Note: This article was originally written November 17, and has been updated with new charts.
And here we are.
I read the other day that the S&P 500's return has been positive one year after midterm elections every time since 1960. Sixty years of data. Impressive statistics.
And here we are...
These and other market statistics that too many people quote every day on CNBC and Bloomberg and elsewhere are "static." What do I mean? These statistics, which are supposed to guide us through the market's gyrations, ignore whether we are in a secular bull market or a secular bear market.
They ignore whether we are in a secular bull market for commodities or not. They ignore the fact that interest rates have broken a 40-year downtrend.
The Federal Reserve's war on inflation is not over and no amount of narratives from Wall Street professionals or 15 minutes of fame pundits on TV will change this. The Fed was late to the game and they are not going to reverse gears because we would love a year-end rally. Tighter monetary conditions have not generated more supply and the data on whether demand has cooled enough are not clear.
Job layoffs at some high-profile companies are being cited as evidence that the Fed needs to slow or pause the rate hikes. But these job cuts are not anywhere near the level that would pressure the Fed to consider a change in course.
Commodities
Nearly every single day in the past few months someone has pointed out to me that commodity prices are down from their highs and therefore inflation is slowing. So? I point out that commodities have stopped declining and low prices do not generate new supply. High prices tend to beget more supply. More supply is what is needed to cool inflation, in my opinion.
In this chart of the DBC, the Invesco DB Commodity Index Tracking Fund, below, you can see that commodity prices stopped declining in late September. The Fed is determined to kill inflation. I believe it will hike interest rates further crushing the economy in the process.
In this 10-year weekly bar chart of the DBC, below, we can see that commodity prices broke out of a super-large base pattern and began a new long-term bull market. Forget supply-chain issues and forget the Covid issues because the rally came out of a four-year base pattern. This is a secular (a number of cycles) shift.
Interest Rates
Interest rates can trend for many years and it is very important that you do not ignore breaks in those trends. The 10-Year Treasury yield declined from 1981 to 2020. Now rates are in an uptrend trend and it is foolish, in my opinion, to ignore this major market change. Rates could dip temporarily but they are in a new long-term upward trend for the foreseeable future.
The U.S. Dollar
The direction of the U.S. dollar is still up till the U.S. economy truly begins to sink, I believe.
In this monthly close-only chart of the DXY, the Dollar Index, below, we can see that the top in 2001 took a year to play out. Think of the U.S. economy as a supertanker -- it is going to take a long time to turn this ship around. A top pattern of only a few weeks is not going to do it.
Market Sentiment
Now a word about sentiment. From my new location in Delaware I can say that my neighbors have not dumped stocks and have not capitulated. But they are extremely worried that their lifestyle is going to be impacted and they may outlive their savings, which are shrinking.
Rallies like the one on November 10 on the heels of the CPI report give people hope that their accounts will get back to even. If the major averages turn down yet again the result could then be that on the margin we could see the over-65 crowd sell stocks in the first quarter of 2023. This could be the price low that we want to buy.
We still need to discuss the elephant in the room: Chinese stocks, which broke a long-term uptrend as you can see in this chart below.
And we should not ignore one of the largest holders of our bonds and various instruments -- Japan. In this long-term chart of the Nikkei 225 Index we can see a trend that is close to breaking down. This is a country that has been shoring up things for years! At some point in time the fingers in the dike will give way.
Bottom-Line Strategy
Traders who did some buying in October should consider raising their sell stops to not give back their gains when prices weaken into a first-quarter 2023 low.
P.S.: Hecla Mining Co. ( HL) is my top equity pick for 2023 and maybe 2024.
