Powell Speech Could Spark Selling
I am not expecting anything new at 1:30 PM ET, but it will be a reminder that the Fed will tighten.
PRE-OPEN MARKET COMMENTS WEDNESDAY – The SPY is wedged between the 100-day MA and the 200-day MA and the volume is very light. Intraday ranges are compressed and traders are waiting for news that will spark a breakout one way or the other. Year-end seasonal strength provided a small bounce off of the low of the year, but that move looks vulnerable. The price action during the bounce was tenuous and there is no follow through. There are major news events the rest of the week.
ADP came in “light” at 127K new private sector jobs (210K expected). GDP was a little stronger (2.9%) and the PCE inflator was a little higher than expected (4.3%). These numbers did not move the needle. Initial jobless claims the last month suggest that the jobs number Friday will be fairly stable at 200K. Many traders feel that a weak jobs report would be market friendly because it will prompt the Fed to stop tightening. I disagree. Strong job growth in the US has kept the hopes of a “soft landing” alive. If job growth drops, we will see a market drop and that will send a message to the Fed. The yield curve is inverted and that is a broadly used metric that forecasts a recession.
This week a Fed Official (Bullard) commented that the market is discounting the need more Fed tightening. This hawkish tone will be repeated this afternoon (1:30 PM ET) when Powell speaks at the Brookings Institute. ECB Chairman (Lagarde) said that inflation has not peaked this week. Central banks are steadfast in their tightening and that means bad economic news… is bad news.
China’s PMIs showed a decline in manufacturing (48 vs 49.2 last month) and services (46.7 vs 48.7 last month). These data points are squarely in contraction territory as the second largest economy in the world struggles with Covid-19 shutdowns.
Morgan Stanley believes that the S&P 500 will drop by 24% early in 2023. This is a bold forecast and it would put the SPY at $300.
Swing traders should remain sidelined. I don’t swing from the short side in November or December, but I am more bearish than bullish. The lack of enthusiasm the last two weeks tells me that this bounce could be tired. If SPY $391 fails, we will see a heavy dose of selling. A breakdown of this nature would also squash any hopes of a year-end rally and it would set a bearish backdrop for the start of 2023.
Day traders should expect rather dull trading ahead of Powell’s speech. That seems to be what everyone is waiting for. Overseas markets were slightly higher. I believe that any rally this morning will set up a nice shorting opportunity. The only decent volume/move we saw yesterday came on the drop from the high of the day. This is a sign that sellers are nearby. I feel that Powell’s speech has more downside potential than upside potential. There won’t be anything new, just a reminder that they are going to keep tightening.
I did not take my own advice yesterday. I traded a light volume market and I lost money. Until we have nice robust price movement on heavy volume – resist the temptation to trade! We need to get through one of these two levels.
Support is at the 100-day MA and resistance is at the 200-day MA.