Trade The Journey

Trade The Journey

The markets stall

Top of the Morning! I hope everyone is enjoying their weekend. I decided to take the week off, after two losing trades that nearly wiped out half of my trading account balance. The first of the two losing trades was mostly due to my inability to close the trade. I mostly clung to hope as I watched the trade. The second losing trade was due mostly to a better-than-expected CPI report. That trade involved UUP, which is based on the dollar, gapping down on the open.

This past week, I decided to reflect on what went wrong. I spent the week revisiting one of my favorite videos on trade psychology by Mark Douglas called, “How to think like a professional trader.” Reading about what you should do during a trade is the easy part, executing what you read is a different story.

My goal for the next trade is to set up a trading plan for the trade. Usually, I review the charts, look for any upcoming events or news stories that might affect the trade, and look at the economic calendar for the week of the trade. I think the main adjustment I need to make is closing the position when the market is telling me what I thought is wrong.

If I can do this consistently, I’ll be one step closer to becoming a professional trader.

Economy:

After the CPI report was released the market’s rallied on the premise that the Fed might be inclined to pivot sooner rather than later. This past week, the PPI report followed the CPI report and reported an ease in the rising price pressure wholesalers face. The PPI report is a forecast of future price increases or decreases the consumer might face.

The PPI for final demand increased by 0.2%, which is a slightly smaller increase than the 0.6% reported in October. PPI came in at 5.4% for the last twelve months. The final demand for goods rose 0.6% and final demand for services fell 0.1%. The increase in final demand for goods was largely attributed to energy costs, specifically gasoline. Energy rose 2.7% in October. For final demand in services, the decline was attributed to falling prices for fuel and lubricants retailing.

Processed goods for intermediate demand fell by 0.2% led by processed materials less food and energy. Diesel fuel, conversely, rose by 9.5%. Unprocessed goods for intermediate demand fell by 11.7% led by unprocessed energy materials, specifically natural gas.

Services for intermediate demand rose 0.3%, led partly by prices for business loans. Transportation and warehousing for intermediate demand also rose by 0.5%. Some other parts of the PPI report included a rise in finished consumer foods, crude (15.6%), transportation of passengers for final demand (2.1%), and construction for private and government demand (2.9%).

Retail sales showed a resilient consumer that still has the money to spend, buoyed by credit and savings. The retail report rose 1.3% from the previous month. It’s important to remember that the retail sales report does not account for inflation. The most notable increases were in food & beverage stores, gasoline stations, general merchandise stores, food services & drinking places and nonstore retailers. The most notable decrease was in electronics & appliance stores.

This report confirms that consumers are still venturing out, shunning the purchase of large items and welcoming the experiences that were lost during the height of the pandemic. Some of the retailers reported that consumers are pulling back on the purchase of goods, especially large ticket items.

The Business inventories report showed that trade sales and manufacturers’ shipments rose 0.2% in September. Manufacturers and trade inventories rose 0.4%. The inventories/sales ratio was 1.33. Merchant wholesalers, retailers, and manufacturers’ inventories all increased slightly from August to September, but it is sharply from the levels a year ago. A good way to look at inventory to sales is how much inventory is on hand to meet sales.

The highest inventory-to-sales ratios were in the following industries: Department stores, clothing & clothing accessory stores, building materials, garden equipment & supplies, and furniture. Having a high inventory-to-sales ratio means that stores aren’t moving the inventory as quickly as possible and may have to discount in the future to bring the ratio back into balance. Some of the recent retailer earnings reports showed some of the challenges retailers are having with inventory.

Industrial production fell 0.1% in October. Manufacturing rose 0.1%, while mining and utilities fell in October.  Durable manufacturing rose 0.3% and nondurable manufacturing rose 0.5%. Within the durable manufacturing, electrical equipment, appliances, and components, aerospace and miscellaneous transportation equipment, and motor vehicles & parts rose. Within nondurable manufacturing, printing, rubber product, and apparel rose.

Capacity utilization also fell 0.2%, bringing the total to 79.9% for October which is still above its long-run average. The long-run average from 1972-2021 is 79.6%. Mining and utilities capacity utilization is below its long-term average. Industrial production of final products which include consumer goods and business equipment rose 0.4% in total for October. Nonindustrial supplies including construction fell by 0.3%. Materials production also fell 0.4% in October.

Housing is still facing a challenging time ahead due to high mortgage rates and prices. Building permits fell in October by 2.4% and is 10% below the rate from a year ago. Single-family authorizations are 3.6% below the September rate. Housing Starts fell 4.2% in October. Housing completions also fell 6.4% in October. Single-family housing starts and completions both fell in October.

Permits for 2-4 units rose 10% while permits for units of 5 or more fell 1.9% in October. Starts for 5 units or more fell. Units under construction fell for single-family but rose 2% for 5 units or more. Units completed for all units fell in October. This report highlights the slowdown in housing and construction. Rates will be a big factor moving forward, and it doesn’t seem like the Fed will be changing its commitment to fight inflation anytime soon according to some of the Fed members that spoke this past week.

In fact, one Fed member forecasted a range for Fed rates to end between 5-7%. Existing home sales fell 5.9%. The median existing-home sales price rose to $379,100 and the inventory of existing homes is 3.3 months. Homeowners are delaying listing their homes during this period of high rates; however, the inventory level still indicates that the market for homes still has a pulse. The unsold inventory of homes is still higher than 2.4 months reported a year ago. The report also mentioned that we may have seen a peak in mortgage rates this past November, but time will tell.

Single-family home sales fell 6.4% from September and over 25% for the same period a year ago. Foot traffic for home showings fell in every region and is down over 25% from a year ago.

It might be worth the time and effort to keep a close eye on the mortgage market because of the impact home buying and renovations have on the economy.

The conference board leading economic index (LEI) fell by 0.8%, after falling 0.5% in September. The coincident and lagging economic index both increased slightly. “The LEI is a predictive variable that anticipates (or “leads) turning points in the business cycle by around 7 months.” Below is a chart of the Leading economic index and what has contributed to its decline.

Finally, initial claims came in at the consensus of 222,000, while continuing jobless claims increased slightly this past week. The labor market remains strong in the face of continuing rate hikes. Due to the difficulty companies faced in finding workers, they may be reluctant to let them go out of fear that finding another qualified applicant is not worth the trouble.

All of the indices stalled after the recent sharp rally following the release of the CPI report. The VIX ended the week on a lower note but remains in the twenty-four range. The nine-day VIX value is 18.34, the three-month VIX value is 25.33, and the six-month VIX value is 27.61. The index put/call ratio is much higher than the equity put/call ratio, signaling that the professionals are much more bearish than the retail traders.

With all this information, it might be tempting to think that we may narrowly avoid a recession but I’m not too sure we have.  With the layoffs in the tech industry, will other industries follow suit? Because the markets are dynamic, the best we can do is make an educated guess about the future.

This past week’s cash flow in review:

This past week didn’t go as planned. I ended up spending a lot more money than I planned, especially on bills. I also ended up attending a clippers game which was another unexpected expense. Luckily, I have built up a sizable savings account to weather any changes in my situation. As I search for new employment, I’ll have to continue to monitor my spending closely until my income changes.

Grade: F

Reason: I had to withdraw money from saving and investment accounts to cover expenses

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