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The big takeaway from everything technical right now is ‘the trend is your friend.’
This market just keeps going higher. And, despite all the doom-and-gloom predictions that the end of the world is imminent, the markets seem unaffected (for now).
So the question isn’t whether or not this market will correct (it will). The question is when does it happen? Well, this week should be interesting. It’s the first week that extended unemployment benefits end. So now we start to get a sense of whether inflationary trends really are transitory or now.
If inflation is transitory — if people go back to work and supply chains ease — if wage inflation slows — it’s a sign the Fed can take its time with monetary policy. Markets should view this positively, perhaps pushing even higher in anticipation of a long and drawn-out tapering process.
BUT… if inflation is less transitory than the Fed predicts (anyone wanna bet a dollar?), then markets may react differently. Current pricing models have the cost of capital at nearly zero. If inflation is deemed more significant, it’s going to blow up a lot of those pricing models. This should, in turn, drop PE ratios as stocks re-align with a likely shifting risk-free rate of return.
So, like a broken record, we continue to watch the Fed. If the cost of capital isn’t changing any time soon, there’s little reason to see the markets change much from here. If it is going to change, look out.
But here’s the trick. Markets only need to perceive things are changing. Because the stock market is typically a leading indicator of economic activity. Soooooo… we’ll have to see if investors get spooked or not.
Until then, the technical data says this thing is going higher. So… we watch and wait. Look for a test of 4560 on the SPX this holiday-shortened week. Support is at 4500 (because, really, there’s not really a support level until all the way back at 4470, but participants are looking at the round numbers again… 4500/4525/4550… you get the idea).
Here’s the latest technical guesswork:
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