Fed’s “All Bark No Bite” Delights Markets

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The Fed offered no surprise and followed the expected theme of hiking rates by only 0.25% with more to come. A mid-day sell-off reversed with traders focusing on chairman Powell’s acknowledgement of falling inflation:

We can now say for the first time that the disinflationary process has started. We can really see that, and we see it really on goods prices so far.

While that was music to the bullish crowd, Powell gave no real hint of a pause in hikes, maintaining that:

Ongoing increases in the target range will be appropriate to a attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

But, he appeared to shrug off the fact that financial conditions have dramatically loosened recently, as ZeroHedge pointed out, a dovish fact that surprised traders and created additional upward momentum off the mid-session bottom supported by another short squeeze.

In the end, the markets expected some hawkish tones during the presser, yet Powell did not bite but maintained a more dovish tone pushing terminal rate expectations to much lower levels. Market participants took that as a Fed in capitulation mode.

This affected bond yields, which retreated sharply, with the 10-year dropping all the way below the 3.4% level, which is its lowest point since last September. As a result, the US Dollar got spanked to its smallest since last April, while Gold shifted into overdrive by adding over 1% for the day to close at $1,967.

$2,000 gold looks to be on the horizon.

2. “Buy” Cycle Suggestions

For the current Buy cycle, which started on 12/1/2022, I suggested you reference my most for ETFs selections. However, if you came on board later, you may want to look at the most current version, which is published and posted every Thursday at 6:30 pm PST.

I also recommend for you to consider your risk tolerance when making your selections by dropping down more towards the middle of the M-Index rankings, should you tend to be more risk adverse. Likewise, a partial initial exposure to the markets, say 33% to start with, will reduce your risk in case of a sudden directional turnaround.

We are living in times of great uncertainty, with economic fundamentals steadily deteriorating, which will eventually affect earnings negatively and, by association, stock prices. I can see this current Buy signal to be short lived, say to the end of the year, and would not be surprised if it ends at some point in January.

In my advisor practice, we are therefore looking for limited exposure in value, some growth and dividend ETFs. Of course, gold has been a core holding for a long time.

With all investments, I recommend the use of a trailing sell stop in the range of 8-12% to limit your downside risk.

3. Trend Tracking Indexes (TTIs)

Our TTIs took another jump, as traders were shocked by Fed head Powell’s dovish demeanor.

This is how we closed 02/01/2023:

Domestic TTI: +8.90% above its M/A (prior close +7.77%)—Buy signal effective 12/1/2022.

International TTI: +11.11% above its M/A (prior close +10.19%)—Buy signal effective 12/1/2022.

All linked charts above are courtesy of Bloomberg via ZeroHedge.

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