Tightening Takes Hold – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

After a couple of opening August sessions, a good rally spiked all indices on Wednesday. The Nasdaq Composite led the way splurging 2.6% and giving confidence to investors and traders. Both the S&P 500 and Dow Jones Industrial Average showed gains of 1.6% and 1,3% respectively. The bearishness to start August was dusted away Wednesday amid several possible negative factors: Pelosi’s unauthorized visit to Taiwan and the lingering interest rate raises. The U.S. services report was optimistic as it showed the service industry of restaurants and lodging, and the general retail sectors were performing near normal in July. “There is still a lot of inflation, central banks are keeping that hawkish rhetoric and we get some geopolitics on top of that,” said Oliver Marciot, global macro portfolio manager at Unigestion, alluding to the markets’ bigger problems. The yield on the benchmark 10-year Treasury note edged higher, up to 2.747% from 2.740% Tuesday. Oil was mixed, then falling about 4% to $90.66 a barrel, as OPEC announced a slight production adjustment, decreasing output. At the pump, retail prices were floating in the $4.15 to $4.29 range, off from the historic highs above $5.00 just seven weeks ago, reflecting its downward direction. Prices were abnormally high at the start of summer, discouraging many car traveling vacationers. “You’ve seen tremendous drops at wholesale prices really in every nook and cranny of the country,” said Tom Kioza, global head of energy analysis for OPIS.

The lingering labor market is showing signs of ‘defrosting.’ Tuesday’s announcement by the Labor Department showed that there were 10.7 million job openings in June, after May’s 11.3 million. This decrease is the lowest showing since September last year. Also hiring slowed as employers were hesitant to add positions amidst recession fears and overall apprehension about interest rate tightening. “Competition for workers remains fierce as employers have to keep bidding up wages for new hires,” said Nick Bunker, an economist with jobs site Indeed. “These red-hot wage-growth statistics may fade in the near term, but there’s a long way for them to drop.” As the U.S. economy compressed (in the first two quarters) this year, many economists feel the economy has ‘qualified’ as in recession. Jerome Powell has been quoted that the U.S.is not near a recession. He (Mr. Powell) feels strongly that a heavy labor market, as seen in the first half, points to a recession-free economy. Recession or not, the labor market is making strong headway, putting fears to rest that a recession is at hand.

Most commodities slid significantly in July, losing for the second straight month after nice gains in the previous six months. The Fed’s massive tightening to combat runaway inflation had negative effects on most commodities. “Most commodity prices could ease gradually for the rest of the year and next,” said Matthew Sherwood, senior lead commodities analyst at the Economist Intelligence Unit. After six months of steady gains, commodities ‘hit the wall’ as interest rates, and inflation took hold. Copper, iron ore, and wheat are leading all decliners, with Brent crude down 7% as of July 28. Paradox, natural gas is soaring, trading nearly 50% higher, as Russiaisshort-supplying Europe. Shawn Reynolds, a portfolio manager for VanEck’s active Natural Resources Equity Strategy, comments, “we see (Russian President Vladimir) Putin treating wheat and other ag products similarly to the way he is toying with Europe on the natural-gas front.”


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Anthony Fauci, Chief Medical Advisor to President Biden, Barron’s “Everybody’s hoping to get a degree of what they call endemicity, living with the virus at a level that does not disrupt society.”

Randall W. Forsyth, Writer, UP & DOWN WALL STREET, Barron’s “Bottom line, the market is betting that a data-dependent Fed will ease in 2023 after lifting the fed-funds rate just to the mid-3% range, still well below all but the most optimistic inflation forecasts. That might stave off a deep recession but result in double-dip downturns, as in 1980 and 1981-82, at the beginning of the Fed’s successful war on inflation four decades ago. That’s not forward guidance but it’s relevant history.”

Jerome Powell, Federal Reserve Chairman WSJ “Are we seeing the slowdown in economic activity that we need?” Mr. Powell said, “There is some evidence we are, at this time.”

Lisa Shalett, Morgan Stanley Wealth Management’s chief investment strategist, Barron’s “The latest bear market rally in our view is full of wishful thinking.”

Ryan Severino, JLL economist, Barron’s “There’s a concern that if people feel doubt about things for too long, then it could actually start to manifest itself in economic activity.”