Q3

2021 passed the half-way point last week and the SPX managed to finish the week at an all-time high. This sets up a push/pull situation for this week’s holiday-shortened 4-day trading week.

Last week the SPX broke out of its trading range and shot higher. In fact, it’s high enough now that it’s looking pretty over-bought. The question is, given the Fed’s steady course, and the fact it looks like other stimulus efforts may be slowing (think unemployment benefits, eviction moratoriums, etc), is this a recipe to keep interest rates low — which keeps investors in the market.

If this premise remains valid (low rates, TINA market), what we’re likely to see is a pull-back of about two percent or so in the index, then a regrouping for a push even higher. The current high-water market is about 4352 for the index. The next area of resistance is at 4392.

The larger question is whether or not inflation is transitory or more significant.

Given history, this is a really tough question. The Fed probably has better tools at its disposal than at any point in history to monitor this kind of stuff. But the markets are also more complex and faster-moving than at any point in history. The key seems to be Washington, DC.

Some are suggesting the stimulus efforts initially used to fight Covid are now being used to force wage increases — sort of a phantom minimum wage play — since larger political efforts to formally do so have met a lot of opposition. Others suggest this is simply an unintended consequence of committing to so much money printing and direct stimulus.

Regardless of who is right or wrong on the interpretation, the challenge remains: will we see inflation stick around?

If housing, energy, and wages are any indication — well, that may be our answer right there. Things are getting more expensive. Employers are struggling to find workers. It’s an interesting time.

If this is transitory, the larger concern would be a cooling of the housing market and the knock-on effects that could create.

So far, the Fed has been relatively cautious about how it speaks to inflation. It suggests it’s transitory and has forecasted a rate increase in a year or so. But they’ve also done more subtle things to subtly reduce the money supply (like the reverse repo stuff we discussed in the last forum call).

This is the push/pull discussion. Inflation, money supply, and rates are all tugging at this market. The technical set-up seems to be over-bought, but also in a break-out to new all-time highs.

There aren’t really hard-and-fast rules for how to handle this. But there are suggestions. And one of them is to keep following the trend until it changes. If this age-old wisdom plays out, this trend looks like there is more upside. (And, of course, if this age-old wisdom is wrong, and the markets go down, the compliance reminds us past performance is no guarantee of future results.)

For the week, there is potential for the SPX to move lower to test support at 4280/4257. However, futures markets are pretty flat right now. If a down-trend doesn’t materialize, resistance is about 40 points higher at the 4390 level. Odds of a pull-back look to be about 50/50 right now (swag technical guess, tough to put real numbers to these odds).

At this point, the SPX has already out-achieved the January projections and we’re only half way through 2021. The question is, do things continue to climb higher from here? So far, the trend suggests we may.

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