Money Flow – Key week for persistence of positive seasonality.

Thanksgiving week is known for positive seasonality, and this year was no exception. Friday’s half-day session was very slow and lackluster, but all indexes finished in positive territory for the week, with the Dow leading largely on Deere and the Nasdaq 100 trailing on weakness in large-cap tech.

The S&P 500 is trading below a strong resistance level around the diagonal resistance of this year’s descending channel. The question is whether the indices can build on the seasonal momentum as we move into some major economic events.

The bulls’ argument is that the market continues to have positive seasonality through the end of the year. The combination of underinvested investors and a desire for some growth at the end of the year could help the indices continue to rise.

The bears argue that this market is ignoring the Covid shutdown in China, the fact that the Fed is still quite hawkish, and the potential for a slowdown in economic growth. The Federal Reserve is yet to support the market, although market participants expect a 0.5% hike in December. This does not mean that the war on inflation is over.

This week will be a test of the durability of positive seasonality. There will again be statements from members of the Fed around 19:00 on Monday, who will again try to dampen the rally with hawkish comments. But the real test will be on Wednesday and Thursday with the release of US GDP, the jobs report, Fed Chair Jerome Powell’s statement, the release of the Fed’s Beige Book, followed by key data on inflation and the unemployment rate.

The market is likely to be nervous ahead of these events and there is likely to be an increased level of uncertainty causing high volatility. The week after that is the CPI report and the Fed’s December meeting.

There has been a pattern of optimism about the Fed and the economy this year that the facts do not support. We currently have another example of improved sentiment, but no real factual basis to support it. This does not mean that the market cannot continue the rally, but it creates a high risk of a sharp decline.