In what has to be considered the most telegraphed move in financial history, Janet Yellen's Federal Reserve announced an increase to the Fed Funds and Discount Rate targets yesterday. And while the mandatory moronic algo-games whipped stock prices back and forth for a few minutes following the release of the news, the major indices stock market wound up moving up smartly on the day.
Everything you need to know about what the Fed is currently thinking can be summed up in handful of comments from the FOMC statement released alongside the announcement of the first rate hike in nine years.
First, Yellen made it clear that the Fed was sticking to its plan in terms of when the initial "liftoff" from ZIRP (zero interest rate policy). The Chairwoman said that the jobs market had hit their target and that in the committee's view, inflation will also move back toward the goal. Here are the committee's exact words:
"The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective."
The next question the markets needed answered was what the "glide path" would look like in terms of future rate hike expectations and whether or not there was any preset formula for future rate hikes.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
As such, investors took solace in the use of the word "gradual" and that the FOMC would be "data dependent" going forward.
Next up was the issue of the state of the economy. Recall that the vast majority of the manufacturing data has come in on the punk side of late and that the global picture isn't exactly rosy at this time. As such, many economists have begun to worry that the global macro situation might sway the Fed from taking action.
In short, the FOMC statement told investors to quit worrying...
"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced."
And finally, there was the issue of what to expect next. While Yellen's bunch has gone out of their way to clearly communicate their intentions about this move, it appears that the FOMC wants to be a bit more secretive going forward.
"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
So there you have it. The Fed finally said the economy was strong enough to be taken off of life support - kinda sorta. But the key is that the Fed did not signal that the recent problems in oil and/or junk bonds was something to fret about. No, in short, they boldly went where no Fed has gone in a very long time.
As for the market reaction, after the usual algo-induced hysteria, stocks wound up rallying, bond yields pulled back a bit, and the dollar was little changed. As such, one can argue that the move was priced in - at least in terms of the bond and dollar.
S&P 500 - Daily
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Stock market investors couldn't be blamed for thinking that all is now right with the world and that what is looking like the traditional Santa Claus rally can continue. However, given that (a) after a two-day reversal, oil prices wound up back near recent lows and (b) traders have had their computerized trades tied to the price of oil lately, we shouldn't be surprised to see stocks refocus their attention on the state of the oil market in the near term - especially if crude breaks to new lows.
In addition, we should keep in mind that there has been a fair amount of hand-wringing recently over the action in junk bonds. And with the drama appearing to be over for the Third Avenue fund, a bounce was to be expected. However, the damage done to this market suggests to me that the current rebound in junk bonds should be considered a bounce of the dead cat variety.
In sum, while it would be easy to think that everything is hunky dory again now that the Fed is out of the way, this market has been schizophrenic to say the least for the past 16 months. And since I doubt the Fed's move will do anything to change this, investors may want to curb their enthusiasm about the potential upside in the near term. I could be wrong, of course, but if we've learned anything this year it is that what goes up must go down - and vice versa.
Today's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: +0.79%
Crude Oil Futures: -$0.09 to $35.43
Gold: -$17.30 at $1059.40
Dollar: lower against the yen, higher vs. euro and pound
10-Year Bond Yield: Currently trading at 2.263%
Stock Indices in U.S. (relative to fair value):
S&P 500: +5.25
Dow Jones Industrial Average: +51
NASDAQ Composite: +26.30
Thought For The Day:
An eye for eye only ends up making the whole world blind. - Gandhi
Here's wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Global Central Bank Policy
2. The State of the Oil/Junk Bond Dive
3. The State of Global Growth
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Neutral
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 2020
- Key Near-Term Resistance Zone(s): 2135
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Negative
- Price Thrust Indicator: Negative
- Volume Thrust Indicator(NASDAQ): Negative
- Breadth Thrust Indicator (NASDAQ): Negative
- Short-Term Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Moderately Negative
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Neutral
- Intermediate-Term: Moderately Oversold
- Market Sentiment: Our primary sentiment model is Negative
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Negative
Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.
Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.
Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.
Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
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The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning is the owner of Heritage Capital Management (HCM) a registered investment adviser. Advisory services are offered through Heritage Capital Management, Inc. For a complete description of investment risks, fees and services review the HCM firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting HeritageHCM also serves as a sub-advisor to other investment advisory firms. Neither HCM or Heritage is registered as a broker-dealer.
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