IWM: Finally Close To Breaking Out (Technically Speaking For 11/2)

Summary

• Bloomberg's new supply-chain statistics shows a very strained system.
• Median CPI isn't as bad as you'd think.
• The IWM is very close to breaking out.

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Bloomberg economics has created a supply-chain measurement:

The measures are based on a range of data, from factory gate prices to the ratio of inventory-to-sales for retailers, and the backlog of orders for service-sector firms. Readings of zero indicate normal conditions, negative ones mean goods are abundant, and positive points to constraints. The gauges show an abrupt shift from excess supply before the Covid crisis to today’s significant shortages.

Currently, all of the components are showing stress:

As a result, the top-line number is just shy of highs:Most central banks thought that this problem wound start to abate -- an analysis which is based on sound economics. Higher prices attract new suppliers, which increases supplies, which lowers prices. That process may be occurring below the surface.

But there's a second problem not accounted for by basic supply and demand analysis: the virus, which is still complicating supply lines:

In Vietnam, plants that make Nike shoes had to scale back output because migrant workers had decamped to their home provinces out of fear of Covid-19. China, the world’s manufacturing powerhouse, is confronting new virus outbreaks and responding with targeted lockdowns.

The Fed has one of the most sophisticated economic models on the planet. But I have to wonder whether even its sophistication can accurately account for pandemic effects.

The Cleveland Fed tracks various inflation measures:A few points of interest:

1. Median CPI (the line where half of readings are above and half are below) is still below peaks from the previous expansion. This implies that a number of inflation readings are in fact low.
2. The preceding analysis is confirmed somewhat by 16% trimmed mean CPI, which strips out extreme readings.

This is not a great chart due to the high readings of overall and core CPI. But the lower-than-expected median reading is somewhat encouraging.

Problems in the auto market could spell trouble for economic growth:

For every car or truck that does not roll off an assembly line in Detroit, Stuttgart or Shanghai, jobs are in jeopardy. They may be miners digging ore for steel in Finland, workers molding tires in Thailand, or Volkswagen employees in Slovakia installing instrument panels in sport utility vehicles. Their livelihoods are at the mercy of supply shortages and shipping chokeholds that are forcing factories to curtail production.

The auto industry accounts for about 3 percent of global economic output, and in carmaking countries like Germany, Mexico, Japan or South Korea, or states like Michigan, the percentage is much higher. A slowdown in automaking can leave scars that take years to recover from.

I believe the correct phrase is, "What's good for GM is good for the country."

Let's take a look at today's performance tables from Stockcharts.com:

Overall, there were modest gains through the entire equity markets. Although -- oddly -- the long-end of the treasury market was also higher.This is a somewhat off table. Three defensive sectors (staples, healthcare, and real estate) are in the third, fourth, and fifth, position. But two aggressive sectors -- basic materials and tech -- are in the first and second position.

This chart is today's big news:

NYSEARCA:IWM 1-year from Stockcharts.com

The IWM spiked higher yesterday. Today, it edged to just around resistance. The IWM has been consolidating since early May. Now, it's positioned to break-out higher.

Meanwhile, the other averages are continuing higher:

QQQ 30-days,

The QQQ continues the rally it started in October 12.

SPY 30-days from Stockcharts.com

The SPY's current rally started on October 14.

DIA 30-days from Stockcharts.

The DIA broke through resistance in mid-October and has continued higher in two waves.

Overall, the markets are in very strong shape right now. The central question is will the IWM continue to break higher.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.