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Marc (00:00):

Folks, welcome to the LPL Research Market Signals podcast. I am Marc Zabicki, Chief Investment Officer at LPL Financial. Joining me today is Adam Turnquist, our Chief Technical Strategist here at LPL. Adam, how are you today?

Adam (00:19):

I'm doing good, Marc. Thanks for having me on.

Marc (00:22):

It'll, it'll be a pleasure hearing from you today. I mean, there's a lot of things going on in broader markets, especially as we look at developments over recent days, as well as the commodity market. And then we're going to get your analysis and all that as well as a look on to market interest rates as well. So, so looking forward to that, as we sit here today, Adam and I, it is Tuesday, November 15th and we're recording this Market Signals podcast. So if we get into capital market activity over the last, you know, several days, been very interesting developments across the board. Obviously, Thursday was a big day for U.S. equity markets, in particular, driven by the CPI number that we got, and we'll, we'll touch on that in just a little bit. But a fairly robust last week for equity markets in general.

Marc (01:23):

We can see most of that attention was driven by, you know, some material upside in U.S. markets, although emerging markets have performed rather well. In addition to that, we saw some definitive strength in the U.S. technology sector. So a little bit of a reprieve for equity markets over the last, you know, week or so, driven by robust activity on Thursday. If we look at the bond market and the commodity market, you know, again, and I know Adam will touch on this a little bit in terms of your comments on market interest rates, but again, robust activity in the bond market, you know, in the global bond market actually, as EM debt was also up rather strongly. A little bit of a give and take in commodities and, and you're going to touch on this, Adam, but I mean, you know, what are some of the moving parts that you're looking at in commodities today?

Adam (02:23):

Yeah, it's been an interesting few weeks in the commodity complex overall because we're so used to seeing energy drive that space. While energy's been a little bit off the gas lately, and we're seeing some pretty good relative strength and absolute returns as well in the metals complex that we'll go over a little bit. And I think that's really helping support the broader commodity complex when we look at it at an index level.

Marc (02:46):

Sure. And then last week, as we just touched on, really driven a lot by CPI, the CPI reading on Thursday in the U.S. We got a 7.7% year over year reading for the month of October for U.S. CPI. That was, versus the 7.9% consensus expectation and the 8.2% number in September. What that really allowed investors to kind of see is a more definitively lower trajectory in inflation pressure, something that this market has been expecting. The translation is probably that if we're going to get a definitive lower trajectory in CPI, which is by the way, has been our expectation as we sit as a strategic and tactical asset allocation committee at LPL research, then that lends itself to, to some visibility around future Fed policy in such that the Fed policy  doesn't need to be as restrictive as it has been.

Marc (03:56):

And again, that's our expectation, we think the Federal Reserve is going to take its foot off the brake just a little bit. Not that there's not going to be some additional interest rate increases from the Fed because we think there is going to be, but effectively the CPI number allowed investors to see a little bit more of the light at the end of the tunnel in terms of the trajectory of the CPI and the Federal Reserve, the future Federal Reserve policy that may answer to that trajectory. So good news, certainly from the U.S. CPI number. Also some good news on Friday as China eased some of its COVID restrictions, reduced some quarantine times that, that it was imposing and also pulled back on some testing restrictions that again, allowed investors to kind of take a look at China and also the global economy in a little bit more of a positive light.

Marc (04:55):

So that was certainly constructive on Friday. We did see on Thursday a little bit of short covering in in the market that's kind of extended that U.S. rally, I think five and a half percent to the upside for the S&P 500 on Thursday. And then that, and then we just kind of added fuel to that positive fire with the China developments on Friday. As we look ahead this week, we did get a PPI number, producer price index number, out of the U.S. this morning. I don't have it on this chart, but we got a PPI reading of, of 8% year over year in the U.S. That compares to the 8.3% estimate expected by the Bloomberg consensus economists and also the prior reading was moved from 8.5%, so the September reading was guided down from 8.5% to 8.4%.

