The time has come to have a serious talk about the market. There are several discussions surrounding whether or not we will experience a recession and whether or not the Federal Reserve can save the market from a recession. My answer no, they cannot. In fact, they may purposely and purposefully cause a recession instead. Let me explain.
SHORT TERM OUTLOOK
The short term outlook on the market is strictly reliant on technical analysis at the moment. Hence why I was able to predict the past several movements on the S&P. This is because traders and investors are easily predicting the Federal Reserve's next few moves with regard to interest rate hikes. Jerome Powell made it awfully clear what their intentions were.
So what is the TA saying? Looking at $SPY for example, it is clear that we are still considered within bearish territory despite the slight pivot on Friday October 21st. SPY has continued to either bounce under, or over the 50EMA. It is evidently clear that if we were to break above the current 50EMA (380.63), then we would see an increase in bullishness - moving us into the the range between 382.35 and 388.75. If we reject however, we will likely see a severely strong pull down back into the high 350s to low 360s.
In addition, we have an existing and strong area of high confluence (AOHC) sitting on Tuesday October 25th. The market will decide its direction on this day. Mark my words. In either case, there will be a large movement this week of October 24th. I expect to see very stagnant and boring moves by the end of this week and at the beginning of next week.
LONG TERM OUTLOOK
The Great Deleveraging
What does this mean and why is it important? The concept behind deleveraging is a Fed-induced recession - a recession caused by the Federal Reserve itself. What exactly is deleveraging? This is the opposite of leveraging. Still not clear? The Fed's goal here is to reduce asset prices in order to make companies and people feel poor. But let's keep it real here...this will primarily affect the people. This will occur by having companies pay off any and all existing debt on their balance sheets while avoiding to incur more debt.
Why is this a bad thing for investors? With the Fed increasing interest rates at an inhumane rate, if companies take on too much debt, the interest payments or cost to service that debt can do financial harm to the company. As a result, companies will be forced to deleverage or pay down debt by liquidating their assets. The issue arises as too much systemic deleveraging can lead to financial recession and a credit crunch.
On the flip side, when investors get the feeling that a company is holding bad debts and unable to deleverage, the value of that debt plummets even further. Companies are then forced to sell it at a loss if they can sell it at all. A company's lack of ability to sell can lead to business failure.
10Y-3M bond spread has inverted for the first time this year
What does this mean? Think of a buying a bond as buying existing U.S. debt with a guarantee that you will receive an x amount of interest following the maturity date (known as yield) - be it 3 months, 5 years, 10 years, 30 years, etc.
In a strong and healthy economy, the further out the maturity date, the greater the yield. The image below shows what a healthy yield curve should look like when the economy is healthy.
When the yield curve is inverted, this implies that we are now in an unhealthy and bearish economy. To keep things simple, you make more interest by buying bonds with a shorter maturity date. The image below shows what that would look.
That in itself should be a call for concern as historically speaking, inversions of the yield curve have preceded recessions in the U.S. An inverted yield curve reflects investors' expectations for a decline in longer-term interest rates as a result of a deteriorating economic performance. In almost all cases of recession predictors, the 10Y2Y spread has been used. But that has already inverted.