After a sour Dec of no Santa Claus rally, S&P 500 is readying a nice Jan move – and I say it would be up. Value hasn‘t retreated deeply while tech is getting ready for a reflexive bounce when it can keep pace with better sectoral picks in the first week of 2023.

Let‘s bring up Thursday‘s super extensive analysis – I hope you didn‘t miss the yearly recap and outlook inside such as:

(…) True, inflation has peaked, but I had been telling you earlier in summer that it‘s going to be sticky and stubborn, better to expect only a shallow retreat that would go painfully slow. And PPI incl. core data show that‘s still the case, with more inflation in the pipeline. The Fed has been and will be forced to take Fed funds rate restrictive, and the figure wouldn‘t be 5%, but rather 5.50% – if they get there before breaking the real economy, which I doubt they would be able to avoid. Actually, it‘s the hopes of tightening breaking something far away that would force the Fed to pivot without any real damage washing across the U.S. shores, that forms the Moynihan bullish case for stocks which I argued and refuted some two weeks ago.

The Fed is going to be frustrated by persistent inflation, commodities retreating no more, and both hot job market with wage inflation running hot, participation rate turning lower (not only for males), and unemployment claims slowly trending up. We‘ll continue witnessing cost-push inflation combined with tight labor market – and it would be crude oil‘s time again to gain in value from current levels. I think that apart from long-term share purchases slated for the start of the year, it‘ll be Jan 2023 inflation data would be the catalyst for stock market‘s good month, whereby we would make a peak, quite consistently with the 3rd Presidential cycle year pattern.

Remember, all of the above is set to squeeze profit margins, leading to lower earnings and guidance. Similarly on the non-corporate front, the consumer confidence data would turn south after the Dec outperformance, which would then reflect upon retail sales, worsening credit and deliquencies. If in doubt, have a look at e.g. used car prices, which were also one of the key drivers of retreating inflation lately. Yes, the consumer is going to get squeezed as well, it‘s not just about deflating housing and sharply going down manufacturing as recent data have shown.

Notably, I‘m not arguing for a housing crash, but for a solid, long lasting (18 months?) and well managed (by the Fed as housing is the first leading indicator to get changing nominal rates – and of course mortgage rates, which have bottomed quite a while ago already, worldwide) retreat in peak to through housing values of say 20%.

So, we‘re firmly on the countdown to recession, which is in several sectors already here, but will strike with full force in 1H 2023. Yes, it‘s the coming six months that would illustrate in stocks what we have seen internationally in bonds – just compare the magnitude of retreat in U.S. yields to that seen in European bonds or UK gilts. Have a look at lumber, home sales or housing starts taking it on the chin if you doubt the housing market‘s direction.

This time, the Fed doesn‘t have your back, and is willing to (over)tighten.

Have a look at the dollar, at how it‘s been unable to catch a bid even as the Fed & co killed the bond market rally in mid-Dec. Financial conditions have also eased last month, working against the greenback. While USD may finally stage a relief rally in Jan for instance on the still hot inflation, it would though remain under strategic defensive throughout the year as the Fed‘s tightening pace and leadership in setting the pace, goes away. Actually, we might be looking at the opening shot in the USD rally provided that the greenback keeps above first 104, then 104.80.

Have a look at real assets during the 2022 times of rising USD – and just imagine what these would do when the dollar fails to catch (very solid) breath later in the year. Talk about decreasing sensitivity late in the tightening cycle, coupled with the upcoming recession that would take yields down in the second half of 2023. Soft landing is the only thing that would preclude a retreat in yields, and we know how likely is that to occur… LEIs don‘t lie.

I‘ll conclude by saying the bond market doesn‘t believe in soft landing one bit.

Keep enjoying the lively Twitter feed serving you all already, which comes on top of getting the key daily analytics right into your mailbox. Plenty gets addressed there (or on Telegram if you prefer), but the analyses (whether short or long format, depending on market action) over email are the bedrock.
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Let‘s move right into the charts (all courtesy of www.stockcharts.com).
 

S&P 500 and Nasdaq Outlook

3,810s are the support zone which I don‘t look for to be broken – conversely, 3,875 would be overcome early in the week. XLV, XLF, XLI, and XLB with XLE are likely to do well while XLK wouldn‘t stand much in the way.
 

Credit Markets

Encouraging signs from corporate junk bonds – stocks are likely to get a tailwind to open 2023. Let‘s now break above $73.75 in HYG.

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