There was a lot of strength in the market last week, which is great to see considering we have to contend with the seasonally weak month of September. The test this week will be if the market can continue the uptrend or was last week a bounce due to the previous three weeks being down. This is something we’ll watch carefully. The good news is a seasonally strong fourth quarter is right around the corner and history is a guide. The midterm elections may provide the added late-year boost, and as you can see in the chart shown in this episode, September has historically been one of the weakest months for stocks. On that same chart, you will see the green bars for October and November. The calendar is historically bullish in the fourth quarter during mid-term election years. We are watching carefully to see if the market strength seen last week will continue into the fourth quarter. A lot of this depends on what the fed decides to do as well as inflation.
The Fed is what is most important in these markets. The Federal Reserve is absolutely watching inflation as is everybody else. Tuesday, we will get this month’s inflation report, the Consumer Price Index. With the Fed meeting next week, this will be the last large data point that they’ll have to analyze. Expectations are for the CPI year-over-year change to be 8%. While that’s not comfortable, it is down from 8.5% and even further down 9.1%. That would be three straight months of decline from the peak. The first thing we’ve got to do is change the rate of change and we’re seeing that, which is a positive indicator. Why is that very important? As shown on a chart in this episode, you can see that the federal funds rate, which is the rate that the Fed puts out on money, peaks in every cycle since 1974 at a higher rate than CPI. Currently, the federal funds rate is 2.5% and inflation is at 8.5%. That shows that the Federal Reserve has a lot of work to do on raising rates. It can come in two ways. They can cross with either the federal fund rate raising or by inflation falling. We really need to see them meet in the middle and hopefully closer to where we are today. The first step is inflation falling. If the Federal Reserve has to do all of the work as it did back in the eighties, we could see interest rates well above 8%. That would be very drastic and negative for the economy so we’re hopeful that inflation will do its part by coming down, starting tomorrow.
The recent jobs report had a little bit of everything in it. We added more jobs, which was good and more than expected. The unemployment rate rose from 3.5% to 3.7%. That seems like a bad thing, however, our labor force participation rate, the number of people actively looking for jobs, rose for the first time in a long time. This type of good news is exactly what the Fed wants to see, more people looking for jobs. Also, average hourly earnings for the month outpaced inflation. That’s another good thing to see along with the fact that we’re adding to the service sector, which is also deflationary. So, as you can see, there was a lot of good data in this recent report, despite the higher-than-expected unemployment number.
Two weeks ago, we saw a lot of volatility in the markets. Last week, we had a good week with all eleven sectors finishing to the upside with Friday’s close coming in at a price of 4,067. That gives us a new short-term resistance level of 4,100 and a new short-term support level of 4,030. Two key numbers we want you to focus on are the intermediate resistance and support levels that reach out to the end of the year and as we approach midterm elections. On the upside, the resistance level we’re looking for is 4,200 and the support level we’re looking for is 3,900. If the market breaks through that 4,200 and stays above that, we could see some positive momentum moving forward.
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