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Weekly Economic and Stock Market Commentary: October 31, 2022


Market Commentary

Note: This week’s commentary will print out longer, and have graphics.

As for the stock market specifically: The bears went into hibernation for the week, and nearly the entire month of October. We didn’t have any scary moments that will get the moniker “Black ______.” In fact, October is on track to be the strongest month since October 1976.

The better news is that with the month of November beginning, we will go back, and this is NOT a prediction, to the seasonally strong period of November through April. I guess I can speak for everyone in saying “Good riddance” to the past six months.

The Internal Revenue Service provided the information for 2023 retirement plan contributions. If you request it from me, I will send you the table, but it is easy for all of us to find.

What follows for the next few paragraphs is stock text that I present occasionally. These items are the basic building blocks for the investment strategy I use. Bear in mind that this is simplified.

Above, I highlighted a bullish chart pattern that I will call a double top break. This is a column of demand that exceeds the previous column of demand. The “signal” occurs when the stock shows demand (buyers) at $35.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

Above, I highlighted a bearish chart pattern that I will call a double bottom break. This is a column of supply that exceeds the previous column of supply. The “signal” occurs when the stock shows supply (sellers) at $38.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

The bullish percent is the number of stocks that have bullish patterns, nothing more, nothing less. It is calculated by counting the bullish charts, and dividing that number by the number of stocks in a sector/market. Then multiply by 100 to get the percentage. A key item to remember is that all stocks that have traded for some time will be either bullish or bearish, not both.

About once a quarter I explain the difference between a market capitalization weighted index, such as the S&P 500, and the “one-stock, one-vote” weighting of the bullish percents. Today is that day.

The discussion comes down to a variation of this: “Why are the bullish percents increasing, but the numbers I see on TV are a little up, flat, or a little down?” Since this is election season, think of the difference in terms of the composition of Congress.

There are two basic answers. One potential answer comes from the nature of the bullish percent. It is based on the notion that a stock as large as General Electric counts as much as a stock of the size of the smallest stock on the NYSE. Think of the bullish percent like the US Senate – California counts as much as South Dakota.

The other potential answer stems from the composition of the index, such as the Dow Jones Industrial Average, S & P 500, or Nasdaq. The S & P 500 and the Nasdaq are known as capitalization weighted. That means the largest companies in the respective index holds greater influence than the smaller companies. The metaphor here is to the US House of Representatives. There, California has approximately 52 representatives, while South Dakota has 1.

The bullish percent indicators all are heading in the favored direction, and on offense. WEALTH ACCUMULATION is the order of the day in all markets.

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

Below is where our indicators stand as of October 28, 2022 (Courtesy Dorsey, Wright, and Associates).

On a general note: The Department of Commerce announced its first reading regarding economic growth for the third quarter. The good news is that the economy grew at an annualized rate of 2.6%. Of course, we will get two revisions on this number, and won’t know the final answer until March 2023. The prime mover for growth in the quarter came from exports of oil and gas. Another large contributor was increased government spending. Business investment declined again in the 3rd quarter, and the level of decline in the quarter was 8.5% from that of the 2nd quarter.

The Labor Department reported its employment cost index rose 5% during the third quarter. That is below the rate of inflation, so employees are continuing to fall behind general inflation rates. The comparison is from the 3rd quarter of 2022, which means that employment costs fell about 3% in real terms.

Finally, the Commerce Department announced Consumer Spending rose 0.6% last month compared with August. Much of the increased spending went towards housing, transportation, and utilities. This came as the Personal Consumption Expenditure measurement of inflation showed prices rising 6.2% in the past year, which is a 40-year high. According to this report, the average income of the American family was flat compared to August. The average savings rate fell to 3.1%, which is less than half the 7.9% rate for September 2021.

If you have any questions or want more information about a particular stock or mutual fund, please contact me at 973-538-7030 and I will get it to you.