Thursday, January 28, 2016

The Morning Call---Fed not dovish enough? Boo Hoo

The Morning Call

The Market

The indices (DJIA 15944, S&P 1882) made another big move yesterday, this time down.  The Dow closed [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance, [c] below the lower boundary of a short term downtrend {16857-17604}, [c] within an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and still within a series of lower highs.

The S&P finished [a] below its 100 day moving average, now resistance, [b] below its 200 day moving average, now resistance [c] below the lower boundary of a short term downtrend {1921-2010}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161}  and [f] still within a series of lower highs. 

Volume was up; breadth was negative.  The VIX was up 3% which was not nearly the magnitude of a move as I would have expected on such a big down price day.  Still it ended [a] above its 100 day moving average, now support and [b] in short term, intermediate term and long term trading ranges. 
The long Treasury was off slightly, finishing above its 100 day moving average, now support and within short term and intermediate term trading ranges.

GLD (107.8) was up big again on heavy volume again, ending [a] above its 100 day moving average for the second day; if it remains there through the close today, it will revert from resistance to support and [b] within short, intermediate and long term downtrends---but very near the upper boundaries of both its short term downtrend {108.6} and its intermediate term downtrend {108.3}.  Clearly, the successful challenge of these boundaries would change the technical picture dramatically.

Bottom line: my summary from yesterday remains spot on: ‘it would appear that the Averages are now in a testing area where they have lost downside momentum, can’t muster much to the upside but the volatility remains.  These are the times to do nothing except watch for follow through.  To the upside, the indices need to successfully challenge one or more resistance level (upper boundary of their short term downtrend, their 100 day moving average or the first major Fibonacci retracement level [circa S&P 1928]) before we can say anything about a meaningful rebound.  On the downside, 15842/1867 are major support.  Any failed test of those levels, the Averages are looking at a serious fall before they find any support.  Caution.’


            Two housing datapoints yesterday: weekly mortgage and purchase applications numbers which were upbeat and January new home sales which blew the doors off the estimate---the latter being a primary indicator.  So far this week’s stats have a positive tilt.

            ***overnight, IMF and World Bank officials headed for Azerbaijan to discuss an emergency loan package in what could be the first bailout stemming from lower oil prices; the UK fourth quarter GDP was up but at the slowest annual rate in three years; EU economic confidence was the lowest in five months; China injected another $50 billion into its financial system.

            Of course, the big news of the day was the statement following the close of the January FOMC meeting.  In short, the Fed (1) left the Fed Funds rate unchanged, (2) downgraded its assessment of the economy slightly, though it did not express concern about oil prices or the global economy, (3) was less confident in its outlook for inflation, (4) stated that it was not ruling out a March rate increase, (5) but that future rate increases will likely be more gradual.  Translation, it was a dovish statement; though judging by the Market’s reaction, it was less dovish than had been hoped for.

                Fed whisperer, Hilsenrath, parses the Fed statement (medium):

            Bottom line: not to beat a dead horse, but I will repeat my take on Fed policy---which is that the economy is not going to improve until QE is a bad memory.  It doesn’t necessarily have to get worse, it just won’t get any better.  Of course, the present Street narrative is that a tighter Fed will exacerbate the current weakness in the economy and that will cause a recession.  I don’t buy that routine.  Frankly, I think it incredulous that anyone would believe that a potential 25 basis point rise in interest rate two months from now off a base interest rate of virtually zero could negatively impact the US economy enough to alter its current course when trillions of dollars’ worth in liquidity injections and a steady decline in interest rates did little to improve it.

What will to occur, when, as and if, QE is unwound is a Market correction.  Investors fell in love with QE---that is clear in how well the Markets have performed since its inception.  Stock prices didn’t roar because the economy was improving in any significant way---because it wasn’t.  So clearly investors weren’t discounting a great economy.  What they were discounting was the presence of cost free money that could be used to chase higher yields (i.e. speculate).  And that is likely why Markets reacted negatively yesterday---because they were disappointed that the Fed wasn’t more reassuring that cost free money would continue.

So the net of this is, in my opinion, that a further tightening in Fed policy would have little impact on the economy.  Indeed, it could actually help as Market participants start making asset pricing and allocation decisions based on something other than the phony paradigm that cost free money was the cure for an economy already suffering from too much mismanagement from the Fed. 

Don’t get me wrong, the economy may slip into recession.  And if it does, it will be more the result of an overreaching QEForever policy and its impact on asset (mis) pricing and (mis) allocation than anything related to some two bit 25 or 50 basis point rate hike from a zero base. 

The corollary to this is that there will be pain but it will be in the Markets as they adjust to the unwinding of QE/soaring asset prices.  How that unwinding happens will determine how the Market pain is felt.  The Fed can ‘rip the band aid off’ and make the journey to normalization shorter but with more intense pain; or it can drag things out and make the journey a Chinese water torture test.  In any case in my opinion, the odds of it returning to a normal monetary policy with little Market impact are somewhere between zilch and nada.

            A great article on the correlation between the price of oil and stock prices (medium and today’s must read):


   This Week’s Data

            December new home sales rose 11% versus expectations of up 2%.

            December durable goods orders fell 5.1% versus estimates of a 0.2% increase; ex transportation, they declined 1.2% versus forecasts of being flat.
            Weekly jobless claims dropped 16,000 versus consensus of down 9,000.


            The latest from Stephen Roach on China (medium):



  International War Against Radical Islam

            Russia’s big win in Syria (medium):

            And now the US is going back into Libya? (medium):

No comments:

Post a Comment