In July 2022, in the wake of 9.1% CPI, we discussed the sequence of events which landed the Fed in the unenviable position of having to attack inflation without causing a recession [see: Oil and Inflation.]
The Fed is finally on the case, raising interest rates and trimming back their balance sheet. But, it’s hard to know how large a decline in stock values they can stomach before at least signaling a pause.
…the guys behind the curtain are going to need to come up with some pretty fancy footwork: a plan that keeps energy prices falling, inflation back under 4% and the 10Y back under 2.5% – all without bringing on a recession that sends stocks down 50% and real estate down 20%.
Personally, I don’t think it’s possible. I think the recession and falling asset prices are not only inevitable, but necessary.
Six months later, the problem is essentially the same. CPI has fallen to only 7.1% while the S&P 500 – currently off 19.2% from its 2022 highs – fell as much as 27.5%. If a 2% drop in inflation produced a 27.5% plunge in stocks, what damage would another 3% do?
Fortunately, the path taken by the 2022 market left some valuable clues. We discussed many of them in our recent Review of 2022. Over the next few days, we’ll do our best to see what lies ahead for 2023.
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We start with SPY, the ETF which tracks the S&P 500. What if I were to tell you that the significant lows during the year were all 80 sessions apart from one another? And, what if the bounces from those lows each retraced 71% of the recent drop? And, what if the highs during 2022 were all aligned in a straight line?
You might think it laughable that the market would behave so predictably. Yet, that’s exactly what happened.
And, that predictability is what chart patterns and technical analysis is all about.
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