Marc (05:58):

Again, another positive look on inflation relative to expectations, which the market so far today sees as constructive. So we are setting up for a fairly robust economic calendar out of the U.S. retail sales. We will get tomorrow capacity utilization and industrial production on Wednesday. Always important numbers and as we look at the U.S. jobs market and, and what the Federal Reserve may think about the U.S. jobs market, initial jobless claims are always important on Thursday. And then housing numbers and then leading indicators to close out the week on Friday. Across the globe, in terms of the economic calendar, quite a bit going on in the U.K. in terms of CPI and PPI readings. And we've got some other CPI data also coming out of the Eurozone and Japan, retail sales in the U.K. and China will also be important.

Marc (07:00):

So quite a robust economic calendar in China as well, and across the globe, frankly. And then key issues this week that people should be paying attention to, we touched on the U.S. PPI number, again, 8.0% was the reading versus the 8.3% survey. Retail sales and industrial production and the home sales numbers we're going to get this week, should be important for investors to keep an eye on. U.S. dollar direction will be important and I know Adam, you'll touch on that in your slides prepared for today. A whole host of retail earnings coming this week—Target, Walmart, Home Depot, T.J. Maxx, Ross Stores, Macy's, et cetera, et cetera, as well as some interesting results out of the technology sector, Cisco and others. And at the G 20 meeting going on right now some of the interesting developments that investors will want to pay attention to is really some developing conversation around you know, the U.K.- Russia conflict and how the U.K. and Russia leaders, in particular, may seek to start thinking about bringing an end to that conflict, which is some semblance of perhaps a resolution between Ukraine and Russia.

Marc (08:33):

That'll be slow developing, I'm sure, but you'll look for some commentary from the G20 on that subject. President Biden and Xi Jinping did in fact get together to talk about the U.S.-China relationship, which has been under some level of strain as we understand it sitting here. You know, Adam, we got some, what looked like a constructive conversation between Biden and Xi on the U.S.-China relations that has some developing impact perhaps on the commodity space and I, and, and perhaps adding a little bit of fuel to that fire. Tell me about commodities and how it's, it's setting it up technically.

Adam (09:22):

Yeah, I think the market's definitely welcoming the news out of the, the G20 and some of the commentary that's coming out of that. It's kind of a, a sigh of relief that it's moving in the right direction, given some of the strains in the relationship between U.S. and China. When you look at the broader commodity complex, you know, we look at the Bloomberg Commodity Index, a lot of that's energy and it's had a big rally this year, it's up 17.5% year to date. Most of that's been the energy component, I think that's up 50% year to date, so a pretty good run overall. But we've seen the energy components start to slow down a little bit and kind of pass the baton over to the metals complex. So we're seeing breakouts in copper recently. Obviously, that's playing into some of the, the headlines out of China, but there's also a supply issue going on with copper.

Adam (10:13):

I think the metal itself is kind of deviated from Chinese markets all the way back to 2021. So there's some tight supply and now we're seeing likely a better demand outlook for copper. Similar story on gold and silver. Gold reversed the declining price channel, I think that was earlier this week. And then silver broke out from a bottom as well. So some of that strength that's holding up the overall Bloomberg Commodity Index is really coming from the metals. And that's really kind of clear on the bottom part of the chart that I brought today. This looks at the Bloomberg Commodity Index ex-energy versus the energy component on a ratio basis. So as you can see is the down trend that's basically signaling that energy's outperforming the broader ex-energy component. And now we've seen since June some of the other sectors  of the commodity complex start to pick up relative strength overall against energy.

Adam (11:12):

I think you know, if you look at part of the rationale too is the, the drop in the dollar that we've seen. That's another big component helping the metals complex. Energy itself as a commodity sector hasn't had the bigger response as some of the China headlines. And we'll look at the WTI futures chart on that as well. Yeah, here you can see WTI Crudes still holding up above its $85 support level. I think a lot of that's going to be on the supply side that's really booting prices or, you know, supporting prices at that level. I did see that the international energy, I think it's the IEA, I forgot <laugh>, the actual, I think International Energy Agency, issued an update on supply. I think it's the lowest among developed countries since 2004 right now.

