Warm CPI, Warmer Middle East

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Bad news started Wed. morning when CPI for March came in warm; up .4% for the month and up 3.5% for the last year.  On top of the warm reports in Jan. and Feb. the market now thinks we will only get 2 rate cuts this year, and a few folks think there is a chance we only get 1 or even 0 cuts.  The market didn’t like that. 

Geo-Political:

Last week I reported that it is suspected that Israel bombed an Iranian embassy in Syria, killing two Iranian generals.  That riled the market last week and that tension carried over to this week, especially when Biden passed a warning to Iran that the US would defend Israel.  Oil, bonds and gold jumped up.  Bonds and gold are called the “safety trade”; they usually rise in times of international strife, then fall back down.

From China last Friday:

“April 12, 2024 – Advanced Micro Devices and Intel dipped on Friday after The Wall Street Journal reported China is ordering the country’s largest telecom carriers to cease use of foreign chips.

Chinese officials issued the directive earlier this year for the telecom systems to replace non-Chinese core processors by 2027, the Journal reported.”

The trade war continues.  We may de-couple one trade sanction at a time.

I could write more, but the section below is more important than usual, so read it twice and think about it.  You can always write a comment and share your thoughts.

Technical Analysis:

For the week ending 4/12/2024, the S&P 500 was down about 1.5%, the third down week in a row.

Technically (see chart below) the market looks negative for the near term.  For a couple of months I have pointed out how extended the market was to the upside and the correction has finally arrived.  RSI at the top of the chart is neutral at 46, but falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative for the near term.

We are at the first line of support, the 50 day moving average.  We could get a bounce here, but my gut says no.  I think the warm CPI and ME tension will trump the technical, but I have been wrong before.

Where might we go from here?  The AI rally since the Oct. low was so strong it lifted a lot of stocks, but it could not last at that rate.  I think the normal rate of rise is the two purple lines rising to the right and that channel began over a year ago.  We could go back into the purple channel, but I don’t see that happening quickly; the economy is too strong, unemployment is too low, inflation is stubborn, but 3% inflation is not going to tank the economy or the consumer.

The shape of the next rally will be what to watch.  If the rally peaks below March peak, we will have a lower high in the market and if later we saw a lower low, that would begin to trace out a down channel, a significant correction.  If on the next rally we go on and set a new high, the correction would be over in what is called a “V shaped recovery”.  What will it be?  I don’t know; I just keep watching the chart.

Our decision when this correction ends will be what to buy (start thinking about your buy list), and are you buying it for a trade (short term) or a hold (long term).  At the end of a market washout if valuations are low, I would buy for a hold.  If the correction is shallow and valuations remain elevated, I would buy for a trade.  Good dividend stocks are easier to hold long term because if they go down a lot, they pay you to wait until their share price recovers.  A caveat, if the dividend is too high, that can be a sign the company is in trouble.  That’s just me.

A friend asked me what that purple line on the chart is, the one up in the air over Oct. – Nov. of last year.  I told him “that’s a mistake”.  When you draw a line, or annotate the chart, it is temporary until the next mouse click on the chart to add an annotation.  Once you click the mouse, the previous line becomes permanent on the chart.  The only way to get rid of it is to delete ALL of the annotations and start over with a clean chart.  I like all of the history on this chart so I have not started over for over two years and I don’t plan to anytime soon, so I’ll (and you) just have to live with that mistake.

Click THIS LINK to open the chart in a separate window.

What am I doing?  This week I sold a big position in KMI that I had accumulated over a couple of years and took a nice profit on a stock that had paid a 6% dividend.  While the market has been down for a few weeks, the energy stocks stayed high so I sold at the current peak.  KMI may go higher, or maybe not, but I locked in a good profit.  With most stocks dropping, and some down hard, I bought back covered calls while capturing 80%+ of the option premium.  I will wait and see when this correction looks over and then sell some Put options when the Put option premiums are high.  Over the last couple of years, I am learning more about the option game and getting a little better.  I have a friend who makes some small trades just to see how the mechanics work and the strategy.  If he loses his $100, he says “hey, that is like the cost of a class and a book; I’m learning”.  I like his attitude on that.

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If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing