Market report 10/18/22
I believe we are looking at a technical bounce, albeit a strong one that may have legs. As ever, fundamentals and technicals rarely support each other on a day to day basis. The reason I do not believe this is over is because everyone (especially options dealers) were out of position at the bottom. And, in this "Greek" driven world, the tail wags the dog.
But, here are some reasons I think what we are seeing is strictly a dead cat bounce:
- The volatility this morning seems limited to equities. Bonds are flat, gold is flat, and the currency moves seem very subdued.
- The real issues in the economy have yet to manifest themselves, although the canaries are starting to die.
- We are headed towards some kind of global conflict. This is something more severe than the US quarrelling with the Soviets in some third world country like Syria. It is direct tension with the Soviets and China simultaneously.
- Options dealers and swing traders are massively out of position, continuing to sell at the bottom and buy at the top. Forgetting about one false breakout down and one false breakout up, we have been in a defined, albeit trading range since last July of 2021.
- Real estate has been the driver of this economy for more than a decade, and we are seeing signs that it is rolling over. There is no day trading in real estate and the market is levered 10:1. When this goes down, it takes everything with it.
- Inflation remains stubbornly high. The concern here is that if inflation breaks because the Fed hits the brakes too hard, deflation could be right around the corner. Every business entity has made improvements to its supply chain since Covid. It stands to reason that these improvements will allow production to continue, even if demand falters. A good analogy for this is real estate. Home prices have a ways to fall to catch up with the increase in mortgage rates. I believe the broader economy will be the same way when the buying stops.
- A large corporate bankruptcy (and the attendant bankruptcies) usually precedes the real sell off. Thus far, we have not seen that.
No market prognostication this morning.
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