Is Inflation Making a Big Comeback?
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In the last blog post we talked about how important it was to trust inflation and not the Fed. The last market low in October occurred right around a peak in the ten year yield. As yields and inflation were falling for a few months, the market rallied since the peak in the 10 year yield.
But its been a rocky road higher over the past few months which is typical in a bear market. We did see a lot of nice moves from our top swing trading ideas including KNSL, STLD, SKY, CALM, PGR, DHI and many others in the alert service.
Over the past year or so its been all about taking more off in that first 5% to 15% profit range on swing trades as we have been saying since early last year to subscribers. Again, pinpointing the best stocks, patterns and entry points with a lot of volume as it reaches the entry point. Less is more when trading long in a bear market.
Now we are seeing more stocks take that second leg higher after reaching a good entry point on a daily chart for more of the larger trading wins.
Trend Change Signals for the Market Averages
Unfortunately, however, the ten-year yield broke an intermediate-term downtrend resistance line a little over a week ago. This led to another wave higher in bond yields as CPI inflation came in a little higher than expected early last week and PPI inflation numbers were much higher than expected on Friday. Meanwhile, the conference boards leading economic index fell again in January but was in line with expectations.
The job market continues to be very strong for now with jobless claims actually moving lower over the past few weeks. This is likely to keep the Fed on the march to 5.25% and perhaps 5.5% or more in the months ahead. We can expect more hawkish Fed speak in the weeks ahead and we will see how the market reacts near key support levels near the 50 and 200 day moving average on the S&P 500.
As we were saying all last year, no one really knows how far the Fed will go. But the bar continues to rise for the future Fed funds rate.
1-2-3 trend changes on the major indices continues to work nicely to gauge the trend in the coming weeks. The bullish 1-2-3 trend change in October led to a nice rally for several weeks into early December. We saw a double top in December that led to one of the worst Decembers on record for the Nasdaq.
Another bullish 1-2-3 trend change in early January led to a nice uptrend for a few weeks.
Will the Market Continue to Trend Higher?
This is looking like a pretty important juncture for the market. As we were saying last time, a yield curve inversion often leads to a market rally for several months or more before a market peak as we saw in 2006 and 2019. Its often followed up with a yield curve expansion and market rally that breaks the prior highs before reaching the next market high with a bear market and/or recession soon after.
So the question now is will we see a test of the highs before the next market peak? Will the economy be able to withstand 5.5% interest rates late this year? Will the market hold up for the next several months at least? Is the conference boards leading economic index wrong for the first time in predicting a recession? Will it be a mild recession that the market can rally through?
These are the questions that are on investors and traders minds. Either way we will be focusing on and respecting the market trend when swing trading. It would be highly unusual for the S&P 500 to spend this much time above the 200 day moving average without breaking the back of the bear market. At least this bear market.
So the technicals are looking much better but the fundamental factors are dubious to say the least. The next inflation reading will be watched closely to be sure. The recession watch has been pushed out to future quarters as Q4 GDP was stronger than expected and the Atlanta Fed GDP now forecast is now up to 2.5% for Q1. However, this could change quickly. Stay tuned.
What Strategies Will Work in 2023?
One thing we are noticing this quarter is that the best earnings gaps are no longer holding like they have been over the past few quarters in most cases. The earnings eruptions strategy has done well overall with just fewer opportunities meeting the rules in the strategy which is typical in bear markets and more volatile markets.
The biggest winner in the earnings eruptions strategy was AEHR which soared nearly 70% within a few weeks after meeting the rules in the strategy and reaching the entry point in early January on an earnings pre-announcement.
But the reason stocks that do not meet the earnings eruptions course requirements are not holding gaps recently could be just from the 10 year yield suddenly rising again. Recent big earnings gaps for high growth tech stocks with high valuations relative to earnings are not able to withstand the higher yields affecting their valuation again.
Chart courtesy of StockCharts.com
The 10 year yield recently moved from about 3.4% to 3.9% over the past couple weeks or so. Great earnings gaps like HUBS and AYX recently were shot down initially by the higher yields and resistance levels they were gapping into with a market pullback developing.
Earlier in the quarter, with a more sideways to downward moving 10-year yield, earnings gaps were holding well. Lets see if the 10 year yield finds resistance at 4% and starts to move lower again or if we get a burst above 4.5% ore more. The Fed has told us they are not going to stop until all yields are above 5%. The inflation fight continues.
A Bullish Technical Argument
Here is a more optimistic chart so we do not ruin our Presidents Day :). Taking a look at the long-term trend of the Nasdaq going back to 2009, we can see the 13 year trend-line is still in-tact on the Nasdaq.
Chart courtesy of StockCharts.com
It actually looks fairly bullish with the trend-line connecting the highs from the top through the August high now being taken out. On a shorter time-frame, the major indices are holding nicely above their 200 day and 50 day moving averages thusfar.
More on our Favorite Strategies for 2023
In future blog posts we will be getting into more detail about our favorite strategies for 2023 and beyond. A deeper look into what has been working over the past year or so and how the next bull market and market crash could both be very profitable swing trading.
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