Trade The Journey

Trade The Journey

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New Lows!!

Top of the Morning! I hope all is well and everyone is enjoying their weekend. It’s been a low rough couple of weeks for markets as the indices drift to new lows. The market is highly volatile as the focus for participants is on each economic report that highlights inflationary pressures. The assumption is that a slowdown would induce the Fed to possibly slow the pace of the rate hikes.

However, that doesn’t seem likely, as Fed members voting and nonvoting alike have each voiced their opinion on what needs to be done to slow down inflation. Some have admitted that they misjudged inflation as transitory, while others having come to this conclusion earlier are eager to quell inflation regardless of its on the economy and markets.

Inflation isn’t just a problem in the United States, it’s a global problem with countries around the world hiking rates. In the Eurozone, inflation has hit 10% mostly due to the soaring price of energy which can be attributed to the war in Ukraine. Russia has already begun to target the pipelines that transport natural gas into Europe as we move into the winter months.

Countries in Europe are scrambling to find alternative uses of energy and some countries have nationalized energy companies to help with the shortage. The new British prime minister, Liz Truss, has centered her stance on inflation as a direct result of the war in Ukraine. To help the citizens she has backed a plan instituting a tax cut and government spending which caused the euro to fall precipitously.

Much to the disliking of the Markets, she and some her officials have stuck to this plan. The Bank of England stepped in during the week and brought bonds on the long end of the curve to help the falling euro and bond yields. Unfortunately, the fear in Europe spread to the other markets, also known as contagion, before the Bank of England stepped in.

The dollar continued its ascent to new highs as other currencies weakened. Treasury yields continue to invert as the five-year yield remains above 4%. The ten-year treasury yield came close to rising above 4% which would have been something to see. As the rate hikes continue, it may take some time before consumers start feeling the effects of a higher cost of money. Corporate bond issues have dropped 23.5% from a year ago as companies pull back due to the higher interest costs.

As the next earning season begins on October 13, how will the strong dollar, higher rates and an economy that’s slowing affect company earnings?

One thing is for sure, this market isn’t for the faint of heart as participants are pulling out of the market and holding their money in cash. There’s so much volatility that’s it hard to tell where everything is going. This past week I purchased two calls that both ended disastrously. Sometimes you can see when there is a high probability of the stock rebounding, other times it’s much harder to tell.

This is one of those times. While it’s probably best for me to sit out the next couple of weeks to watch what happens, I feel that sitting out may deprive me of valuable trading experience. The only thing that may have saved me from losing most of the call premium on both options is that I set the amount I was willing to lose. If my exit target wasn’t set, I could have easily lost a couple of hundred dollars.

If you’re going to trade in a market like the current one, make sure that your stops and exit targets are tight because there’s no telling how far up or down this market may move. Nor is it clear how quick it may move in either direction.

Economy

Consumer confidence improved in September, buoyed by declining gas prices, and a strong labor market. The expectations, and present situations index both improved. The short-term outlook for business conditions, labor market and financial prospects increased in September. 

The final report for the University of Michigan survey of consumers echoed the consumer confidence report as consumer sentiment improves. The year-ahead inflation rate declined to 4.7% and long-run inflation expectations fell below the 2.9-3.1% range.

The durable goods report for August fell 0.2%. New orders for manufactured durable goods fell 0.2%, however excluding transportation and defense, new orders rose slightly. Shipments rose 0.7 percent led by transportation equipment. Unfilled Orders and Inventories rose slightly for August while new orders for capital goods fell 0.7%. Shipments, Inventories, and unfilled orders for capital goods rose for the month of August. New orders for communications equipment led for August followed by Electrical equipment, appliances, and components. Electrical equipment, appliances, and components also led in unfilled orders.

Shifting our attention to the mortgage market, new home sales rose by close to 30%. The median sales price for August was $436,800 and the average sales price was $521,800. New home sales rose across all the regions while the monthly supply of new homes fell 2.3% from July’s reading. New home sales rose across the price ranges except for the $500,000 to $749,000 range.

In the latest weekly MBA survey, mortgage applications fell by 3.7%. The refinance and purchase applications both fell for the week, with the refinance index falling by 11%. The thirty-year fixed rate rose to 6.52% for conforming loans and rose over 6% for Jumbo loans. The share of refinancing applications as a portion of the applications also decreased. Adjustable-rate mortgage applications continue to rise as a portion of mortgage applications submitted.

The labor market remains strong, as initial jobless claims fell below 200,000 this past week signaling that Fed may have to continue raising rates. Continuing jobless claims also fell this past week. The Fed’s preferred gauge of inflation, the Personal Consumption Expenditure report was released this past week. In nominal or current dollars, disposable income rose 0.4%, the PCE index rose by 0.4% and personal income rose by 0.1%.

Compensation was led by private wages and salaries, mostly in the service-producing industries. There was an increase in spending on services offset by a decrease in spending on goods. Housing, utilities, transportation, and health care led to an increase in spending on services. Spending on gas and other energy goods led to a decrease in spending on goods. The real PCE which accounts for inflation rose 0.1%. The savings rate remained at a 3.5% level from July.

The PCE and initial claims reports both showed that the Fed has yet to conquer inflation and will mostly continue hiking rates. As the Fed continues to hike, the probability of a recession is continually rising and most likely all but certain. The market usually bottoms before the Economy turns but as of now calling a bottom in the markets is unlikely to prove to be a profitable endeavor.

For investors, this may be or will be in the coming months an opportune time to begin adding stocks to their portfolio if you can stomach the volatility.

This past week’s cash flow review:

This past week went well in terms of money management. I was able to continue building up my savings account balance while paying down my credit accounts. One of the biggest changes I made to my spending plan was setting aside a set amount from each paycheck before I start making purchases and paying bills.

So far, I haven’t touched my savings account balance which is a good sign. This coming paycheck, I plan to set aside a higher amount from my paycheck for my savings account and see how I fare.

Grade: C++

Reason: Continued improvement

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