Trade The Journey

Trade The Journey

Volatile markets, Volatile returns

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. The report garnering the focus of the market this upcoming week is the CPI report and to a lesser extent the PPI report. Both are measures of inflation in the economy. The CPI is the inflation at the consumer level and PPI is the inflation at the producer level. CPI stands for consumer price inflation and PPI stands for producer price inflation.

These reports are important because they will assist the FED in determining the pace and size of future rate hikes. They also have the potential to move the markets which include stocks and bonds. I can’t wait to review these reports. Another big announcement made during the week was OPEC’s decision to cut production by 2 million barrels a day which will ultimately affect the price of oil and not in a good way.

As the price of oil rises it will increase the level of inflation which most economies are attempting to bring down. By cutting production, OPEC has assisted Russia in boosting its oil revenues. The U.S. will probably have to release oil from its strategic reserve to help soften the blow of rising oil prices.

With so many variables affecting the market’s performance, many participants have piled into cash funds. To be honest, that might be the best strategy unless your trading skills warrant you doing otherwise. Personally, I’m undecided on if I’ll continue trading through this extremely volatile period. Just when you think being bearish for the short term might pay off well, the market rallies.

Be careful if you plan to trade and make sure you set tight stops. During these times, I wouldn’t hesitate to cut the position if it isn’t performing according to your trading plan.

Economic Market Review

Although ISM manufacturing index came in lower at 50.9% it still marked the 28th consecutive month of growth since its above the 50% mark. New orders contracted in September by 4.2%, coming in at 47.2%. The production index came in above 50% albeit slightly lower than in August. The price index also retreated. The backlog index contracted as did the employment index. The supplier’s index contracted while the inventories index rose for September. Supplier deliveries above 50% indicate slower times and below 50% faster times.  The reading came in at 52.7% a 2.7% improvement from the previous month. New export orders contracted while import orders rose for September.

Demand is obviously contracting according to new orders and the level of backlogs. Consumption which is measured by production and employment according to the report also contracted.

Machinery, Transportation equipment, food, beverage & tobacco products, and computer & electronic products registered medium to strong growth.

Respondents’ remarks and concerns: Strong growth, some supply chain issues still exist, concern about a slowing economy, employee retention and in some cases hiring freezes and inventory buildup.

Overall, manufacturing has continued to expand although at a slower pace. Manufacturing corresponds directly to the growth of the overall economy, the recent 50.9% growth in manufacturing is related to 0.8% growth in the Gross domestic product. Only transportation equipment, computer & electronic products registered growth in new orders.  The average lead time for capital expenditures decreased by two days to 178 days, and for production materials to 94 days. While lead times are still high for production materials and business expenditures, they have improved. Price increases are also slowing for raw materials, attributed to lower energy prices, lower demand for copper, steel, aluminum, and corrugate markets, and decreased demand for chemicals and plastic.

The ism non-manufacturing index also known as the services index grew for the 28th straight month, coming in at 56.7%. Business activity decreased slightly as did the new orders index. Supplier deliveries are also contracted. Prices fell as did inventories. The services sector continues to expand putting a strain on inventory. Employment in the services sector grew in September.  Prices increased for services securing materials and services. Most of the industries reported growth in September.

Respondents’ remarks and concerns: Homes are being discounted to improve sales, hiring challenges remain, chip shortage remains, farmers have cut back on consumption due to pricing and weather-related issues, overstocked inventory, and business activity is improving for some industries but slowed for others in September.

Overall, the services sector continues to register strong growth as consumers shifted their preference to services over goods. The 56.7% growth in the services sector corresponds to a 2.4% increase in real gross domestic products.

Total Construction spending fell 0.7% in August. Private and public construction spending also fell in August as did residential spending. New single-family private construction spending fell while new multifamily private construction spending rose in august.  Total construction spending has been falling for the last few months albeit 8.5% higher than in August of last year.

According to the weekly MBA weekly application report, mortgage applications fell over 10% from the previous week. The refinance and purchase index also fell over 10% from the previous week. Rates for mortgages continue to rise to near historic levels, coming in at 6.75% for a thirty-year fixed-rate mortgage. Conforming loans ($647,200 or less) increased to 6.75% and jumbo loans (Greater than $647,200) increased to 6.14%. Adjustable-rate mortgage applications continue to increase its share in total mortgage applications. Homebuilders as mentioned above are having to adjust to the slowing housing market as rates continue to rise.

Employment continues to be a sticky issue for market participants, as the market awaits each report on the employment situation. Participants are hoping for a slowdown in hiring which they believe will cause the Fed to slow or decrease the size of its hikes. Initial claims increased by 29,000 bringing the total number of initial claims above the consensus to 219,000. Continuing claims increased from the previous week. Several reports of increasing initial claims and/or a deteriorating hiring report might be needed before the Fed reconsiders its aggressive stance on inflation.

Several Fed speakers indicated that they are committed to fighting inflation and bringing it closer to their two percent target. The job openings report showed a decrease in the number of job openings available. Hires and total separations showed little change as did quits, layoffs, and discharges. Quits, a heavily watched metric, indicated that people are remaining at their jobs. A high quit rate like the levels seen in early February and March indicates that people feel that the labor market is strong and the chances of finding a better-paying or more flexible job situation are highly likely.

The job openings rate fell for businesses of all sizes except for those with nine employees or less. The market rose on the news of a lower amount of new job openings, however, the main report the market awaited was the employment situation report. The employment situation report provides a more in-depth picture of employment.

The latest employment report wasn’t what the market was looking for and corresponds to the indices finishing the week at lower levels although still registering some growth for the week. Total nonfarm employment increased by 263,000 and the unemployment rate fell by 0.2%, coming in at 3.5%. Notable hiring increases occurred in leisure, hospitality, and health care.

The labor force participation rate remained unchanged at 62.3%. The number of workers working from home or outside of the office decreased by 1.3%. Leisure and hospitality added 83,000 jobs, and food & services added 60,000 jobs as did the healthcare industry. Job losses occurred in business support services, legal services, and advertising & related services. Manufacturing and construction added jobs, with construction registering its first monthly growth in jobs in the last eight months.

Average hourly earnings rose 0.3% in September and are up 5.0% in the past year. Although wage growth is up, it’s still lower than the latest inflation rate. The average workweek remained the same for nonfarm payrolls and manufacturing. After adjustments in the previous months, the number of jobs added were higher for July and August.

Consumer credit outstanding increased. Rates for new car loans, credit card plans, and personal loans all increased in August.

While it is evident that the rate hikes by the Fed are slowing down economic activity the labor market remains tight evidenced by the employment situation report. The next Fed meeting is in November and the probability of another seventy-five-basis point hike has increased. The market was hoping for a weaker situation report, hoping that the Fed would either lower the rate hikes or forecast some time in the future when the hikes would cease. The Fed has made it clear that the hikes will continue, and Fed governor Lael Brainard will be speaking this upcoming week.

While it’s almost clear that we are heading toward a recession, its severity is unknown. Volatility in the markets should be expected to continue. Money managers continue to move cash out of the market as the direction of the market remains unclear.

This past week, I suffered two losses in bearish options positions as the market rose at the beginning of the week. I placed no other positions for the rest of the week. In the last post, I mentioned that I would remain in the market to gather trading experience but now I’m not so sure.

Market Performance

Market Performance


This past week in Review:

This past week went well as I continued to build up the amount of savings needed to cover an emergency. Even though my monthly income has decreased slightly, I continue to make the necessary weekly adjustments to my spending. My only concern is that I may be becoming a little too budget conscious.

Grade: C+

Reason: Continued improvement.

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