Stocks rallied on Friday, despite being down sharply 30 minutes before the opening. A WSJ article noted that the Fed was going to discuss the pace of future rate hikes following another 75 bps rate hike in November.

The story didn’t lay out anything new, and the majority of Governors I have heard favor a front-loading approach still. This, I believe, means unless inflation comes crashing down over the next two months, it seems likely that we will get a 75 bps hike in November and December.

This week we will get a couple of crucial inflation metrics, with PCE, Core PCE, the GDP Price index, and the employment cost index. Core PCE year-over-year is expected to rise to 5.2% in September, up from 4.9% in August. Also, the Core PCE reading has beaten estimates in 19 of the last 21 months.

Meanwhile, headline PCE is expected to rise by 6.3% in September from 6.1% in August. Like core PCE, it has come in hotter than anticipated in 19 of the past 21 months.

Additionally, the employment cost index is expected to rise by 1.2% for the third quarter, down from 1.3% in the second quarter. Also, the GDP price index is anticipated to come in at 5.3% for the third quarter, down from 9% last quarter. Third quarter GDP is projected to have risen by 2.3%, up a drop of 0.6% in the second quarter. The GDP price index has come in hotter than expected in 9 out of the last 11 quarters.

These will all be essential data, especially in the wake of the Fed’s next meeting on Nov. 2.

Japanese Yen

Additionally, on Friday, the big news was that Japan intervened in the FX market to defend the yen vs. the dollar. I’m not sure if this changes anything. The last time Japan intervened in September, it did nothing other than slow things down. The yen fell back to support at around 146 to the dollar, and it is probably still on its way to 158.75.

S&P 500 (SPY)

However, on Friday, it helped send the dollar index down and killed the idea I had run with the night before for a drop to around 3,600 on the S&P 500. The S&P 500 futures were trading down to about 3,640 at 9:00 a.m., with rates racing higher and the dollar up sharply. The day was well positioned for a drop to 3,600, but as fate would have it, the market pulled the rug out from under me.

However, the futures failed to push beyond the Oct. 18 high, stopping short, and the straight-line rally higher seems unstable at best. And with options expiration now behind us, plenty of puts came off the board, and traders may look to create new put positions heading into the economic data this week and the upcoming Fed meeting. Additionally, it is not unusual to see a counter-trend move coming out of OPEX.

Every month, except for March, we saw either a sideways consolidation or a reversal post-OPEX from the prior trend. For example, going into July, stocks fell and then reversed higher following OPEX. Into August, stocks had been rising and then declined after OPEX. In September, stocks fell and moved sideways for a few days. Into October, stocks were rising, which would suggest either a reversal lower or a sideways consolidation.

So, for now, I will stick with my call to see the S&P 500 fall back to 3,600. If the futures should successfully close above 3,760, then maybe I need to reassess things, but at this point, it is worth waiting and seeing one more day.

Growth vs. Value

Going in a different direction, I noticed a few things this week that I follow and check in on from time to time. Most interesting to me was the ratio of the SPYG to SPYV. Growth stocks could be at a point to significantly underperform value stocks, as this ratio comes to a historically significant trend line. A break of that trendline would be terrible for the direction of growth stocks.

QQQ to SPY Ratio

The QQQ to SPY ratio has fallen sharply and is also at a critical point. Interestingly, a 1.618% extension of this latest bear flag would line up with the ratio where it stood before the pandemic. That would suggest the QQQ has a lot of underperformance ahead of itself versus the SPY.

TLT to SPY Ratio

Finally, this last chart shows the TLT to SPY ratio at a record high. It would suggest that the SPY is overvalued to the TLT and that the SPY would need to drop for the ratio to fall. For the ratio to fall back to its pre-pandemic levels of 2.4, the SPY would need to drop to $223, assuming the TLT remains unchanged.

That would be a massive decline, which suggests that perhaps the SPY needs to fall and the TLT needs to rise. But considering how much the TLT has moved relative to the SPY, it seems that the SPY has some catching down to do. Even to get back to the March 2021 level of 2.96, the SPY needs to fall to around $275.

The rising flag pattern is bearish and suggests this ratio may reverse and start to head lower. Of course, this could mean the TLT may rise, but given how far out of whack the ratio is, I think the SPY is also on board to to decline.

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