The market underwent some severe mood swings this week and finished with some ugly action on Friday. The indexes were pounded to wrap up the week, with the Nasdaq 100 fund (QQQ) breaking under its 50-day simple moving average and losing 1.75%. Breadth was around three-to-one negative, and new 12-month lows were around 300.
The choppy market action is due in part to negative seasonality, but the primary issue is the economic debate. The bulls continue to celebrate slowing inflation, and they are also optimistic that there will not be any significant economic slowing.
The bears are adamant that the lag effect of monetary policy is about to hit hard, and they have plenty of data showing that the consumer is struggling. I've been trying to reconcile the view of many economists who say that the economy is in good shape with the data that I see: Real wages are declining, credit card debt is at new highs, and savings are depleted. But I have been unable to do so. Price action will eventually have the answer for us, but it is going to be a nasty debate and produce a high level of volatility.
Next week is historically the worst week of the year for the market. We also have the Fed interest rate decision on Wednesday, which creates a very interesting news catalyst. No one expects the Fed to hike next week, and the Fed is likely to leave its options open for a hike on Nov. 1, but every word that Jerome Powell utters will be carefully weighed.
We have a very poor market environment right now, but the good news is that this market needs a deeper correction to setup conditions for strength to end the year. The bulls have been hoping for straight-up action, but that just doesn't work very well when we have so many important economic issues to navigate. Too many bulls are optimistic about the economy, and the market would be better off if there was a wall of worry to climb.
Have a great weekend. I'll see you on Monday.
