Markets unlocked on 10/31/22: Fed Watch

Ivan Martchev profile picture

Douglas getting up

Contributions to GDP

Happy Halloween everyone!

As we approach the end of the first month of the last quarter of the year, the main news behind us is a GDP report. Politicians and commentators widely reported that GDP growth shows the economy is fine, nothing to worry about, really, and that we dodged the bullet by avoiding a recession.

This week the Fed meeting will likely be closely watched and will be a source of volatility. Be careful not to include heavy (large) items in the report.

What makes GDP work?

We’re pretty sure a recession could also have been avoided with another redefinition of the term, but we don’t think the report is as positive as it appears on the surface. A look at the GDP contribution/breakdown in the chart above shows why.

All GDP “growth” is based on net exports. This is a number that is obviously likely to suffer in a strong dollar; in other words, this is not real, sustainable growth.

Furthermore, the real canary in the coal mine is consumption, which has been, and continues to be, lukewarm at best. The Consumer is not at all confident and is cutting spending in all areas. We also expect that the revisions (2 more to go before the GDP figure is final) may not look so rosy, but those revisions will come after the US midterms.

Excuse our cynicism. While we remain optimistic in the long term on both the economy and the markets, we see plenty of cause for concern in the short term.

Market conditions

The best thing to do to predict price direction is to identify a small incline in the odds – this is reality. It’s not sexy, flashy marketing (Crush the markets with no losing trades!), but it’s the reality real traders face every day.

At this point, the patterns in the major US and global stock indices remain at least moderately bearish. Of course, these patterns could degrade and we could see substantial rallies towards the end of the year. We could end the year at all-time highs in the indices! We could go up 40% more next year! Benevolent aliens could show up next week and cure all human ills and usher in an unprecedented era of peace on the planet.

All these things are possible, but today we would not bet on any of them.

We are currently watching these bear flags on the daily indices and will be watching for further weakness. When something changes, so do we. (And that’s the best we can hope to be as active traders.) A little more strength on the daily chart would set up the first short-term longs we have seen in a while, which could lead to further trading in the same direction.

E-mini S&P 500 Continuous Contracts

Next week (data releases that could influence the market)

  • monday: none
  • Tuesday: FOMC meeting begins
  • Wednesday: EIA Crude Oil Inventories, ADP Employment, FOMC Announcement
  • Thursday: Job numbers, productivity and unit labor costs
  • Friday: Nonfarm Payrolls, Unemployment Rate

Earnings season continues in full swing, with around 1,500 names reported this week.

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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.

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