Market Notes – January 20/23

Stocks rallied on Friday to finish the week strong after briefly losing the momentum of the January rally.

The Dow Jones Industrial Average added 330.93 points, or 1%, to close at 33,375.49, while the S&P 500 advanced 1.89% to 3,972.61. Both indexes snapped a three-day losing streak. Meanwhile, the Nasdaq Composite rose 2.66%, with help from Netflix and Alphabet, to end the day at 11,140.43.

The Nasdaq was also the outperformer for the week, posting a 0.55% gain and its third positive week in a row. The Dow finished the week lower by 2.70%, and the S&P posted a 0.66% loss, both breaking two-week win streaks.

All of the major averages are still in positive territory for the year.

With the S&P 500, we can see it is forming a wedge pattern and is testing the upper rail, which coincides with the 200-DMA (blue wavy line). That 4000 level is near-term resistance, with 4100 being key resistance. Near-term support sits at 3850, with key support at 3570, which was the Sept & Oct double bottom.

One thing investors should know is that typically, the bottom in the market aligns with when the Fed STOPS CUTTING rates, not STOPS RAISING them. As is clearly evident on the chart below highlighted by the green arrows, in the last few Fed rate cut cycles (2003, 2009 & 2020)  it was when the Fed finished  cutting rates that the stock market started its next bullish move. Aso clearly evident by the red arrows, when the Fed started their rate cuts, the market started to decline.

Many have assumed that the root cause of the inflation problem that we are in today was  the Russian invasion of Ukraine.  But in reality, one of the prime root causes was the amount of government stimulus that was pumped into the economy.  Governments started handing out stimulus cheques like they were candy.  As a result, US personal saving went from $1.45 trillion in late 2019 to a whopping $4.85 trillion in mid 2020. That’s an increase of $3.40 trillion or 234% in just 6 months.

All of the money handed out created new demand…too much money, chasing too few goods. As a result, inflation started to rise dramatically. By the time Russia invaded Ukraine, inflation was already ~8%.

All that increase in personal savings created a whole new group of investors. The Reddit crowd started investing the meme stocks such GameStop and AMC. That infusion of over $3.4 trillion created a ‘wealth effect’ and resulted in the S&P 500 rising over 100% in 2021.

The bond  market continues to ‘fight the Fed’ buying bonds, pushing 10-year yields down, expecting the Fed to PAUSE or even PIVOT soon on their rate increase policy.

Both the Fed and Bank of Canada have stated that they want a ‘positive real rate’, meaning they want the central bank rate HIGHER than the inflation rate. As we can see on the chart below, both Canadian and US real rates are still negative.  The mantra for 12+ years has been ‘don’t fight the Fed.’ Will fighting the Fed work this time?

Stay tuned!

Howestreet Special Offer

In case you missed it, the Trend Letter’s Martin Straith was a guest Friday on Howestreet’s ‘This Week in Money’. The interview with Martin begins at 1:00:17. In the interview Martin disucced the following topics:

• The AI ChatGPT app
• How the root cause of the inflation problem started long before the Russian invasion of Ukraine
• Why the market treat bad news as good news
• What is happening in the bond markets
• Currencies: $US, $CAD, Euro, Yen
• Outlook for gold, silver & oil
• Key technical triggers for when to buy stocks
• What will Bank of Canada do this week?
• What is the biggest obstacle for people being success investors

After the interview Martin offered listeners some Special Pricing for our three services.  We are keeping these offers open for this week. Find them at the bottom of this page.

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