Adam (12:05):

So that's definitely helping support price. I think some of the global demand headlines that we've seen, you know, have weighed a little bit on the shorter term. So for, for support levels that we're watching, the 84 to $85 level will be key. If we, if we do break below that, you're looking at, you know, $82 and then down towards 76. So it's been a kind of a lackluster response in crude oil. I still think that overall that the supply side will probably continue to support price and, you know, we could see a rebound here in crude.

Marc (12:42):

Yeah. And Adam, so much of the commodity engine, I mean, is perhaps coming from, from this kind of, you know, kind of slight changes within China as you mentioned. As an asset allocation committee you know, much of perhaps the equity market engine is, is going to come from this notion that we're not going to be living with 8% CPI for the rest of our lives. CPI is actually going to, to come down and the Federal Reserve is not going to be tightening through the end of time. Actually, at some point policy will ease a little bit, especially as we look into implied Fed funds rate in the latter half of 2023, there are some expectation that the Federal Reserve will begin to reduce interest rates. So that'll be interesting. But I, I think as we look at U.S. equity markets and maybe risky assets, in general, there's some, some, some brighter spots a little bit, maybe slow in developing, but how would you characterize that?

Adam (13:47):

Yeah, I would say the, the good news or the list of good news is growing. That doesn't eliminate the, the bad news. And  we'll start with that. I guess. Looking at the S&P 500 chart, it's pretty much been a downhill ride for the S&P for this year. I mean, it, it did start off at a record high, and as you can see, it's been lower high since, and we're below that declining 200-day moving average. So now that the, the bad news is out of the way, we can kind of go over some of the good news. We've had  about a 15% rally off that October low, which also coincided with a CPI report as well. So clearly the market likes what they're seeing in terms of where this  inflation data is going.

Adam (14:29):

That's translating, as you said, into Fed policy and some of the reduced expectations for tightening. What that means for the market is that we've gapped above this 3,900 resistance level that we've talked about. I think that's been tested, I lost count after 20 times, it's been tested as support or resistance. So when you see a gap above that, it takes on quite a bit more significance. And now we're above a 50-day moving average as well. I think the 200 day is about 2% away from, from retesting. Doesn't mean we're going to immediately go right through it, but I do like the setup as we're getting closer to the 200 day. I did highlight some of the change that we've seen in momentum with the relative strength index in the second panel of this chart. And when a technician's looking for a bottom, you want to see divergences and momentum.

Adam (15:21):

And what I mean by that, is prices going lower and then some of the momentum indicators like RSI is actually making higher lows. So that's just basically implying that downside momentum is losing steam. And that's what we're seeing on the S&P 500. You know,  the key levels that we're going to be looking at are that 200day moving average, that's 4,078. There are some price gaps above that, but I think when you look at some of the breadth components that are, that are or the, the strength and breadth, if we do break above that 200-day moving average, I think it's going to be a pretty significant sign that the market has put in a low. And this is a closer look at those breadth metrics that I'm talking about. And what I mean by breadth is just participation in the rally.

Adam (16:06):

This has not been a mega cap rebound. Actually the mega cap stocks have really not done a whole lot. And, and that's being kindly to the mega caps, I think, because they've been hit pretty hard. But we're seeing industrials, financials, energy, some healthcare lead this market off the lows. And I think it's pretty interesting to see some of these divergences that I'm, I'm highlighting here on this chart, the top panel, this looks at the percentage of S&P 500 stocks that are above their 200-day moving average and we just eclipsed the August level, so we're above 50%, which I view as bullish. And even though the market itself is about 9% below its August high, breadth is actually higher. So that's  a very bullish divergence when we're looking at breadth. And then if you look at, on the flip side of that, how many stocks are making 52-week lows, you know, at over 40% back in June. And then when we hit another, in terms of the S&P making a new low in October, that number was actually less. So now we have less stocks making 52-week lows, more stocks above their 200-day. So both divergences point, you know, from a technical lens, to this rally having some sustainability.

