Trade The Journey

Trade The Journey

High Inflation, and One-day Reversal

Top of the Afternoon! What a week! Or should I say what a one-day reversal we saw on Thursday? I had a position open on Thursday and there was no way I could have predicted a reversal on Thursday. Wednesday, the PPI (Producer Price Inflation) set the tone for Thursday’s CPI report and I wholeheartedly thought that Thursday would be a down day and it was.

My plan was to close out the position on Thursday with a huge profit and it didn’t happen quite like I planned. My position was a bearish put position that I had to roll which means extending the position for another week to remain in the market through the inflation reports. Initially, the position showed a loss and I was hesitant to keep the position open.

The bearish put I had opened was on the S&P 500 financial index ETF, XLF. The reason I opened the position was because of the chart pattern. XLF was near a reference level that I felt would be broken through to the downside. XLF kept hovering near the level but failed to break through, so I decided to roll the position, thinking that it breaks through after the inflation reports.

Inflation has remained stickier than anyone had previously predicted including the Federal Reserve. The market has been focused on inflation due to its resulting rate hikes by the Fed. The Fed has been hiking rates at seventy-five basis points in the last few meetings and the reports would signal would the size of the Fed’s next hike.

The size of the rate hikes is extremely important because each new rate hike at seventy-basis points increases the likelihood of a recession and lowers the probability of a soft landing. The inflation reports came in hot, meaning higher than expected, and the markets drifted lower.

I had a choice to make keep the profits I had made by closing the position or keep the position open hoping to rake up an even larger profit. Being that the bearish position had exceeded my profit expectations, I decided to close the position.

Almost an hour later, I opened the trading platform expecting to be disappointed that XLF had drifted lower, and I had missed out on an extremely profitable position, XLF had moved higher. I checked again and XLF had moved even higher. Confused, I checked the indices, and they were moving higher as well. The market had staged a one-day reversal that exceeded anyone’s expectations.

A lot of people got hurt expecting the market to continue heading lower. I was lucky to close the position when I did.

The market action reinforced the importance of setting profit and loss targets because you never know what can happen when you’re trading the markets.

These types of trading experiences are once-in-a-lifetime lessons that you can’t read about to learn or attend a trading seminar to hear about.

The market has been extremely volatile due to several variables like inflation, the UK bond market, the war in Ukraine, and other situations occurring. You must be very careful if you plan on trading during these uncertain times. As the earning season begins, we’ll see exactly where companies are as the economy slows due to the rising cost of leverage for companies, households, and the economy.

On-day Economy

The NFIB small business optimism index rose 0.3% in September marking the ninth consecutive month below the 48-year average of 98, at 92. Inflation was listed as the biggest concern for small business owners.

Key highlights

  • Small business owners’ sentiment on improved conditions increased
  • Decreased average selling prices
  • Expectations for real sales increased
  • Uncertainty index increased
  • Job openings remained elevated
  • Challenges in hiring qualified workers remain
  • Inventory improved with solid sales
  • Supply chain challenges remain

Price hikes were reported in the following industries: Retail, construction, transportation, and wholesale. 45% reported raising compensation and 23% plan to raise compensation. Owners reported lower profits cited for these reasons: cost of materials, weaker sales, labor costs, and lower prices. Higher profits were reported for the following reasons: Credited sales volumes, usual seasonal changes, and higher prices.

Difficulty in filling positions was reported in the transportation, construction, and manufacturing industries. Inventory shortages were reported in the transportation, agriculture, retail, wholesale, and manufacturing industries.

The CPI index rose 0.4% in September, after a lower number of 0.1% in August. The CPI for the last twelve months fell slightly to 8.2%. The gasoline index fell 4.9% but was offset by rises in Shelter, food, and medical. Used cars & trucks, apparel, and communication declined.

The shelter index rose 6.6% in the past year accounting for over 40% of the total increase in all items less food and energy.

From a year ago:

Food at home: 13.0%

Food away from home: 8.5%

Energy: 19.8%

Shelter: 6.6%

Core CPI: 6.6%

The PPI report increased by 0.4%. Most of the rise in the PPI can be attributed to services. The final demand for services is up 0.4%. Final demand for goods is up 0.4% as well. For final demand services, most of the rise is due to an increase in traveler accommodation services. For final demand goods, most of the rise is due to an increase in the food and vegetable index.

Intermediate demand for processed goods rose 0.1% with most of the rise due to processed energy goods or diesel fuel. Unprocessed goods rose 0.3% with most of the rise due to natural gas. The services intermediate demand index rose 0.3%, with the rise attributed to investment services.

The retail sales report was unchanged from the previous month.  The retail sales report does not account for inflation. Gasoline Stations sales fell 1.4%. The largest increase in sales was attributed to general merchandise stores, at 0.7%.

The University of Michigan sentiment report came slightly higher than the previous month. The expectations index declined close to 3% while the current economic conditions improved. Expected year-ahead inflation rose to 5.5%. Long Run inflation expectations fell below the 2.9%-3.1% range.

The weekly MBA survey reported that application volume fell 2%, the refinance index fell 2% and the purchase index also fell 2.0%. Mortgage rates are near 7% with 30-year conforming rates a 6.8% and jumbo rates at 6.25%. Adjustable-rate mortgages represented 11.7% of the application volume.

The labor market remains tight although initial claims came in above expectations at 228,000. Continuing claims increased slightly.

Earnings season kicked off with some of the major banks reporting first with mixed results. All banks reported growth in net interest income due to higher rates.

Citigroup beat on earnings and revenues but fell in net income. Per the earnings calls, a recession is expected in the third quarter with the severity dependent on where you are in the world. Retail banking grew to help to increase overall revenue. A large amount was set aside for loan loss provisions. Returned $1 billion to shareholders through dividends.

JP Morgan beat on earnings per share and revenue. Provision for credit losses increased this quarter. The net credit reserve decreased the net income reported.  Consumer & business banking improved sharply while home lending decreased. Banking revenue was down 18%.  The average consumer is spending 35% more on gas and 6% on recurring bills and other non-discretionary categories. Jamie Dimon highlighted these potential headwinds: stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices.

Wells Fargo beat on earnings and came in short on revenue. Broad-based loan growth in both consumer and commercial. Expects to increase dividend payment by 30%. Consumer and commercial credit quality remains strong, however, Wells Fargo set aside for allowance of credit losses. Mortgage and Auto loan originations declined from the previous quarter.

Morgan Stanley missed on earnings and revenues. Investment banking revenue declined by over 50%. Advisory, equity and fixed-income underwriting revenues also declined. Equity and fixed-income revenues both increased with the latter increasing by over 40%. The Firm repurchased $2.7 billion of its outstanding common stock during the quarter.

This past week’s cash flow management in review:

Another great week adhering to my spending plan and adding additional funds to my savings account. The only drawback to this week was resuming my student loan payments. Although the monthly payments are quite high, I don’t owe that much compared to others. The total amount due is under $30,000. This upcoming week, I plan on continuing to manage my expenses and pay off my credit accounts.

Grade: B

Reason: I’ve been adding a consistent amount to my savings account each week.

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