Even the F_E_D is downgrading US economics finally as it's just impossible to act like you don't see it anymore. Today the F_E_D, in addition to dropping "PATIENCE" from the policy statement , paving the way for a rate hike as soon as June as April was seen as "unlikely" by the F_E_D and no one I know has ever mentioned April, they also downgraded the US economy.
The F_E_D now sees 2015 GDP at 2.3 to 2.7% down from 2.6-3% just in December. They made note of the slowing in housing, Export growth has weakened, the former growth "Expanding at a solid pace" was replaced with growth has "Moderated somewhat". Inflation is anticipated to "Decline further" as opposed to the last statement, "Remain near its recent lows".
In the meantime US allies, despite pressure from the President, including the UK, Germany, France and Italy have all signed up to join the Chinese led AIIB bank, a break from the Dollar dominated world.
Do you remember this post just yesterday? Leading Indicators and Perhaps a Surprising Change in Dollar Direction . Apparently there was more than just a divergence today in the $USD as I had made mention of the strong $USD trend which is record setting in many ways, about to abruptly change. Now looking at the long term charts I don't think this was all about a knee jerk move today in the market on the F_O_M_C downgrading the economy and paving the way for interest rate hikes, a dichotomy I've struggled to understand. I suspect there's a global move away from the $USD, perhaps that's part of the reason gold is looking so interesting right now, either way, there seems to be something bigger going on.
So why would the F_E_D raise rates when the economy is falling apart? I wonder if the 17 year old hedge fund manager in California can tell us or any of the 1/3rd of Wall Street that has never seen a rate hike and if they haven't seen that, it's likely they have never seen a bear market either.
I keep wrestling with this question and the best I can come up with is the F_E_D has painted itself in to a corner and as the Bank for International Settlements (the central bank's bank) said in it's annual report, "Leading Central Banks don't have the ability to deal with even a GARDEN VARIETY recession".
So I thought maybe that's it, but I've had this sneaking fear that whatever it is, a rate hike will damage the economy, hiring, cap-ex spending, car loans, housing and just about everything you can think of other than savings so why would the F_E_D do that when they've finally been forced to admit what we've all known since Q4 of last year? The economy is sliding?
Well sometimes answers are so simple they are staring you in the face and you don't even realize it.
I've said and I believe that the market decline/bear market that is coming is likely to be the greatest opportunity of our lives, far greater than anything made from 2009 to present, just look at the 2002/2003-2007 bull market and how fast it was torn down and how much further the market lost ground below the starting point. I believe if you are on the right side of the market and know how to trade a bear market (as 1/3rd of Wall St. pros haven't even seen one- I've been through 2 while in the market), there's an unprecedented opportunity of not only a lifetime, but of multiple generations.
So what gives on these rate hikes if the F_E_D can no longer afford to act like the economy is fine which ended today? One of my good friends passed along the most famous of Newsletter writers ever, 90 year old Richard Russell of the Russell 2000.
As you know the dichotomy I've been asking about almost every day is "How can the F_E_D raise rates when the economy is in this condition?"
From an excerpt from Russell's newsletter yesterday,
"Everybody and his brother are talking about when the Fed may raise rates, but few are talking about why the Fed may raise rates. The Fed will raise rates to protect its fanny. Remember when Alan Greenspan let the housing market go crazy and then crash? Greenspan’s answer was that nobody can tell when things get too hot, but after they crash, we should simply clean up the mess. With money from all over the world rolling into the dollar, and the dollar buying US stocks, the Yellen Fed is afraid of a buildup in the stock market and then a crash. So by raising rates, the Fed can say that it saw the market becoming overheated, and if the market then crashes, the Fed can insist that it raised rates early to calm down the stock market. Of course the Fed will never admit this since they can’t even mention a melt-up and then a crash. But raising rates is the Fed’s way of covering its fanny.
The stock market is overvalued, overloved and manipulated, with money from around the world pouring into the US dollar, and from there, into US stocks. But ominous indications are starting to appear. There are six distribution days on the S&P and five on the Nasdaq. This is a very large number, and it tells us that professionals and some institutions are bidding this frenzied market good-bye."
Could it be as simple as that, staring us in the face the entire time? I can't say for sure, but I can't find any fault in the argument, especially after the F_E_D downgraded the economy today and removed "Patience", paving the way for a rate hike. If this is the case, they aren't just hiking rates until they hit a certain percentage, they are hiking until they destroy the market bubble which was created by an unprecedented $ trillion dollars in F_E_D balance sheet expansion on what I still believe has been a stealth bank bailout.
For now, that's a decent answer and makes some sense so lets just leave it at that as we won't know the truth until it's already in the history books.
As for today, I've covered pretty much as much as I can. There was still gas in the tank, the market has still looked horrible, the knee jerk reaction is nothing new, in fact its virtually boiler-plate with anything F_E_D related and it's not indicative at all of the market.
So I just want to cover where we stand from here on subjects I haven't already covered which include the intermediate term Index futures where the "gas in the tank" was still to be found earlier today which is now all about spent. Our QQQ and SPY targets were hit right to the exact number and the length of the bounce so far has been to the exact day as per last Wednesday's forecast.
As per our leading indicators, this one specifically , the SPX:RUT Ratio was calling a base and a bounce days ahead of it which allowed us to forecast a bounce, looked like this...
