A soft landing turning into the shallow recession, and into...

15 Feb

Following the release of worse-than-expected inflation data in the United States, the volatility jumped by an astounding 26%, and major stock market indices turned lower. Then, yesterday, the situation quickly cooled down, and indices erased much of the post-release losses. In the process, the SPX returned above the critical level of $5,000, and the VIX dropped by approximately 9%. Today, new data releases are due, including jobless claims, retail sales, industrial production, manufacturing production, and the NY Empire State Manufacturing Index. As many of these releases are expected to be in negative territory (on a monthly basis), the question is whether bad data will be good enough for the markets to continue higher. While the answer to this question is unknown, bad data will mean an economic slowdown (which is becoming increasingly apparent in all parts of the Western world). There is pretty much no growth in Europe, with many countries fighting higher inflation rates than that in the United States. At the same time, many of those same countries are experiencing a “soft landing,” seemingly a new term for a shallow recession. But as the narrative changes from that of no recession to a soft landing and then to a shallow recession, another question arises: How long until a medium recession in Europe and a shallow recession in the United States? Well, the answer is again highly speculative, but judging by reaccelerating inflation (in the USA as well as in Europe) and rate cuts being off the table in the United States, one could make an argument that the odds of such progression are increasing.

Illustration 1.01

On Tuesday, the SPX formed an opening gap that has not been filled yet. If the price fails to close the gap today or tomorrow, it will be concerning.

Illustration 1.02

One of the much talked about topics in the news is the troubled commercial real estate sector in the United States, which saw the delinquency rate on commercial real estate loans soar by more than 67% between 3Q22 and 3Q23. Meanwhile, the delinquency rate on credit card loans is up by approximately 43% in the same period (but up by 92% since 3Q21); the delinquency rate on all loans went up by about 11% between 3Q22 and 3Q23.

Technical analysis gauge
Daily time frame = Bullish
Weekly time frame = Bullish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

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DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor or any other entity. Therefore, your own due diligence is highly advised before entering a trade.