Marc (17:28):

Yeah, Adam, we sit around as an asset allocation committee and, and, and discuss you know, the particulars around Fed policy and the, and the likelihood that we continue to see a retrenchment in the CPI and fundamentally that that makes for a, a positive setup. That's been our expectation for, for a while. And now the market is starting to see that. I mean, the importance I think is that the CPI reading Thursday really shined a light on the visibility of, of an actual CPI and inflation retrenchment and the visibility around Fed policy tightening actually coming to an end. So it led to  that bounce on Thursday. And then it's, and it's also additive to our conversations as an asset allocation committee when some of these breadth indicators and technically we get a little bit more of a constructive picture showing up.

Marc (18:39):

So that's, that really just is more additive to why we're not necessarily bullish in this environment. But we do think as an asset allocation committee, when we get that additional visibility in CPI retrenchment and, and, and more realization that the Federal Reserve is likely going to stop its tightening cycle, perhaps in early 2023, the market setup gets a little bit better. I want to turn your attention to the fixed income side because as an asset allocation committee, we've talked about perhaps a peak in the 10-year treasury yield. And our expectation that, you know, a retrenchment in the 10-year treasury yield could also lead to positive things for risky asset prices. How does it look to you?

Adam (19:28):

Yeah, absolutely. It's really been rates, obviously, driving this bear market in stocks and we've had a bear market in the treasuries as well. And we're starting to see on the technical side evidence that, you know, perhaps the top is in for yields. It's a bit early. You know, we've seen a, a bit of a lower high here on the 10-year and it did roll over last week and broke below that 4%, kind of psychological support level. And now we're right around the 50-day moving average, I think intra-day, you know, we might be below it. So this is a shorter term, when I'm looking at this Marc, it's a shorter term up trend valuation. And I'd caution that with, you know, this does not mean that we're going to immediately go back to ultra-low rates and you're going to see a, a sub 3% on the 10-year.

Adam (20:16):

But, you know, we might go back and retest those summer highs, right around 350. I think that would be good for equity markets overall. I don't think we necessarily need to put in a new low in the 10-year or even get back to the 200-day, which is, you know, just below 3%. I think the market will welcome any type of stability or even if it's minor downside, which I think might be the case for next year. I did highlight also, just in terms of overall momentum, when we look at RSI again. Here, you've seen a bearish divergence as rates continue to move higher, we actually saw momentum start fading in the 10-year and now you're actually in bearish territory, which is under 50 in terms of RSI. So I think risk for a breakout to the upside is becoming less and less, you know, likely. And I think the market's going to continue to welcome at least stability in the rate market. We've seen that with some of the implied volatility metrics that we look at. A huge move and, and technically it's called the move index which, you know, went basically parabolic this summer, that's come down and that's basically like the VIX index for the treasury market. So as that comes down, I think it also helps suggest that, you know, we may see a top here on the 10-year.

Marc (21:37):

Yeah, and good points, Adam. As we set up through the, let’s call it month and a half of 2022, which, oh by the way, is pretty good calendar set up, historically. So Santa Claus rally and all that, we'll see if that comes to pass in 2022. But we are getting that better visibility and as you've described here, both from an equity market and a fixed income market the technical backdrop seems to be improving as well. So that is indeed constructive. We're glad to see it as an asset allocation committee because we've been expecting this set up to come to pass for, for a few months now. So now that we're actually seemingly perhaps, turning some semblance of a corner and, and, and remains to be seen if we're going to continue to turn that corner.

Marc (22:30):

But you know, what we've seen so far, technically and fundamentally, seems to be a, a more positive backdrop both in the equity market and in fixed income. Adam it's a pleasure to have you join us today, Adam Turnquist, our Chief Technical strategist here at LPL Research. I am Mark Zabicki, Chief Investment Officer. I want to thank the audience for joining us today. Hopefully you picked up a little bit of insight, not only what's going on today in capital markets, but how we're thinking about it. So you enjoy the rest of your week and we will see you next Tuesday with Market Signals.

LPL Research breaks down the market implications from the latest developments surrounding China and domestic inflation. They highlight recent changes to commodity market leadership, the improving technical backdrop for US equity markets, and take a closer look at trends in the Treasury market.

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