Modest but still weak improvements in the short term

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Two points on inflation:

Paul Krugman argues that inflation is about to decline, arguing that the “whiplash effect” is at play:

Beyond that, there are growing indications that the whiplash is about to kick back.

What? The bullwhip effect is a common problem for products at the end of long supply chains: changes on the consumer side can lead to very exaggerated changes further down the chain. Suppose, to take a non-random example, that a shift to working from home – and then the coronavirus panic – leads to increased purchases of supermarket toilet paper (which is a somewhat different product than that used in offices). Consumers, seeing a shortage, rush to stock up; supermarkets, trying to meet demand, over-ordering; distributors supplying supermarkets over-order even more; and suddenly there are no more rolls to be had.

The Cleveland Fed released its latest indices of the median and trimmed average CPI at 16%, which are designed to show the rate of inflation independent of outliers. As the bank explains:

Advantages: By omitting outliers (small and large price changes) and focusing on the interior of the distribution of price changes, the median CPI and the 16% trimmed mean CPI can provide a better signal of the trend core inflation than the headline CPI or the CPI excluding food and energy (also known as the core CPI).

Here are the graphics:

Cleveland Fed CPI indices

Cleveland Fed CPI indices (Cleveland Federation)

The median CPI is just below 5%, while the average CPI reduced by 16% is slightly above 6%. Both still have a strong and upward trajectory.

Consider the following two tables:

EMA picture of defensive and aggressive ETFs

EMA picture of defensive and aggressive ETFs (Data from StockCharts; author’s calculations)

The EMA alignment for ETFs in the defensive sector is very bullish while the EMA alignment for Technology and Communication Services (both aggressive sectors) is negative. This means that the market is quite bearish.

JPMorgan has increased its reserves:

JPMorgan Chase & Co. added $902 million to its bad debt reserves, saying the odds of a recession were slightly higher due to rising inflation and the war in Ukraine.

The raise, the bank’s first since the depths of the pandemic in 2020, included about $300 million related to Russia, chief financial officer Jeremy Barnum said on a conference call with analysts on Wednesday. The rest reflects recession fears.

The possibility of an economic slowdown triggered by Federal Reserve interest rate hikes has moved from “low” to “slightly less low,” Barnum said.

Add to that a growing number of worrying negative developments in the credit market, which usually precede a recession by 12 to 18 months.

Let’s look at three sets of charts:

IWM 3 months, 1 month and 2 weeks

IWM 3 months, 1 month and 2 weeks (Stock charts)

The IWM is trying to hit rock bottom. The bottom right chart shows that prices are consolidating. There is a second shaded area above that which shows the magnitude of the lower gap. A solid move through this box and above the 200-Minute EMA would be a strong, potentially bullish move.

3-Month, 1-Month, 2-Week QQQ Chart

3-Month, 1-Month, 2-Week QQQ Chart (Stock charts)

The QQQ broke through resistance on the 1-month and 2-week charts.

3 month, 1 month and 2 week charts

3 month, 1 month and 2 week charts (Stock charts)

The SPY is still consolidating in a downward sloping pattern (two charts to the right).

Mid-week, things are fair. The market is trying to improve but has yet to make significant bullish technical progress.

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