As we close out the first trading week of 2023, all 3 US indices close on Friday with a 2+% gain. What a great start to 2023! Is it really, though?
If you think the market rallied on higher than expected NFP and lower unemployment rates, this is your first mistake.
For most of 2022, the market had considered any economic strength is bad for stocks because it would mean higher inflation and a lower chance of a Fed Pivot.
We saw this time and time again in 2022 when the market dropped on lower unemployment rates, higher wages, and higher retail sales.
Even Jerome Powell has stated countless times in FOMC that the tight labor market is terrible for bringing down inflation.
What caused the market rally, then?
The ISM Non-Manufacturing Report.
What you see here is the 1-hour chart of the S&P500. The market did rally on the NFP report, but it came back down immediately. However, at 11 pm, when ISM Non-Manufacturing numbers came out, it gave the market confidence to rally.
What is the ISM Non-Manufacturing Report?
It measures the business activity in the non-manufacturing sector, mainly the service sector. The service sector accounts for 80% of US business activities, and manufacturing accounts for the remaining 20%.
After 30 consecutive months of activity growth (Since May 2020), the Service sector has contracted.
Before last Friday, the last time Service Sector went into contraction was during the Covid19 crash and the Housing Crisis. So this is a piece of terrible news, then? Why did the market rally?
The market believes that a weakening economic condition will trigger Federal Reserve to cut the rate. The market still believes in this delusional Fed Pivot narrative.
Time and time again, Jerom Powell will come out during FOMC and kill the rally. During Dec 2022 press conference, Powell explicitly stated, "No Pivot in 2023" (go see the conference for yourself).
The market is still fighting the Fed. The 10 Year Yield and 2 Year Yield diving 4% also proves this delusional "Fed Pivot" mindset. The Fed is raising FFR to keep the rate high to discourage cheap money. But if the 10Year and 2 Year rates are crashing on the backdrop of a delusional scenario, it will make the Fed's job even harder. They even stated that in the December meeting minutes.
"Unwarranted easing in financial condition, ESPECIALLY IF DRIVEN BY A MISPERCEPTION BY THE PUBLIC or the committee's reaction function, would complicate the committee's effort to restore price stability."
Once again, this market rally has no legs to stand on. When the FOMC decision arrives on 31 Jan 2023, Powell will stop this rally dead on its track again. Or maybe the CPI number coming this Thursday may slap some sense into the market.
Do not get tricked (again). This is not the first time. Both July 2022 and October 2022 rallies were also based on a Pivot delusion. And it did not end well. If you are long-biased, do not overstay your welcome. I will be heading to these two key event with a short bias portfolio.
NOTE: Banks and Big Techs earnings are coming up!
If you think the market rallied on higher than expected NFP and lower unemployment rates, this is your first mistake.
For most of 2022, the market had considered any economic strength is bad for stocks because it would mean higher inflation and a lower chance of a Fed Pivot.
We saw this time and time again in 2022 when the market dropped on lower unemployment rates, higher wages, and higher retail sales.
Even Jerome Powell has stated countless times in FOMC that the tight labor market is terrible for bringing down inflation.
What caused the market rally, then?
The ISM Non-Manufacturing Report.
What you see here is the 1-hour chart of the S&P500. The market did rally on the NFP report, but it came back down immediately. However, at 11 pm, when ISM Non-Manufacturing numbers came out, it gave the market confidence to rally.
What is the ISM Non-Manufacturing Report?
It measures the business activity in the non-manufacturing sector, mainly the service sector. The service sector accounts for 80% of US business activities, and manufacturing accounts for the remaining 20%.
After 30 consecutive months of activity growth (Since May 2020), the Service sector has contracted.
Before last Friday, the last time Service Sector went into contraction was during the Covid19 crash and the Housing Crisis. So this is a piece of terrible news, then? Why did the market rally?
The market believes that a weakening economic condition will trigger Federal Reserve to cut the rate. The market still believes in this delusional Fed Pivot narrative.
Time and time again, Jerom Powell will come out during FOMC and kill the rally. During Dec 2022 press conference, Powell explicitly stated, "No Pivot in 2023" (go see the conference for yourself).
The market is still fighting the Fed. The 10 Year Yield and 2 Year Yield diving 4% also proves this delusional "Fed Pivot" mindset. The Fed is raising FFR to keep the rate high to discourage cheap money. But if the 10Year and 2 Year rates are crashing on the backdrop of a delusional scenario, it will make the Fed's job even harder. They even stated that in the December meeting minutes.
"Unwarranted easing in financial condition, ESPECIALLY IF DRIVEN BY A MISPERCEPTION BY THE PUBLIC or the committee's reaction function, would complicate the committee's effort to restore price stability."
Once again, this market rally has no legs to stand on. When the FOMC decision arrives on 31 Jan 2023, Powell will stop this rally dead on its track again. Or maybe the CPI number coming this Thursday may slap some sense into the market.
Do not get tricked (again). This is not the first time. Both July 2022 and October 2022 rallies were also based on a Pivot delusion. And it did not end well. If you are long-biased, do not overstay your welcome. I will be heading to these two key event with a short bias portfolio.
NOTE: Banks and Big Techs earnings are coming up!