Edition #94
Inflation Actually Transitory?, Stock Market Perspectives, BTC Chart Update
Economy:
The most important economic data this week was released on Tuesday for the August 2021 consumer price index (CPI). With considerable gains so far this year, market participants and economists have been spending a significant amount of time on inflation data in order to monitor the Federal Reserve’s monetary policy in the near-future. In the last two months, the 12-month change in the CPI was +5.4% vs. +1.4% in January 2021. Unequivocally, this has been a substantial increase in the rate of consumer prices increases.
The narrative has been that the increase in the rate of inflation will be transitory, with the expectation that it will begin to moderate after a quick acceleration. Many economists believe that inflation will be much more persistent while others are siding with the Fed that it will indeed be a temporary shock followed by a moderation. I fall in the second camp, although I believe it will take longer than the Fed expects for the “moderation” phase to complete. This is a big test for the Federal Reserve and an important test for the U.S. economy as the economic recovery has decelerated in the last few months.
Consensus estimates were for a 12-month change of +5.4% (again), but the result came in at +5.3%. Essentially, the rate of price increases has been stagnant. Yes, prices are still increasing at high levels, but the rate of change is practically zero. In my opinion, this favors those in the transitory camp. For the last three months, the rate of inflation has stabilized. This is an important win for the central bankers, but they aren’t out of the woods yet.
While the headline number came in at +5.3% on an annualized basis, economists are also interested in the core CPI figure, which excludes food & energy prices. I don’t typically like looking at the core CPI change because food & energy prices are critical expenditures that shouldn’t be excluded from consumer prices. The argument for looking at the core CPI is that it gives a less volatile measurement of inflation. For August, the core CPI change on a 12-month basis was +4.0% vs. +4.3% in the prior month. Here is a longer-term view of the core CPI data:
No matter how we examine the CPI data, we can see that it’s been stabilizing for the past three months and has in fact begun to slow down. So far, the Federal Reserve has been spot-on with their inflation projections since the COVID response; however, we’re still pending major improvements in the labor market in order to initiate the tapering process. If CPI inflation moderates below +4% over the next three months, then continues to decline towards +2.5%, I believe the Fed will consider themselves to be right on track.
The full report for August’s CPI data can be found here.
Stock Market:
Generally, I want to take a moment to comment on broader stock market conditions. The market has come under pressure over the past 1.5 weeks, but the daily movements have been quite minimal. It almost feels unfair to say that the market has been “under pressure” considering that the S&P 500 has only fallen as much as -2.3% from the ATH’s on September 2. The S&P 500 rallied +0.85% during yesterday’s session, recouping much of the losses since 9/2/21. In fact, after yesterday’s close of $4,480.70, the S&P 500 would only need to gain +1.46% to reach new ATH’s.
At the present moment, I’m fully allocated in my trading account & focused on letting my positions work. There are some that I’m planning to sell over the next 1-2 weeks, but I’m willing to cut the majority of my portfolio if I sense that an actual pullback is underway. I continue to be overweight technology and consumer discretionary companies, particularly those who reported strong earnings in the most recent quarterly results. Aside from my current positions within the tech space, notably SaaS & cloud stocks, I want to build-out some semiconductor exposure. There are several names that have caught my eye from a fundamental perspective, but I’ll be making decisions about specific trades based on the technicals & chart structures.
The semiconductor sector was one of the top investment themes in my publication at the start of the year highlighting my top stock picks for 2021. The companies on that list were:
NVIDIA Corporation ($NVDA), +71.25% YTD
Taiwan Semiconductor ($TSM), +12.33%. YTD
Ambarella Inc. ($AMBA), +66.12% YTD
Lam Research Corporation ($LRCX), +30.02% YTD
Broadcom Inc. ($AVGO), +18.23% YTD
SiTime Corp. ($SITM), +95.55% YTD
Cadence Design Systems Inc. ($CDNS), +22.81% YTD
The others on my radar are $KLAC, $AMAT, $MCHP, $AMKR, and $XLNX.
In regards to cool & interesting data that I saw since the last newsletter, the following grabbed my attention the most:
2021 has shown remarkable levels of inflows on a historical basis. This is proof positive that demand for global stocks is extremely strong. Is it a little too enthusiastic? Most likely. We can conclusively see that there is one outlier on this chart, and we’re currently living in it. I certainly don’t expect this to persist in 2022, but that doesn’t necessarily bode poorly for global stocks. Even if we see a repeat of 2010, 2013, 2017, or 2018, that would be a positive sign. Either way, I remain bullish on U.S. equities & expect that dollar-denominated assets will continue to have strong undercurrents for price appreciation.
Cryptocurrency:
In my Saturday edition, I covered an interesting chart showing the similarities between the price chart of Bitcoin in April - July 2021 (left) and the current price chart (right).
I pointed out the fact that the chart on the left resulted in a +84% gain in the price of BTC over a short amount of time & reiterated my bullish stance for the price chart on the right. Here is what the right chart looks like in the present moment, still using 1hr candles:
When I originally wrote the analysis, we were at the blue arrow and price has since gained +9.75%. We can see that the consolidation channel worked almost to perfection, using the lower-bound as support & the upper-bound as a hesitation level. Price used the 21 exponential moving average (yellow) as dynamic support in the final leg higher. I suspect this will continue to be the case in the short-run, but will likely only last over the next 24-36 hours. The chart looks great on multiple time frames, making me optimistic that we’ll be trading back over $52k over the next 7 days, or possibly sooner. It’s always possible that price behaves in a totally unexpected manner, throwing this technical analysis & structure into the trash. Either way, I remain optimistic on both the fundamental value factors of BTC and the technical analysis & price structure.
Talk soon,
Caleb Franzen