Last week was another good reminder of why I spend so much time preparing for scenarios instead of trying to predict exactly what the market is going to do. Along with several of you, I had a great Monday with a trade that gained roughly 70%, but getting there required me to pivot when the original idea was no longer working. We followed that with another trade on Friday that gained roughly 40%, which is interesting because Monday and Friday are two days where I usually do not like to trade as much. Neither trade worked because the week followed some perfect script. They worked because the preparation gave me enough information to recognize when something had changed and adjust accordingly.
That is an important distinction. A plan is not a prediction. If you enter the week believing every level has to work exactly the way you drew it on Sunday, you are going to spend a lot of time fighting the market. The point of preparation is to know what you are looking for before the pressure of the trade gets involved, then pivot when price gives you information that conflicts with the original idea. Sometimes the best trade of the week will come from the scenario you expected least.
I will be absent Monday and around in a more limited capacity throughout the rest of the week while I recover from surgery. I will still update my charts and views as I am able, but this is actually a pretty good week to reinforce the value of having the preparation beforehand. You should not need me staring at every candle with you to understand what matters on the chart.
The economic calendar is also considerably lighter than what we dealt with last week. The main event comes Wednesday afternoon when the Fed releases the minutes from the September meeting where they raised rates. Thursday gives us Weekly Jobless Claims, and Friday gives us the preliminary October Consumer Sentiment report from the University of Michigan.
Wednesday, Oct. 7 | ||
|---|---|---|
2:00 PM | FOMC Minutes | |
Thursday, Oct. 8 | ||
8:30 AM | Weekly Jobless Claims | |
Friday, Oct. 9 | ||
10:00 AM | Michigan Consumer Sentiment |
The Fed minutes matter because the market has already started changing its expectations for what happens next. September payrolls increased by only 29,000, well below expectations, while July and August were revised lower by a combined 60,000 jobs. The unemployment rate also moved up to 4.2%. That weakened the case for the Fed immediately following September's hike with another one in October, and markets moved toward expecting a pause at the next meeting.
That gives us a slightly different macro picture from the one we entered last week with. The Fed already raised rates, but softer employment data reduced some of the urgency surrounding another immediate hike. Inflation has also cooled enough to take some pressure off the October meeting without getting anywhere close to the point where the Fed can declare victory. The minutes on Wednesday should give us a better idea of how divided the committee was when they made the September decision and what they would need to see before raising rates again. The minutes are scheduled for 2:00 PM ET Wednesday.
Normally, that combination could provide equities with a little breathing room. The problem is that bonds still refuse to completely cooperate.
The 10-year Treasury yield reached roughly 5.34% last week, its highest level in more than two decades, even as expectations for another immediate Fed hike came down. That is important because it reinforces something we have discussed for several weeks now: the Fed does not have to raise rates again for the long end of the curve to continue creating a headwind for equities. The market can do some of the tightening on its own.
Friday gave us a particularly useful example. The employment report came in much weaker than expected, which reduced the odds of an October hike and initially gave equities a reason to move higher. Bonds still resumed selling, however, and yields moved higher again. In other words, one potential headwind became less aggressive while another one remained. This is why I keep separating the Fed from the bond market instead of treating them like the same thing.
For anyone newer to these letters, this is where the headwind and tailwind framework becomes useful. Softer employment data can become a tailwind if it reduces the probability of additional tightening. Elevated long-term yields remain a headwind because they increase borrowing costs and give investors a more attractive alternative to taking equity risk. Neither one dictates what $SPY has to do. I want to know which pressures are present, then watch which ones price actually responds to.
This week should make that somewhat easier because we do not have a major report arriving every morning. Wednesday's minutes can change how traders interpret the next Fed meeting, Thursday's claims give us another look at the labor market, and Friday's Consumer Sentiment report gives us another look at how households feel about the economy. September sentiment finished at 48.1, down from 51.7 in August, so the preliminary October reading will tell us whether that deterioration continued.
Earnings will also begin creeping back into the conversation. PepsiCo reports Thursday morning, and the broader earnings season is beginning to get underway with names such as PepsiCo and Delta among the early reporters. I am not building the $SPY plan around either company, but earnings will gradually give the market another source of information outside of the Fed, inflation and employment. That becomes more important as we move further into October.
Now we can get back to the chart, because despite everything that happened last week, we are still essentially dealing with the same range.