It was another solid session yesterday that shook off early anxiety and embraced hope into the close. Once again, all eleven sectors in the S&P 500 finished higher, which has largely been the pattern in 2023.

I realize these days, the worst thing for investors is to have been hopeful. Unfortunately, last year knocked a lot of enthusiasm out of folks - that not only lost money, but lost money partly to the strange and outsized role of the federal government and Federal Reserve.

The former pumped trillions into the economy, taking vote-buying to levels that, like traveling to space, were unfathomable. Now the Federal Reserve, which has done its share of money printing, is willing to crush the economy to whip inflation. Jay Powell is probably furious because he takes any market uptick as a personal affront to his own seriousness.

Cynicism and doubt are running high, but I will never give up hope. Never!

Heat Map: Green on the screen. 

Real Estate (XLRE) led the parade, followed by Consumer Discretionary (XLY), which has been the real sleeper sector this year. Technology (XLK) is coming on, and Materials (XLB) continue to enjoy the largest advance in 2023.

Look at Amazon (AMZN) and other mega-cap names the experts on Wall Street said are down for the count.

NASDAQ-100

Once an unstoppable juggernaut, the NASDAQ-100 (NDX) is trying to regain its footing in a market environment where the focus is on low valuation metrics, and not on top-line growth. But the NDX seems to have found support. And the chart, while in a serious downtrend, seems poised for a major reversal breakout.

The NDX also sees wide participation, as close to 60% of component shares  are changing hands above their respective 200-day moving average. This is close to the highest since early days 2022.

Consumer Prices

Releases	Consensus	Prior
CPI (y/y)	6.5%	7.1%
CPI (m/m)	0.0%	0.1%
CPI -Core (y/y)	5.7%	6.0%
CPI – Core (m/m)	0.3%	0.2%
Initial Jobless Claims (w/w)	215,000	204,000
Initial Jobless Claims (con)	1.705 million	1.694 million

 

The Cleveland Fed is looking for a print above the consensus – if correct, “Katy bar the door.”

Nailbiter

The violent reaction to this report underscores why it has become the most critical monthly data point.  Check out the reactions on the days the Consumer Price Index (CPI) report was released:

• May 11, 2022: -1.65%
• June 10, 2022: -2.91%
• July 13, 2022: -0.45%
• August 10, 2022: +2.13%
• September 13, 2022: -4.32%
• October 13, 2022: +2.60%
• November 10, 2022: +5.54%
• December 13, 2022: +0.73%

Portfolio Approach

We closed a position in Financials and one in Materials and are adding a new position in Real Estate in our Hotline Model Portfolio.  If you are not a current subscriber to Hotline Service, email Info@wstreet.com to join today. 

Today’s Session

The CPI is out, and the first observation is that all the key components are in-line with consensus.  There was a sense there would be better than consensus elements to the report.

For Main Street, the number is still far too high, especially ‘food at home’ component.

The number is still too high for the Federal Reserve but moving in the right direction.  The sticky problem of services less energy remains in place, especially with rents.  On one hand, I expect rents to come down and match private sector data and trends, but the BLS uses a system that is months behind.  

The initial reaction from the market was disappointment, but the report doesn’t alter the notion rate hikes are working, and it’s time for the Fed to acknowledge that, even it means a ray of hope for investors.

Harker Goes Off Script

This morning, Philly Fed President Pat Harker detoured from his colleagues:

25 bps “will be appropriate going forward”

• Signs inflation cooling
• Inflation core could come down to 3.5% in 2023
• Not forecasting a recession
• Sees 1.0% GDP in 2023

Curiously, Harker sees very little jobs destruction, which counters what Powell is trying to achieve.

The street now sees an 87.2% chance of 25 bps hike next month, up from 76.7% yesterday, and 35.1% a month ago.

Bond’s React

Bond yields are dropping, and this is the most important asset movement to watch this morning.  On the ten year yield, 3.40% is a huge support point- if it doesn’t hold, we could see urgent buying of stocks and bonds.

I don’t want to get too giddy.  These key support points and resistance levels are tests.  They must be breached before becoming ultra-aggressive.

 

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