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Money Flow – Despite the shift in sentiment, catalysts are missing

We have witnessed a significant change in the nature of market action over the past few days. A new market narrative, in fact, is now being imposed.

It was the fifth straight day of losses for the S&P 500 , which is rare at the start of a new month. The last two times were in June 2011 and February 2002.

The breadth was mediocre from about 3,400 gainers to 4,700 decliners, but the most alarming statistic is that new 12-month lows hit nearly 400 names. This is a high level as the indices are still well above their lows levels in October.

For a while, the main focus was on the consumer price index inflation numbers. Bulls hoped that peak price increases combined with a slightly less hawkish Fed would drive the market higher for the rest of the year.  There was a significant bounce from the October lows, which peaked when Fed Chairman Jerome Powell gave a speech in which he reiterated his belief that a December rate hike would be scaled back to half a percentage point.

New fears emerging are that the recession will hit in early 2023. Not only are many market strategists at major brokerage houses making this prediction, but some financial sector executives are sounding the alarm as well.

The dilemma facing the Fed is that it still has no control over the inflationary pressures caused by strong employment. The economy is still creating jobs, and as labor force participation declines, pressure on wages continues.  We may have peak CPI, but we don’t have peak wages. The only way the Fed can handle this is to keep raising rates enough to trigger more layoffs, which is why we have so many calls for a recession now.

This is the bearish narrative taking hold this week, leading to a significant sell-off. Some bulls are looking for an oversold bounce as the negativity has become quite extreme for a few days, but there is no convenient news catalyst.

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Friday’s producer price index (PPI) may cause some movement but the main focus is on the consumer price index and the Fed’s decision next week.

The market is jittery for now as there is a change in the sentiment which remained positive for almost a month and a half. After such a decline, we are likely to see a short-term bounce before continuing to the downside.


 Dealer Anatoliy Pavlov

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