Trade The Journey

Trade The Journey

Markets Continue their descent!

Top of the Morning! It was a rough week for market participants, me included. Each of the indices ended the week down as the Markets brace themselves for a possible recession. As participants continue to scale down their exposure to risk assets, investors will have the opportunity to buy great companies at a discount.

For traders, this is an excellent opportunity to make some profits due to the heightened volatility present but be careful. Although options are more expensive at the moment, I still like them because of the leverage factor. I personally plan on trading through whatever scenario the market throws at me as options will provide me the flexibility to do so.

NFIB Optimism Index

Small Business Owners’ expectations remain at their lowest level in over forty years, while selling prices have risen to their highest in over forty years.

Inflation, supply chains, labor quality, and filling open positions are the top concerns for small business owners.

The following industries report challenges in filling open positions: Construction, manufacturing, retail, and wholesale. Even though owners increased compensation for employment, it’s not compensating for the increasing costs for products and services. Capital goods spending remains strong for the overall economy signaling the companies are still managing to make improvements.

PPI

PPI for final demand increased 0.8% for goods and 0.4% for services in May. The last twelve months’ PPI totaled 10.8%. Most of the increase in the PPI goods is attributed to energy specifically gas. Though the PPI services were unchanged for the month, transportation and warehousing services attributed heavily to the PPI services number.

Processed goods for intermediate demand increased by 2.3% on the month. Most of the increase can be attributed to processed materials ignoring foods and energy contribution. Unprocessed goods for intermediate demand rose 6.3% for the month, with most of the increase attributed to unprocessed energy materials which rose 16.3%. Natural gas contributed to the rise in unprocessed energy materials by 39%.

Services for intermediate demand rose 0.6% on the month with most of rise attributed to securities brokerage and dealing. All the stages for intermediate demand are up on the year, with each stage showing an increase larger than 10%. Goods inputs for each stage of intermediate demand rose significantly beginning mostly in January of this year.

Retail Sales

Retail is down for the month to the tune of -0.3% total. Retail & food services excluding motor vehicles & parts rose this past month. Auto sales were down to their lowest level this previous month and lower than the March low. New car dealers’ sales have steadily decreased these past few months. Building materials & garden equipment & supplies dealers rose this past month slightly. General Merchandise also rose this past month. Gasoline stations posted the largest increase in sales after falling in April, followed by food & beverage stores.

This report illustrates where consumers are spending their money which is mostly on travel and food. Large durable good order sales like vehicles, furniture, and appliances seem to be on the decline as consumers feel the pinch in their wallets due to inflation.

Housing Starts, Permits, and Completions

Housing completions increased in May by 9.1%. Single-family housing completions rose by 2.8% and completions for 5 units or more increased by more than 30%. Building permits fell by 7%. Single-family authorizations decreased by 5.5%. Housing starts fell by 14.4% and single-family housing starts fell by 9.2%.

Permits for 5 units or more fell by the most in the recent month to the tune of 10%. Starts for 5 units or more also fell by 26.8% from the previous month. Units under construction for single-family homes were flat and increased slightly for 5 units or more. Going back to the retail sales report the building materials & suppliers dealers reflected builders’ hesitancy to take on new construction projects.

Mortgage applications rose from the previous week as did the refinance and purchase index. Mortgage rates came in at 5.65%, increasing due to inflation and the Fed’s planned rate increases to help fight inflation. Inventory shortages, affordability, and steadily rising rates continue to discourage prospective buyers according to the weekly MBA report.

Initial claims fell on the week but not by much. One report I read by a former economic advisor to the white house stated that in order to cool inflation, the Fed will have to become comfortable with a higher unemployment rate. One reason wages increased was the result of employers seeking to secure workers by offering higher pay. As the Fed continues to raise rates, will that cool down the economy enough to allow companies to save on labor costs?

Industrial production rose by 0.2% in May. Manufacturing output fell in May by 0.1%. Each major market group increased slightly in May. Major market groups include consumer goods, business equipment, construction supplies, business supplies, and materials. Mining and Utilities both rose in May and are at their highest levels this year.

Capacity Utilization increased by 0.1% for a total level of 79% in May. Manufacturing utilization fell by 0.1% while mining and utilities rose in May.

Markets

It was a rough week for each of the indices as they started the week gapping down. Although all the indices finished Friday with a small gain, they finished the week down. There was some bond-buying to end the week which helped bonds across maturities finish off their lows. The five and ten-year yields are both above 3% in response to inflation and the Fed’s rate increase of seventy-five basis points. The Fed has already stated that the next meeting could feature a rate hike of fifty to seventy-five basis points.

Each of the sectors fell precipitously during the week as market participants continued to sell. The energy sector broke through its 50 SMA while most other sectors continued their free fall down to monthly lows. Most of the sectors’ 50 SMA crossed their 200 SMA weeks ago.

Crypto is also facing a continued sell-off as Bitcoin steadily drifted below $20,000. At the moment, Bitcoin is slightly above this level. Most of the alt-coins sold off during the week, following Bitcoins’ lead. The outlook for crypto is continued bearishness as the resolve of investors and traders alike will be tested in the months ahead.

Volatility will remain as the markets are forecasting an incoming recession. Markets will react first followed by the economy. The Technical definition of a recession is more than one negative growth GDP report. The latest forecast for the next GDP report is no growth but that may change in the coming months. If retailers are starting to feel the pinch, that may be a sign of consumers shifting their focus towards necessities over discretionary purchases. If consumers continue to pullback on spending, GDP will definitely fall.


This past week in Review:

I think this past week went well in terms of purchases. I contributed excess money to my savings and investment accounts. This upcoming week should be more of the same.

Grade: C+

Reason: Consistency

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