Commodity Insight: Tale of the tape in markets

Over the past few weeks, a host of markets have turned lower to sharply lower. The reason for the weakness is the money managers, the funds, the “algo boys” high-frequency traders and chartists are finally reluctant to fight the Fed that is lifting interest rates at the fastest pace in 40 years.

It is higher interest rates and fears of a Fed-induced recession that is causing markets of all kinds to slump badly.

The weakness is causing the tape to suggest loudly that more weakness is coming. The red ink with the tape makes the charts appear bearish.

The Fed has been raising rates for a year, but only in the past few weeks, when the January personal consumption price index, that excludes food and energy, increased 0.6% for the month, has the marketplace began to leak and badly so.

Wall Street had been expecting a reading and a rise of 0.5% to 4.4% with personal consumption. Instead, the rise came in at 4.7%. The report pushed the Dow Jones lower by 500 points to a new three-month low.

From CNBC following the release of the inflation report that sent the Dow tumbling: “‘This morning’s strong inflation data continued the recent spate of market-unfriendly news. This could keep the policy rate higher for longer than the market had hoped, which in turn will likely pressure earnings,’ said Matt Peron, director of research at Janus Henderson Investors. ‘While we do see signs that inflation will eventually moderate, higher rates for longer will take a toll.’”

However, there were other reports that also made the Fed squirm. Pending home sales jumped 8.1% to the highest level since mid-2020. Consumer confidence surged to a two-year high, as did consumer spending.

Capital goods orders jumped 1.1%, and despite the Fed hiking rates aggressively for a year, pending home sales jumped 8% in January. All such news shows the economy robust and growing.

But such good news is now viewed as bad news because it means the Fed will keep pushing rates higher and for a longer period of time.

I cannot emphasize enough how important it is to not only respect the Fed and its policy, but to also understand how vital it is to grasp the concept of watching the tape.

The tape is what jolts the money managers into buying or selling sprees. If the tape shows support levels with any market, stocks, bonds, grains, livestock and so on starting to “give way,” the money managers quickly turn seller.

As the tape shows weakness, the money managers increase their selling. The more they sell, the lower the market goes. And the lower the market goes, the more they sell.

An interesting statistic was announced this week that shows clearly the impact higher rates are having on the economy.

It seems that housing demand is still slumping badly, according to the Mortgage Bankers Association. It claims that mortgage loan applications just hit their lowest levels in 28 years.

It also blames the Fed on that problem as it keeps lifting rates higher. But think about that — mortgage applications hit a 28-year low!

But getting back to charts and the tape and why they should be watched carefully by investors and traders, there are many that view charts and the tape as voodoo and false indicators to determine the direction of stocks, bonds or commodities. Here is one view highly skeptical of trading off the tape and charts.

From the finance blog, The Prince of Wall Street, posted a while back: “Whenever I, the Prince, hear bloggers or financial ‘professionals’ reading charts and talking about breakouts, support, momentum, resistance, chart patterns, or any number of goofy names for the shapes that charts make, I immediately begin to smile. I do admit that there is useful information to be gleaned from charts such as the number of buyers and sellers or the volume of a stock.

“The truth is most institutional investors and real Wall Street professionals know that technical trading is absolutely hogwash.”

My two top rules to follow when investing or trading are as follows: One, when it comes to a market and a forecast, no one knows for sure what will happen. Not for sure, they don’t.

My second rule is more important yet, always use a stop. And the reason for using a stop is because no one, the Prince of Wall Street or yours truly, knows what a market will do.

Not for sure we don’t.