Most financial markets have validated a sharp rebound as liquidity restriction policies continue. Inflation in the United States now seems to be stabilizing in a still fragile way. In this context, the markets are now in heightened doubt. On the one hand, many analysts argue for a buy and build strategy with a short-term perspective. On the other side, funds and institutions that hedge or stay away from the market. Indeed, the market is approaching absolutely strategic target areas. While the CEO of JP Morgan anticipates high recessionary risks and greater credit risk, the indices persist in their hesitation…
Inflation is slowly stabilizing… in the United States
Inflation in the United States fell very slightly in the United States for the month of September 2022. Price growth over one year in September 2022 nevertheless remained high at +8.2%. In fact, inflation fell by 0.1 percentage point between August and September. Peak inflation in the United States was reached in June at +9.1%. There is therefore a relative, but not negligible, decrease in the rise in prices in the American economy.
In the latest BLS report, we note that the fall in inflation is mainly induced by the decline in the price of fuel, but also of used cars (more relative). Overall, the rise in food prices seems to have peaked in May and July, when the price of transport seems to mark a new rebound. In this sense, nothing is gained…
But it would be very inaccurate to apply the same conclusion to the case of the euro zone. Inflation in the euro zone for September came out much higher than expected, at +10% over one year. This depressed environment in Europe worries investors around the world. For the time being, we are not seeing any temporization of inflation in the euro zone, on the contrary, it has even gained strength in recent months and weeks. Only countries like France remain relatively spared.
Cryptocurrencies are preparing a trend…
Over a month, the price of bitcoin (BTC) remains generally very stable. Indeed, recent bitcoin price movements in recent weeks show extreme stability. After a new attempt to cross the “absolute” support of $1850, bitcoin still manages to maintain its levels. However, a sustainable crossing of $1850 would quickly project us towards the $14,000 area.
In addition, the temporality of bitcoin could play against a potential rebound if no bullish signal is confirmed before the beginning of November 2022. In fact, the graph below shows the respective periods of 3.14 months associated to a period of rapid decline in bitcoin since 2021. While the entry since August into a temporization zone suggests that the decline will stop, early November would rekindle the downside risks. However, we are witnessing an upward movement in the first weeks of November, which would validate the hypothesis of a major bullish reversal in the price of bitcoin.
In addition, in monthly terms, we observe the formation of a spinning top over the month of October. That is to say, maintaining current prices by the end of the month would reinforce the hypothesis of a bullish exit. Moreover, this scenario is accompanied by a slight bullish divergence on a monthly basis. The presence of these two contradictory analyzes confirms the behavior of the market in the short term. But at this point, it would be safer to surmise that the downside risks are still too persistent in the near term when the possibility of a medium-term bullish rally becomes more relevant.
“The United States in a kind of recession in six to nine months”
In an interview on CNBC, JP Morgan chief Jamie Dimon said the risk of a recession in the United States was significant and that another leg of declines in the markets would not be surprising. Thus, since January 1, the S&P 500 has fallen by more than 25%. The perspective drawn by the boss of JP Morgan does not bode well for the future. According to him, ” the next 20% [de baisse] would be much more painful than the first “.
“These are very, very serious things that I think are likely to push the United States and the world – I mean, Europe is already in recession – and they are likely to put the United States in a sort of recession in six to nine months” –Jamie Dimon JPMorgan: Jamie Dimon warns that the United States could soon tip into recession (cnbc.com).
Despite these risks of recession and market relapse, this speech seems to have reassured investors. Banking stocks have so far remained the main stocks impacted by the prospect of a recession. However, during the week of October 10, certain stocks such as JP Morgan in the United States, the largest banking capitalization in the world, rebounded by nearly +5%. This rebound in the price is mainly explained by the reassurance of investors that bank managers are anticipating credit risks.
The S&P 500: at the crossroads of the markets
Many analysts are both alarmed or charmed by the current levels of US stock indices. Indeed, the current levels of the S&P 500 correspond to the level of the 200-week moving average. This moving average is all the more strategic in that it announces crashes or lasting rebounds in the market in stock market history. The passage below the 200-week moving average in June 2008 thus heralded the start of a downward movement much worse than any institutional would have imagined.
In the same way, this moving average is more often the source of major price rebounds. The December 2018 market drop, the COVID crash, the 2015 drop, were halted by this average. Thus, the closing of the weekly candle of the S&P 500 Friday, October 14 at 3583, while the moving average at 200 weeks shows a value of 3600, leaves us facing the greatest caution. Obviously, we will have to wait until the end of the month to see if the persistent closing of the S&P 500 prices below the average confirms the entry into a more durable bear market.
Note also the incredible linearity of this moving average. Therefore, we must emphasize the structural, strategic and absolute role of these price levels. Current market levels act as automatic stabilizers. A second leg of decline below this moving average could probably only be driven by negative external news (recession, war, crisis, bankruptcy, etc.). The lasting passage below this price level (zone of 3600 on the S&P 500) would signal a structural change in the trajectory of the long-term indices!
An elastic market: stretched to the point of implosion or explosion?
Finally, the low value of the Hurst coefficient encourages us to be extremely cautious (Hurst exponent and financial analysis – Tremplin.io). Indeed, two scenarios will guide our analysis:
- If the Hurst coefficient goes back above 0.33 with stock prices stagnating or rising. In this case, the scenario of a resumption of the upward trend could take shape in the coming months.
- If the Hurst coefficient goes back above 0.33 but prices continue to fall. In this case, the risk of a rapid downward acceleration exposes us to systemic risk.
In this sense, the more time passes, the more the tension on the markets increases. The reading of this voltage is double. Either we consider that these price zones are interesting in the long term, and that companies offer attractive prospects or dividends. Either we consider that the market is likely to continue to fall, and in this case, the option of remaining liquid and away from the market is preferred.
Conclusion
Ultimately, the markets are attempting a rebound of hope. But this rebound is all the more uncertain as the economic situation “stabilizes”. In the United States, the inflation figures confirm a temporization of the latter. This would encourage the FED to slow down its rate hikes in 2023. But for now, the situation remains worrying. The CEO of the largest bank capitalization, Jamie Dimon, has explicitly affirmed the recessionary risk in the United States. This economic risk would be essentially harmful to the credit market, and the magnitude of the expected crisis is foreign…
In the euro zone, the situation is very worrying. Inflation in September came out at +10%, while the political and social context is not helping matters… In this context, assets have found areas of equilibrium in recent weeks. Thus, the price of bitcoin has generally remained abnormally stable. Despite the presence of downside risks in the short term, the prospect of more favorable signals in the medium term could be confirmed or invalidated in the future.
In the case of equity markets, the price zones are decisive. The considerable persistence of the downtrend since February questions the market on the conditions for a bullish reversal. The absence of a bullish or slightly bullish recovery by the end of October would open us up to a bigger bearish scenario for the next few months. General liquidation or easing of the market?… The question is all the greater since the strategies between buyers and sellers are starting to become divergent on these price levels!… The extreme caution of funds and institutions persists while some buyers reaffirm their interest at these price levels.
The fight between buyers and sellers, dominated by sellers so far, will be even more vigorous in the coming months as we approach 2023!
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