Transcript:
Tom Vaughan:
Of course, I always like to start off the show with just a little commentary about what I saw happening so far this week in the stock market. And I’ll share with you kind of the chart here. So this is the S&P 500 year to date, you can see here what’s happened in the last couple of days, including today, market fell out of this range, we were in this range for eight trading days in a row. You know, if you look at that closer, you can see where we’re kind of bumping up against the top. But really, everything was revolving around waiting for the the number coming out for the inflation, the consumer price index, and it came out this morning. And you can see what happened, the market dropped right away this morning. And it’s kind of heading downward. And the reason is, because the inflation was higher than expected, we take a look at that number here. So this is the the index for year over year, for the last 12 months. So we were at 8.6% increase in prices on you know, this may versus last May. And you can see what happened here is we actually hit a high and march at 8.5. And then we dropped down to 8.3 in April, and there was some hope that we’d continue to come down.
And then the Federal Reserve might be able to do something different in September. So they’ve already announced and it seems to be pretty much baked in that we’d have a half a point increase in June, half a point increase in July, they don’t have an August meeting. So September maybe would be more reasonable. But with these higher inflationary numbers, now people are talking about the possibility of a higher increase maybe another half a point in September. They do meet next week. So we’ll find out more. And when they are interviewed, and they talk about what their thoughts are, they’ve been pretty clear about broadcasting what they see, as far as that goes. So one thing that’s very fascinating, though, if you take out food and energy, what they call core inflation, and this is a particular basket that the Federal Reserve does look at pretty heavily, mainly because they feel like this is something they have more control over, you know, Saudi Arabia and Russia, etc, might have more control over energy prices than the Federal Reserve does. So they look at these other pieces that are in there, that’s actually been coming down, it did peak out in March. And so maybe that helps as far as what the Federal Reserve might be looking at here. as that goes.
The big thing we’re probably going to be talking about a lot here is really gas prices, we’re here you can see this chart, at nearly $5 A gallon nationwide. I live here in Silicon Valley, we haven’t seen $5 A gallon in a long time, we’d love to see that. But nonetheless, you know, the price is going up, you can see those a big jump, really in February when the invasion of Ukraine happened. And so this is something that’s not going to probably get better for a while, just because we have Europe pulling off of Russian oil, Russian natural gas and Russian coal. And so that’s going to make them have to go out and find you know, these resources in a very tight market already. And so that creates all kinds of issues. As far as that goes. But Fourth of July is normally the peak for gas prices. I’d be a little bit surprised if that happened this year, I think it could actually keep going for a while. But you know, we are in a seasonal timeframe where gas prices do go up also. So that’s impacting pretty heavily, you know, the inflation numbers that we’re seeing as far as that goes. So that’s what’s going on in the inflation arena, it’s a big deal. It’s the it’s the thing that we’re all talking about, and looking at, and trying to figure out how this might slow down in some format. And what the Federal Reserve has to do, in order to get this under control. Of course, the big concern is the Federal Reserve will have to tighten up the money supply and basically raise rates by such a high percentage that that could kick us into a recession. So you know, that’s what we’re all kind of walking this tightrope to see what happens.
I’ll show you a couple things that are kind of interesting. This is a two year chart of the S&P 500. So you can see we had this pretty phenomenal run up. And then obviously, as a beginning of this year, we’ve had this kind of jagged downward motion. This big green blob, you know, that’s over my head here is what’s called a volume profile. This is a really cool concept. What what we’re looking at here is every one of these bars shows how many shares were purchased at that price. So when the bar comes over farther, you know, and there’s a bigger bar, that means there’s more price more purchases at that price. And so if we look for example, right, there is a lot of overhead resistance. And you can see that that eight days that we spent was right under that and what happens is let’s say somebody buys a stock at $10 it drops to $8 when it gets back to 10 They might take their money back, hey, got my money back. So they call that resistance. And so we dropped down below and then tried to get back up, we could not get through that resistance and eventually broke down. But now we actually have support. And so again, this is an area where a lot of people bought shares, it did jump up, right. And so they say, Okay, I bought it at 10, and went to 12, I was pretty excited. If it gets back to 10. Again, I’m going to buy, right, so that’s what’s called support. And so we are we dropped right down to the support level that we have here, you know, today this morning, but one of the things to consider here is there’s not a tremendous amount of support under that. One of the disadvantages of running straight up like you see here is that you didn’t spend much time in any one price. And so oftentimes, that means you can kind of cascade, you know, once you get through that. So this is going to be very important to watch this support level right now, to see what’s happening.
This, this is this is the S&P 500 as presented by the Spyder ETF. And so you know, it’s not the be all to end all to look at support and resistance, but it’s a very active ETF with a lot of volume. So it’s a great one to look at, in my opinion. But just to clarify what this is. So anyway, that’s what’s happening here, in terms of support resistance. And the other thing that we were really watching for is the possibility of recession, I talked about last week, pretty, pretty succinctly, the three big indicators that I’m watching the three months versus the 10 year Treasury yield spread, and the leading economic indicators from the Conference Board, and the ClearBridge economic indicators, all of which right now are showing no recession in next 12 months. But that can change. And so what I’m showing you here is the rate on the three year treasury bill, you can see it’s going up quite, quite nicely, really very much. So this should help your bank accounts and your savings accounts. And those types of things should start paying more CDs, you know, short term CDs, or start paying more, we’re up to 1.33%. You know, and, but if you look at that pattern, it’s pretty straight up. And then if we compare that to the 10 year treasury, you can see the 10 year treasuries going up recently, but not quite as smoothly and as fast as the three month. And so what they call the spread is the difference between the three month and the 10 year. And what we really want to watch for is if all of a sudden the three months starts paying more than the 10 year, the bond market has been very accurate historically, at predicting recessions. Essentially, what they’re saying is that they’re not willing to pay as much on a tenure, because the future doesn’t look bright, right? When the tenure is a lot higher than the three month we’re expecting growth. And when we see that opposite happened, what they call an inversion, we’re expecting contraction, which would be a recession, so pretty far away, got 3.15 versus 133, pretty big spread between them. But you can see the pattern, there’s a little bit of consolidation recently.
So we’ll see how this plays out also. So I mean, that’s what’s happening in total. I think it’s something we just kind of keep watching and see what’s gonna happen here. Watch the support level, it’s a time to be a little bit cautious. You know, as far as that goes, you know, we’re not probably looking at significantly lower inflation during the summer, that’s usually a higher inflationary time period. So we might not see relief on that CPI number until the fall. So we’ll have to see how that how the market plays that out as far as that goes. So, nonetheless, that’s what’s going on this week so far and look forward to being able to talk to you again next week about it.