There will be plenty of economic data this week, but Fed commentary will be absent. The Fed is in the middle of its blackout period, so we won’t hear from the Fed again until Dec. 14 at the FOMC meeting.

I think the most significant number of the week comes on Friday, as the University of Michigan provides inflation expectations for one-year and 3-5 years; estimates are for 4.9% and 3%, respectively. I think consumer expectations are essential, hitting a peak of around 3.1% and falling through most of the summer before reversing higher. 

This raises the question of whether this is a series trending lower, making lower lows and lower highs, or a series making higher lows and higher highs. This matters because if the expectations are for inflation to rise in the future, it could suggest that inflation will be much harder to bring down.

The ISM services report will also be critical on Monday. That is estimated at 53.3, down from last month’s 54.4. The ISM manufacturing report suggested the economy is inching towards an actual recession, and the services sector could confirm or deny whether that is happening. It would probably take a reading below 52 to signal the potential for a recession.

I think if we were to get a cooler-than-expected ISM report and a hotter University of Michigan report, coupled with the hot wage growth from Friday’s job report, it would suggest that we have entered a period of stagflation. A time of slowing economic growth, but rising wages and high prices. 

The reason wages could be increasing is due to the size of the labor force shrinking and the number of people not in the labor force rising. The data show that the number of people not in the labor force has pushed back above 100 million, while the population has declined, and the number of people working has declined.

Added to that are the nearly 10.7 million job openings and 6 million people unemployed. You can see why wages are rising and why consumers expect inflation to be higher over the long-term.

So it seems more than likely that we will see slower growth at some point, and prices will remain high as wages keep rising. It will create a terrible environment for businesses, forcing them to keep raising prices or see margins and profits deteriorate. So, the data this week is essential.

S&P 500 (SPY)

The S&P 500 gapped lower on Friday by more than 1%, rallied back to fill the gap, and closed down by just 12 bps. Now, depending on how you want to look at things, the S&P 500 could be inching closer to the large trend line which started in January and may need to close above 4,150 for an official breakout.

Or it possibly has tested that trend line at 4,100 and failed. Now, you may ask how there can be two trend lines that can be so different. Well, the top chart is based on closing highs, and the bottom chart is based on Intraday highs, and it does make that much of a difference.

In this type of environment, it is pretty easy to be faked out, and for me, I have a few criteria to determine whether or not a move above the trend line is real. First, I want to see the index gap above the trend line and, more importantly, close above the closing trend line.

What I do know so far is that neither has happened. The index rose to the Intraday high trend line at 4,100 and has thus far failed, which matters most. It may have even risen enough to fill the gap from Sept. 13. So instead of trying to predict where the index will head, it is worth waiting a day or two to find out what it wants to do. But my gut says it will not break the closing trendline.

One reason is that I think there is a diamond reversal pattern on the intraday chart, which usually results in the index returning to its origin, which would be at 3,950.

Volatility Index (VIX)

The other reason I feel this way is that the VIX spot minus the VIX three-month generic futures contract fell to -5.78. This year when the number had fallen below -5, it had told us we were in a region of a market top, and once it gets below -5.7, it would suggest we are at a market top. It doesn’t mean the indicator has to work again this time, but that is what has happened in the past.

Nikkei

Meanwhile, the Nikkei has turned lower in recent days, and this is important because if the Nikkei continued to fall, it would be a negative indicator for the Dow Jones. The Dow Jones has been moving with the Nikkei for some time, and this is the first time the two have diverged recently.

Dow Jones

Additionally, the Dow has a rising flag pattern present, and those are bearish reversal patterns. This would suggest the Dow is near or at a peak, and a break of 33,500 would signal a trend reversal.

Energy (XLE)

Meanwhile, the XLE has diverged from oil, and that divergence probably isn’t going to last much longer. The XLE has formed a diamond reversal pattern, indicating that the ETF could be heading lower to $78.50.

Goldman (GS)

Goldman has also formed a diamond reversal pattern, and if that plays out as I expect, it could result in Goldman falling back to support at $352.

Exxon (XOM)

Exxon has a similar diamond pattern as that seen in the XLE and Goldman. If it is the case that it is a diamond pattern, it would mean Exxon may fall back to $102.

Anyway, that is all I have for this week. I will be back next Sunday. If you enjoyed this write-up, you could get it Monday through Thursday as part of my newsletter subscription; it is only $99 for the first year.

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