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Weekly Economic and Stock Market Commentary: October 24, 2022


As for the stock market specifically:

With a bit more than a full trading week left in the notorious month of October, we have yet to have a day, or series of days, that needs to be placed in the historical record of massive negative runs of stock market history. Last week resulted in gains with strong action in both directions until Friday settled the matter in a positive way. In any event, it’s going to take two very strong months to bring this year to a higher close than the start.

The news that came to me as the reason for the good market last week is that the Federal Reserve won’t have to raise interest rates much more.

That’s as good as any other reason, but we will have to wait to see if that happens.

A couple of weeks ago, my research was extremely oversold. You’ll recall my stating the “Weekly Distribution for S&P 500” (wdspx for those of you who may remember my charts) was 68% oversold.

Let’s illustrate that with my favorite metaphor – a spring coiled tightly with a 10,000-pound weight on it. For the sake of discussion, the spring is coiled as tight as it could go with breaking.

The coiled spring represents plenty of stored energy.

As of last Friday’s close, the spring pushed the load closer to the neutral point – where the spring is neither in compression nor tension. It’s not completely neutral but now has a reading of only 18% oversold.

I am not saying we are out of the woods, but we are in a place where putting together a shopping list could have some merit. Any actions here would be considered a “trade,” as any purchases just may turn right around and head south again. So be wary.

I’d feel more at ease if/when the relative strength of stocks vs. cash and/or bonds goes back to favoring stocks.

I don’t know when that will be, but I’d have my list ready to go.

The bullish percent indicators strengthened last week, and we have great field position with a split recommendation of WEALTH ACCUMULATION for the NYSE and WEALTH PRESERVATION for the OTC.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of October 21, 2022 (Courtesy Dorsey, Wright, and Associates)

On a general note:

The Internal Revenue Service gave us some information concerning the tax brackets for next year.  As required by law, multiple sections of the tax code get indexed for inflation each year. That is the good news. The bad news is that indexing did not make up for the change in prices. The IRS indexing will adjust the 2022 values by 7%. The bad news is that inflation in 2022 is higher than the 7% adjustment by the IRS. In English, your taxes are going up. Anyone surprised?

The other piece of economic news I have this week comes from the National Association of Realtors. The trade group told us that existing home sales in September declined 1.5% from August to a seasonally adjusted annualized rate of 4.71 million units. September was the eighth consecutive month of declining sales. That is the longest lower sales streak in 15 years. It also was the weakest monthly sales rate since May 2020. Another reference point is that the September 2022 sales volume is about equal to levels (excluding the pandemic-affected months) experienced in 2012. In a related note, the Mortgage Bankers Association stated there was a 34% decline in home purchase mortgage applications during the week ending October 14th, compared to the same week in October 2021. The median home sales price in September was $384,800, which is a gain of 8% over September 2021. However, that median sales price was the third consecutive monthly decline in that measure from the record high of $413,800 that occurred in June 2022.