Weekend Strategy Review March 20, 2022
Posted by OMS at March 20th, 2022
This past week, the Fed raised rates by 0.25 percent to slow the 7.9 percent rate of inflation. It’s not enough. If the Fed continues to raise rates at the current pace, interest rates will likely end the year at 3 percent. This will not be nearly enough to prevent the economy from entering a period of stagflation for the next few months which will likely lead to recession later this year or early next.
One of the reasons I say this is because the BLS is not telling the truth when they report inflation at 7.9 percent. If you use the model that was in effect during the 1990’s, inflation is closer to 12 percent. The BLS changed the model in the 90’s so they wouldn’t have to pay millions of baby boomers the additional money they were due in Social Security benefits. BTW, this was not the first time the BLS changed the model. The first time they did it was during the 1980s. If you used the 80’s model, the real rate of inflation would be over 16 percent! With the current BLS model, it means that it now requires $107.87 to buy what $100 would have bought in February 2021. With the older (truer) models, those numbers are $112.60 and $116.47 to buy the same stuff you bought a year ago.
So, think about it. If inflation is closer to 12-16 percent, do you really think a 0.25 percent increase in interest rates will stop anything? No, it won’t. All the money the Fed printed out of thin air in the last 22 months is now coming back to haunt us.
Think about this: Back in January 2020, the money supply was at $4 trillion. By October 2021, that number had increased to $20 Trillion. In other words, 80 percent of the U.S. dollars in existence were printed in the last 22 months.
During that time, the Fed’s Balance sheet has doubled in size to about $9 Trillion. They simply printed money and used the funds buy stocks to offset the impact of the Covid pandemic and other stimulus programs, like Biden’s $550 Billion infrastructure bill. Now, with $9 Trillion of stocks and mortgage-backed securities on their books, the Fed is no longer trying to stimulate the economy. Now they’re in a panic mode, where inflation is their main concern. But they can’t raise rates too quickly, otherwise it will tank the stock market and cause the country to go into recession. Rising interest rates will also cause problems in the bond market and increase the cost of servicing the Federal debt, which is mostly held by China. All this is happening at the same time the Fed is trying to reduce its bloated balance sheet. It’s a mess. The Fed is now between a rock and a hard place. For the first time since 2009, mostly because of the huge rise in inflation, the Fed is being forced to become a seller. If you held stocks, from March 2009, the Fed was your friend. Now they’re your worst enemy.
This will create a real problem for the equity markets and the economy going forward. The combination of rising interest rates AND Fed selling will almost certainly cause the U.S economy to enter recession. I don’s see how it can be avoided, especially if the Fed continues with quarter point increases, like it said it would do in Wednesday’s announcement. This will have major implications for your portfolio in the months ahead. So, take some time this weekend to think about how these two major changes will impact your strategy. Like I always say, nobody rings a bell on Wall Street when a major change occurs. I’m ringing the bell this weekend.
As for the market, in Thursday’s Comments I discussed how the pattern on the Dow had morphed into a double zig-zag. I said that because the new pattern required five waves, not three, there would likely be more upside before it was complete. I was using the 34,200+ level as a potential target. The Dow got as high as 34,755, as Friday’s triple witching options expiry caused both prices and volume to volume surge. Over 19 billion shares were traded with 68 percent of the volume on the upside. The huge increase in volume pushed prices to the upper limit of parallel trend lines, connecting the highs and lows since the Bear Market started in January. This upper trend line should provide stiff resistance to any further rally. If there is any remaining upside potential before Wave 2 up completes, the gap from the 16 February close near the 35,000 level should provide strong resistance. This would also be a .786 retracement of Wave 1.
BTW, from a historical perspective, a higher close on a Fed Day and an options expiration Friday usually leads to a down market the following week. We’ll see….
My short-term targets once Wave 3 down is underway are:
Dow: 29,700- 30,200, S&P: 3,800, then 3,600. NASDAQ: 11,500 -11,750.
Please take all necessary precautions to protect yourself.
After Friday’s action, the Dean’s List and The Tide are positive.
The Market Timing Indicators for the Dow, S&P, and NASDAQ are positive.
The Scalp Trading Indicators for the Dow, S&P, and NASDAQ are positive.
The Sector Ratio strengthened to 13-12 positive after Friday’s session. The top five strong sectors were Energy (5), Material (3), Food Drugs (2), Cap Goods (2), and Insurance (1). The top five weak sectors were Household Products (-5), Autos (-5), Consumer Products (-3), Semiconductors (-3) and Telecoms (-2).
My Doctor’s Trade in TZA generated a Red Exit Bar as the last bar on Tuesday. TZA is now down 6.57 points since the exit criteria was flashed. All I’m doing now is waiting for the next Green Arrow to appear. The recent decline is the Russell 2K still appears to be a complex Wave 4 triangle. In Thursday’s Comments I mentioned the RUT could trade up to the 2030-2040 level before the wave 4 retracement was complete. Friday’s close at 2086 was more than enough to complete the pattern. The next wave down, Wave 5 down, should drop the small cap index below the Wave 3 low at 1,901. IWM, the index I use to track the RUT should see the 183 level or lower during the process. I’m still waiting for the next Green Arrow to appear on TZA.
Cryptos: The Market Timing Indicators for the Cryptos turned Green on Friday. GBTC is now on a confirmed Green Arrow on its 4-hour bar. I’m looking for opportunities to enter the trade.
Bonds: TMF gained 0.74 cents as it bounced off its a new low. The Bond ETF also generated a confirmed Green Arrow on its 4-hour chart. The only problem I have with buying TMF now is that the bias indicator, while rising, is still negative. I think it’s OK for a pop of few points, but the ETF is not going anywhere unless the bias turns positive.
Gold: I’m still watching GLD on the 4-hour chart as it continues to pull back. The pattern still suggests the pullback is part of a corrective wave 4. If so, it should be followed by a strong wave 5 up. On the other hand, if prices don’t start to rally soon, gold could continue to decline down to the 1,885 level before any sort of rally begins. Gold (the metal) closed at 1,925 on Friday. I’m still watching GLD closely and will look to buy mining stocks and ETFs on a confirmed Green Arrow on the 4-hour bars. I still believe that gold has significant upside potential near the 3,000-level based on the multi-year cup and handle pattern that started in 2011. A move above 1,950 now would be EXTREMELY bullish for gold.
Have a great weekend.
That’s what I’m doing,
h
Market Signals for
03-21-2022
DMI (DIA) | POS |
DMI (QQQ) | POS |
A/D OSC | |
DEANs LIST | POS |
THE TIDE | POS |
Index | Signal | Signal Date |
---|---|---|
DOW | POS | 17 Mar 2022 |
NASDAQ | POS | 18 Mar 2022 |
GOLD | POS | 25 Feb 2022 |
U.S. DOLLAR | POS | 18 Feb 2022 |
BONDS | NEU | 15 Mar 2022 |
CRUDE OIL | POS | 18 Mar 2022 |
CRYPTO | NEU | 17 Mar 2022 |
DISCLAIMER
As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.
All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.
Category: Professor's Comments, Weekend Strategy Review