Briton Ryle here with your Morning in the Markets for December 12.
Last week was not a good week for stocks. It started badly with heavy selling that took the S&P 500 from 4,071 to 3,941 on Monday and Tuesday.
After a bout of heavy selling, getting a little relief is never a surprise. And there was a slight recovery mid-week up to 3,963. But the selling resumed on Friday after a worse-than-expected read on inflation from Thursday’s Producer Price Index (PPI).
The declines on Monday and Tuesday took the S&P 500 back below its 200-day moving average (MA). This could be considered a pretty negative development because the 200-day MA is generally considered the long-term trendline. If the S&P 500 is above the 200-day MA, then we’re in a bull market uptrend. If the S&P 500 is below it, then the trend is lower.
The S&P 500 had just moved above that 200-day MA on November 30 for the first time since May. So sure, there may have been some minor celebrations that stocks were showing some strength. I told you at the time that I didn’t expect stocks to move higher from those levels, and they didn’t…
But the failure to hold above the 200-day MA is not a complete disaster. And I’ll tell you why…
Friday’s decline brought the S&P 500 down to 3934. That is above an important support point at 3,920. There are three main things to consider as the index is confronting 3,920 support. One is tomorrow’s release of the November Consumer Price Index (CPI). The second is the Fed’s FOMC meeting that concludes on Wednesday with a new interest rate hike. And third is the technical picture I laid out in Friday morning's Markets in the Morning…
I wrote: 3,920 on the S&P 500 is very unlikely to hold as support, given this new inflation report. The 50-day Moving Average (MA) for the S&P 500 sits at 3,834, likely the next stopping point. And if next week’s CPI report is also worse than expected, the S&P 500 will head lower still.
3,920 did hold as support on Friday. So that forecast remains a “what if.” Keep that in mind…
Tomorrow’s CPI is expected to show a small decline, not nearly as dramatic as the drop that was expected from last week’s PPI. So I expect that even if the CPI comes in worse than expected, it’s not going to be significantly worse than expected. And that matters.
It’s always about expectations in the stock market. Whether it’s earnings or economic data, so long as it’s in the ballpark, investors can say, “that’s about what I was expecting, I was ready for that.”
So, I hate to be dismissive, but I think tomorrow’s CPI number will not be a market-moving event.
This brings us to the Fed on Wednesday…
As we all know, the Fed has been hammering the economy with 75 basis point interest rate hikes. The most obvious result of these hikes is in mortgage rates. A year ago, you could get a loan for 3%. Today, that same mortgage is close to 8%. If your monthly payment was $1,000 at 3%, it’s over $1,500 on loan at 7.5%. Basically unaffordable. And the point is the Fed’s rate hikes are significantly affecting the U.S. economy.
The main reason stocks started a rally back in October that culminated in that brief move over the 200-day MA on November 30th is that investors were looking for the Fed to slow the rate hikes as we near the end of the rate hike campaign.
Right now, the Fed is expected to deliver a 50 basis point hike on Wednesday, followed by two 25 basis point hikes early next year. So, 50 being lower than 75 and 25 being lower still, it appears the market is getting what it wants. And after Wednesday, the end of the rate hikes is in sight.
3,920 remains a very important technical point. But I have to say, I now think that 3,920 will hold as support unless the Fed deviates from the script on Wednesday (like delivering a 75-point hike and suggesting more than the two 25-point hikes early next year).
So sit tight, keep an eye on 3,920, and we’ll see what the Fed says on Wednesday.
Take care, and I’ll talk to you tomorrow.
The Profit Sector