- Moving the markets
As expected, the Fed raised their interest rate by 0.25%, but traders were more interested in the accompanying statement, and that’s where the disappointment came in.
The statement was a hawkish pause, which signaled that “some additional policy firming may be appropriate,” as opposed to what traders had hoped for, namely “some additional policy easing may be appropriate.”
For a while, confusion reigned, as Wall Street came to grips with what was said, and how it could be interpreted, with the major indexes chopping up and down (see chart above), before the bears stepped in and took the upper hand.
Former chair Richard Clarida summed up best the tight spot the Fed finds itself in:
The chair will have his work cut out for him because when the chair will say ‘pause,’ the markets may hear ‘done.’ And if he says it again, they may hear ‘rate cuts.’
And that’s exactly how the market has reacted over the past year, in that Powell’s words were ignored in favor of what the markets wanted to hear.
In the meantime, the banking crisis goes on, and it remains to be seen how many of the 4,000 banks will follow the same downward path. You may not think that the 3 banks that failed so far are a big deal, but they are when compared to the events of 2008.
All three had more assets ($549 billion) than all 25 banks ($374 billion) that collapsed in 2008. That is a sobering statistic, and should the domino effect continue, which I believe it will, equities will be severely affected.
The Regional banks took another hit, after Powell announced that the banking system was sound and resilient. Huh? Bond yields tumbled, with the 2-year again losing its 4% level.
The US Dollar tanked and reached 2-week lows, which was a benefit for Gold, as the precious metal solidified its position above the $2k level.
2. “Buy” Cycle Suggestions
For the current Buy cycle, which started on 12/1/2022, I suggested you reference my then current StatSheet for ETF selections. However, if you came on board later, you may want to look at the most recent version, which is published and posted every Thursday at 6:30 pm PST.
I also recommend you 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.
In my advisor’s 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 pulled back, as Fed head Powell did the expected but maintained a hawkish stance. As a result, our Domestic TTI slipped a tad below its long-term trend line. However, the break below was not enough to have an impact on our holdings.
This is how we closed 05/03/2023:
Domestic TTI: -0.05% below its M/A (prior close +0.53%)—Buy signal effective 12/1/2022.
International TTI: +6.03% above its M/A (prior close +6.21%)—Buy signal effective 12/1/2022.
All linked charts above are courtesy of Bloomberg via ZeroHedge.
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