We're witnessing a significant change in the character of the market action over the last few days. A new market narrative, in fact, is now taking hold. Let's dissect that shift and take a look at several stocks I'm watching right now.
For quite a while, the primary focus was on consumer price index inflationary numbers. The bulls were hopeful that peak price increases combined with a slightly less hawkish Fed would power the market higher into the end of the year. There was a sizable bounce off the October lows that topped out when Fed Chair Jerome Powell gave a speech in which he reinforced the belief that the December rate hike would be reduced to a half a percentage point.
This celebration of "peak inflation," however, has fizzled out, and the new narrative taking place is that a recession is going to occur early in 2023. Not only are many market strategists from large brokerage houses making this prediction, but some CEOs in the financial sector are also sounding the alarm.
The dilemma that the Fed faces is that it still does not have control of inflationary pressures caused by strong employment. The economy is still creating jobs, and with labor force participation declining, there is continued wage pressure. We may have peak CPI, but we do not have peaks in wages. The only way for the Fed to deal with this is to keep raising rates enough to cause more layoffs, and that is why we have so many calls now for a recession.
That is the bearish narrative taking hold this week, resulting in a sizable selloff. Some bulls are looking for an oversold bounce as the negativity has become fairly extreme, but there isn't any convenient news catalyst.
We have the producer price index on Friday and then CPI next Tuesday. That is followed by the Federal Open Market Committee decision on Wednesday, which will be a market mover. I'll be watching to see what sort of setup develops into these events.
In the meantime, I'm making a few trades. I was able to add to one of my favorite names, such as the small-cap company Aehr Test Systems (AEHR) , which is a supply of equipment that is used to test chips that are primarily used for electric vehicles. I have also been trading a leveraged biotech exchange-traded fund, the Direxion Daily S&P Biotech Bull 3X Shares (LABU) , to catch some short-term movement, and I also continue to build a position in Beyond Air (XAIR) as I await contract news.
The AdvisorShares Pure U.S. Cannabis ETF (MSOS) , which is the U.S.-based cannabis fund, has been blasted the last few days on news that the SAFE banking act would not be attached to a bill in Congress as expected. There is still a fairly good chance it may be attached to another bill before the end of the year, but it has been sold hard due to the constant disappointment caused by the political gamesmanship. At $11, it is sitting at the 50-day simple moving average and has some decent support, and could move on even a hint of political progress.
The early bounce is fizzling out, which isn't too surprising given how the bearish narrative has taken hold. It is tough to produce an oversold bounce when there isn't some sort of catalyst to get it started.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider some of these stocks to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)