, the S&P 500 finally broke on Friday as these systemic fund flows have faded and should no longer be a factor. On top of that, the index broke that major uptrend that had been in place since the end of July and the uptrend in the RSI. I think these two significant technical developments are likely to lead the market down a path that revisits 3,950.
It is the same for the QQQ, which may be worse because the QQQ rose above a long-term downtrend. So not only has the QQQ fallen below the short-term uptrend on both the price and RSI scales, but now it is in danger of flashing a failed break-out attempt on the long-term downtrend crossing. Ultimately, I think the QQQ is heading back to $300.
Taiwan Semiconductor Manufacturing (NYSE:TSM) will be an essential stock to watch this week, as it is getting very close to breaking lower and falling below a critical uptrend. There is a gap at $75.50, which could serve as a potential target should this stock break down.
I had mentioned on Thursday that Twilio (NYSE:TWLO) would be one to watch, and if it fell below support at $80, it could signal trouble for the entire market. Well, Twilio broke support on Friday, and now it appears it can head towards $63, and it could also be telling us another significant leg lower is coming for the entire market.
I say that about Twilio because there are a whole group of stocks with similar positions and ARKK type of related names. The ARKK ETF also broke down on Friday, falling below a critical uptrend on both the price and RSI chart. The next level of support comes at $43.50, but after that, the June lows may come back into play.
Anyway, we will finish up with Tesla (NASDAQ:TSLA) because I think that 2b top remains in play, and all we need at this point is confirmation with a break of the neckline at $840. Once that level of support breaks, it should be lights out for this one with a return to around $745.
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