In fact, upon closer inspection...
Our pro sentiment may have had some slight interest in looking for a knee jerk move today, but it wasn't to buy it, it was to sell it.
Once again, Index futures ran above the EUr/USd correlation, however that may soon be a more complicated subject than simple correlations and cross assets correlated to it as the Greek issue as well as the ECB's troubles with QE are already apparent and may (Greece) create a scenario in which some of the biggest banks in Europe are on the ropes.
Remember the USD/JPY correlation and carry trade?
Again, I'll be tracking this one too, but for now the rising $USD and falling Yen is what keeps the carry cross alive at unreal amounts of leverage, even small moves against the pair can result in catastrophic losses because of the leverage. So for the moment, we'll keep these two charts in mind along with the reversal above.
I used a 4 hour chart of Yen futures to show something. Is that support along with a leading positive divegrence? I wrote several years ago that when it was time for the market to REALLY fall, the USD/JPY would also fall, that means $USD down and Yen up, these are some strong charts with some strong signals in that direction as well as the $USD seeing the biggest percentage drop today since March of 2009; that was an ugly time.
As to yields, other tan the recent Yield curve flattening...
The 10 year dropped as low as 1.92% today.
And the 5 year since re-coupling after the March 6th Jobs data...
HYG (HY Corp. Credit) helped out today as I suspected earlier it might on a short term basis in this morning's post, Levers, however it didn't do enough to make it sustainable near term...
Certainly far from enough on a primary trend basis where HYG is already in a primary downtrend, remember "Credit leads, stocks follow"
The one form of HY Credit that is not manipulated like HYG, High Yield Credit is telling a more accurate story of what smarter money is doing...
Commodities got a good bounce today, not enough to change their negative signal vs. the market and this was on Oil strength after last night's shocking API 10.5 mm barrel build and today's EIA expected 5 mn barrel build that came in at 9.62 mn.
I still like USO, but this move today in my view was bunk and we still have a base and a nice trade available there, although I may move around the 1/2 size position entered last month. The same with gold.
There's already the start of intraday distribution in USO, you probably know why it bounced, hint $USD. The same with Gold, but both have decent bases and nice prospects, I may just look to try to squeeze the gains out of each of the partial positions and re-enter. This morning oil was the worst asset one could mention as far as the media goes, tonight, well things change fast.
VXX or the UVXY position suffered no damage on the timeframe where it counts, again see this morning's Levers. In fact I believe it was just yesterday I was wondering if VXX/UVXY would see a head fake move...
The same goes for the market averages, there's only so much we can see in 2 hours, but as you already saw the futures in this post, Beware the Knee Jerk- Uncertainty, Meet the Market. as well as some of the averages already , I think we'll be just fine and if confirmed as I expect, we have the kind of options/put entry I look for almost exclusively.
I'll update Index futures in the morning after they've had some more time to settle in, 2 hours isn't a lot of time to get the best signals in anything other than intraday, but I don't think we'll be having a problem and I still maintain the forecast of continuing the stage 4 decline and challenging the October lows.
We have an interesting Dominant Price/Volume Relationship tonight, across the SPX (366 stocks), NDX (77 stocks) and Dow (27 stocks) we have an exceptionally DOMINANT P/V relationship, it's Close Up / Volume Up which is considered to be the most bullish of the 4 relationships, ironically it's also the one relationship with the strongest next day bias as the market is considered 1-day oversold and the most common result is a red close the next day.
Interestingly though, THE RUSSELL 2000 HAD NO DOMINANT P/V RELATIONSHIP. Like yesterday, it was split almost evenly among the 4 possible relationships. I'm not sure what this means as I've never seen anything like it with such an otherwise dominant relationship, but it looks like more of those internal troubles that caused rotation in the averages last week and this week as well as this week's Hindenburg Omen. Notice the Russell lagged again today?
Not surprisingly, 9 of 9 S&P sectors closed green, with Energy leading at +2.91% and interestingly, Financials lagging at +.57%. In fact after the F_O_M_C, Financials were the biggest laggard.
The Morningstar Industry groups saw 218 of 238 close green, between that, the S&P sectors and the Dominant P/V relationship, I'd say we definitely have a 1-day oversold condition which has nothing to do with indicators, it's all breadth count.
The Russell's strange internals remains a mystery, but one I doubt is positive.
After a quick look at market breadth indicators, I didn't expect to see anything unusual on a day like today, however I was a bit surprised the % of stocks (all NYSE) above their 40-day only climbed to 53%, it's usually hovering around 80% during a bull market and the % above their 200-day only at 51%, usually around 70%, still both were below 50 yesterday.
I also found the NASDAQ Composite's Advance / Decline line barely changed and the McClellan Summation Index didn't move at all.
I suspect tomorrow breadth internals will be a bit more interesting other than the Russell 2000 Dominant P/V today, that's a new one I've never seen.
Finally for the most part Index futures are close enough to inline that I wouldn't make a big deal out of it, EXCEPT NASDAQ 100 futures, there seems to be a problem brewing...
In fact it has made its way to the 5 min chart as well...
At the 7 min chart as ween earlier, they are all negatively divergent and worse than earlier so futures may indeed be interesting tonight, I'll let you know if I find anything beyond what we have now.
Have a great night!
