The key sector to reflect optimism / pessimism regarding consumers, industrial demand, supply chain issues and upcoming budget proposals is transportation and the commercial ETF (IYT).
The Retail sector improved at the start of the week. As measured by XRT, we are seeing improvement in the bullish return phase, but still a very limited area.
We have seen more rotation in small caps, although IWM also looks very limited in the range.
The KRE Regional Banks were quite satisfied, and perhaps the increase in yields helped this area.
However, the transportation industry (IYT) continues to intrigue us the most. IYT, at the end of the day, was unable to break past the 50-day moving average or the all-important 6-month range on the calendar.
Is this indicative of the many fractures that we see both economically and politically?
On the table right now is the $ 3.5 trillion budget reconciliation package, recognized as the centerpiece of President Joe Biden’s national agenda. It is a ten-year spending plan designed to meet support needs in education, health care and child care.
It also includes a package to combat climate change and infrastructure.
However, with 10 moderate Democrats on the fence, the potential for a stalemate is high, with questions about taxes, health, climate change and the ultimate price.
Centrist Democrats see the overall price too high, while progressive lawmakers are reluctant to compromise further after they’ve already given up on even more ambitious ideas.
Plus, most if not all Republicans will likely veto it.
In addition, a $ 1,000 billion infrastructure bill will be sent upstairs in the House next week. This bill includes funding for roads and bridges, money for transit and rail, a broadband upgrade, and an upgrade of airports, ports and waterways. All of them are considered essential upgrades to the failing infrastructure of the United States.
And that’s not all !
The fiscal year ends Thursday. The government has to come to some sort of deal before then or risk a government shutdown. However, according to projections, the Treasury will still be able to exercise its borrowing power until October 15 or November 4 depending on the length of the current allocations.
Even without Biden’s budget package, the good news could at least come in the form of a deal to pay off old debts, requiring a marginal hike in the debt ceiling. The bad news would be that raising the debt ceiling to include the budget proposal is unlikely to pass the Senate.
So the government could prevent a shutdown, or worse a default, but without adopting the budget proposal, confidence in the current administration will suffer further.
At the end of the day for the market, we see rates continue to rise, or at least we dare say that rates have bottomed out.
Without a package for infrastructure or spawning growth, we still see a cycle of stagflation. We expect a commodity super cycle to follow, resulting in commodity shortages, supply chain issues and a weak labor market. A hoarding mentality will prevail.
Obviously, our dear transportation industry sees this conundrum. How will the United States and central banks cut easy money, cut the bond buying program, and raise rates enough to control inflation without collapsing a fragile system?
If it can be removed, we’ll see it in IYT. If it can’t be removed, we’ll see it in IYT!
Analysis and Summary of Trading ETFs:
S&P 500 (SPY) Recorded an indoor day below the 50-day moving average.
Russell 2000 (IWM) 228 is resistance and 221-22 is essential support.
Dow Jones Industrial (DIA) Also stopped before clearing the 50 day moving average.
Nasdaq (QQQ) Income below 50 day moving average.
KRE (Regional banks) The winner today – 66.35 is support and 70 is resistance.
SMH (Semiconductors) 267 must hold and 272.50 is a level he must overcome.
IYT (Transport) 252.10 the 50-day moving average, with 250 being the pivotal support.
IBB (Biotechnology) Broke 50 day moving average and is now testing support.
XRT (Retail) 92-98 is an area limited to the range.
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