This chart is from our MarketGauge product called Big View.
Coming into the FOMC, the sentiment for risk is neutral. A week ago sentiment was 100% bullish. A month ago, it was neutral leaning towards bearish. Amazingly, the sentiment and the persistent trading range in the S&P 500 are aligned.
SPX failed the 23-month moving average or 2-year business cycle, which, if it clears, signals a softer landing. Yet, it held the pivotal 3900 ahead of the Fed, signaling a no landing. And, by tomorrow, we will have to watch if SPY breaks below 3900, more of an indication of a hard landing. So a neutral sentiment while we wait is appropriate and speaks volumes about the smarter retail investor.
With so much speculation on "landings" for the economy, let's examine the definitions and implications.
A "no landing" means that the economy still grows even though the Federal Reserve tries to lower inflation by continuing to rase interest rates.
A "soft landing", or what many believe is the best scenario, would be if the Fed raises rates just enough to cool while the economy remains robust.
A "hard landing" infers that the only way the Fed can control inflation is by raising the rates enough so that the result is the economy going into a big recession.
It seems to us, that the word "stagflation" is more appropriate. Stagflation is a period when slow economic growth and joblessness coincide with rising inflation.
The argument against this scenario is that joblessness, even with all the job cuts by large companies, has yet to take hold in the jobs numbers -- at least for now. Also, GDP comes out this week. The expectations are for an annual rate expansion of 0.6% this quarter. That is up from previous calls for a 0.2% increase.
Clearly, the FED minutes shed no new light. The consensus is to watch the upside risks for inflation, keep raising if need be, and, of course, be mindful of going too far to cause recession.
Looking at the weekly chart of Granny Retail XRT, it will be easier to gauge next steps.
For starters, this is 70% of the GDP. Consumers count. Secondly, XRT never cleared the 2-year cycle high or 23-month moving average. Thirdly, it is in a bullish phase on the daily and weekly charts.
Next, the Real Motion momentum indicator shows declining momentum and a bearish phase on the weekly charts. The daily charts show a retracement to momentum support. XRT is indeed marginally outperforming the SPY on the weekly timeframe and underperforming on the daily timeframe. Hence, a neutral bias, and a bit more patience needed to see if the consumer's confidence remains high or not.
From deflation to inflation to stagflation and beyond, our approach to 2023 is to consider each of those potential outcomes, weighing market expectations against the price.
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